Yellen's continues her testimony before the Senate Banking, Planning and Urban Affairs COmmittee

FXStreet (London) - US Federal Reserve Chairman Janet Yellen is currently presenting her Semiannual Monetary Policy Report to Congress before the Senate Banking, Housing, and Urban Affairs Committee.

In prepared remarks, the Fed chairman said that, since her appearance before the Committee last July, “the employment situation in the United States has been improving along many dimensions”.

“The unemployment rate now stands at 5.7 percent, down from just over 6 percent last summer and from 10 percent at its peak in late 2009. The average pace of monthly job gains picked up from about 240,000 per month during the first half of last year to 280,000 per month during the second half, and employment rose 260,000 in January.

“In addition, long-term unemployment has declined substantially, fewer workers are reporting that they can find only part-time work when they would prefer full-time employment, and the pace of quits--often regarded as a barometer of worker confidence in labor market opportunities--has recovered nearly to its pre-recession level. However, the labor force participation rate is lower than most estimates of its trend, and wage growth remains sluggish, suggesting that some cyclical weakness persists. In short, considerable progress has been achieved in the recovery of the labor market, though room for further improvement remains.

Yellen also addressed imporvements in the labour market, and improvements in domestic spending and production. “Real gross domestic product (GDP) is now estimated to have increased at a 3-3/4 percent annual rate during the second half of last year. While GDP growth is not anticipated to be sustained at that pace, it is expected to be strong enough to result in a further gradual decline in the unemployment rate. Consumer spending has been lifted by the improvement in the labor market as well as by the increase in household purchasing power resulting from the sharp drop in oil prices. However, housing construction continues to lag; activity remains well below levels we judge could be supported in the longer run by population growth and the likely rate of household formation.”

Monetary Policy

Turning to monetary policy, the Federal Reserve chairman stated the FOMC mandate of a commitment to policies that promote maximum employment and price stability. “As my description of economic developments indicated, our economy has made important progress toward the objective of maximum employment, reflecting in part support from the highly accommodative stance of monetary policy in recent years. In light of the cumulative progress toward maximum employment and the substantial improvement in the outlook for labor market conditions--the stated objective of the Committee's recent asset purchase program--the FOMC concluded that program at the end of October.”

“Even so, the Committee judges that a high degree of policy accommodation remains appropriate to foster further improvement in labor market conditions and to promote a return of inflation toward 2 percent over the medium term. Accordingly, the FOMC has continued to maintain the target range for the federal funds rate at 0 to 1/4 percent and to keep the Federal Reserve's holdings of longer-term securities at their current elevated level to help maintain accommodative financial conditions.

“The FOMC is also providing forward guidance that offers information about our policy outlook and expectations for the future path of the federal funds rate. In that regard, the Committee judged, in December and January, that it can be patient in beginning to raise the federal funds rate. This judgment reflects the fact that inflation continues to run well below the Committee's 2 percent objective, and that room for sustainable improvements in labor market conditions still remains.”

Policy Normalisation

Addressing the mechanics of how the FOMC intends to normalise the stance and conduct of monetary policy when a decision is eventually made to raise the target range for the federal funds rate, Yellen outlined the likely approach to raising short-term interest rates and reducing the Federal Reserve's securities holdings.

“The FOMC intends to adjust the stance of monetary policy during normalization primarily by changing its target range for the federal funds rate and not by actively managing the Federal Reserve's balance sheet. The Committee is confident that it has the tools it needs to raise short-term interest rates when it becomes appropriate to do so and to maintain reasonable control of the level of short-term interest rates as policy continues to firm thereafter, even though the level of reserves held by depository institutions is likely to diminish only gradually.

“The primary means of raising the federal funds rate will be to increase the rate of interest paid on excess reserves. The Committee also will use an overnight reverse repurchase agreement facility and other supplementary tools as needed to help control the federal funds rate. As economic and financial conditions evolve, the Committee will phase out these supplementary tools when they are no longer needed.

“The Committee intends to reduce its securities holdings in a gradual and predictable manner primarily by ceasing to reinvest repayments of principal from securities held by the Federal Reserve. It is the Committee's intention to hold, in the longer run, no more securities than necessary for the efficient and effective implementation of monetary policy, and that these securities be primarily Treasury securities.”