Yellen says 'economy needs Fed aid': What it means for global markets

New York: The US economy has made “good progress” since the worst of the recession, but the Federal Reserve has “more work to do” to support the labor market before it can return to “a more normal approach” to monetary policy, Federal Reserve Vice Chairwoman Janet Yellen said in prepared testimony released on Wednesday.

“We have made good progress, but we have farther to go to regain the ground lost in the crisis and the recession,” Yellen said. “Unemployment is down from a peak of 10 percent, but at 7.3 percent in October, it is still too high, reflecting a labor market and economy performing far short of their potential.”

[caption id=“attachment_1228509” align=“alignright” width=“380”]  The global markets latched onto the remarks which underlined Yellen’s staunchly pro-stimulus stance. AP[/caption]

The global markets latched onto the remarks which underlined Yellen’s staunchly pro-stimulus stance, one day before her first Senate confirmation hearing to be the next chairman of the Federal Reserve. Yellen’s confirmation hearing on Thursday before the Senate Banking Committee ends a five-month radio silence from Yellen, who has been tapped by President Obama to succeed Ben Bernanke.

More from Economy

Inflation likely to be a big focus area for budget 2024, say sources Explained: Will the Bank of Japan break tradition and raise interest rates?

The dollar weakened versus the euro, yen and rupee after Yellen’s comments. The rupee gained against the dollar for the first time in six days and closed at 63.30. The rupee has been on edge in recent days over concerns that the Federal Reserve may be close to a major policy change - a scaling back of its longstanding stimulus efforts.

The markets will be looking for Thursday’s hearing to signal that, despite imperfect policy tools, the US Federal Reserve is committed to keeping its foot on the accelerator.

With speculation increasing that the Fed could taper its asset purchases as soon as December, Yellen defended the Fed’s controversial $85 billion-per-month bond-buying program. She spelt out the reasons why the central bank still needed to support the economy.

“A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases. I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy,” said Yellen in remarks prepared for delivery to the Senate Banking Committee on Thursday.

Taper terror grew after Federal Reserve Bank of Atlanta President Dennis Lockhart told reporters the central bank will consider reducing its bond-buying program at next month’s Federal Open Market Committee meeting on December 17-18. A tapering “could very well take place” in December, Lockhart said in an interview on Bloomberg Radio.

The upbeat October US jobs data released on Friday, suggested the labor market could be strong enough for the Fed to begin to pare its $85 billion-a-month bond-buying program sooner rather than later. The US economy added 204,000 jobs last month.

On the flip side, a Reuters poll of primary dealers on Friday found a majority of respondents still believe the Fed taper would not happen until March or later.

Expectations that the Fed might start to taper its stimulus program have been a concern for the world since May. Battered emerging markets like India got a reprieve when the Fed shocked investors in September by maintaining its cash injections of $85 billion a month in full. The Fed’s decision in September not to reduce stimulus was a “relatively close call” for policymakers, according to minutes of the meeting that suggested there was still support to trim bond-buying this year.

Markets rallied when President Obama formally tapped Yellen on October 10 to succeed Bernanke, as she is one of the architects of the Fed’s bond-buying program. Yellen will oversee the difficult task of unwinding the extraordinary stimulus designed by the Fed after the economic downturn in 2008. But she is likely to embrace gradualism when it comes to tapering. An expert on the job markets, Yellen has been Bernanke’s ally as he has used low interest rates and stimulus to reanimate the US job market.