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Fed Chair Yellen Stays On Message In Second Day Of Testimony

By Kitco News
Wednesday July 16, 2014 10:08 AM

Editor's Note: This article will be updated on an ongoing basis during the question and answer period of Yellen's testimony.

(Kitco News) - As expected, Federal Reserve Chair Janet Yellen did not change her prepared statement for her second day of congressional testimony, this time before the House Committee on Financial Services.

However, markets will still play close attention to Yellen’s answers during the question-and-answer portion of the hearing.

According to analysts, Yellen was fairly neutral and revealed no surprises about the central bank’s monetary policy outlook as she testified before the Senate U.S. Senate Committee on Banking, Housing and Urban Affairs Tuesday. Analysts are expecting Yellen to stay on message during the second hearing.

“We expect little change in the tone of Yellen’s remarks, though we caution that Yellen could use the second day of testimony to lean against any unexpected market reaction to her comments on Tuesday,” said Gennadiy Goldberg, U.S. strategist at TD Securities.

Yellen Reiterates Fed Doesn't See Asset Bubbles In Financial System

Right away Yellen was on the defensive regarding the Federal Reserve’s independence. Atlhough Yellen said that she meets with the Treasury secretary often, she added that she still sees the Federal Reserve as completely independent of the executive branch.

Yellen also reiterated that the central bank is committed to normalizing its balance sheet and monetary policy over time, but she couldn’t give an exact timeline of when the Fed will start decrease its balance sheet.

“We are discussing our principals of normalization of our policies. We will be able to give more guidance later this year when those discussions are resolved,” she said.

The Federal Reserve can appear to be formulaic during normal economic periods, but the central bank still needs the flexibility to address, said Yellen. She added because of the uncertainty in the economy, the central bank should not be “bound to a mathematical formula.”

Yellen remains extremely neutral on when the Fed could start to raise interest rates. She said that it is the Fed’s intention to conclude its asset purchases after the October meeting and would only say that rate hikes will be dependent on the state of the U.S. economy and the labor market.

Changing dynamics in the labor market, including an aging population, are having an impact on the participation rate; however, Yellen said that there are indications that the exceptionally low rate is more than simply an aging population retiring.

Yellen continues to reiterate that the central bank does not see asset bubbles forming in the financial system. She said that threats to the financial stability are at moderate levels and are not out of line with historical norms.

"There may be pockets of stretched valuations, but not generally," she said. 

She added that the Federal Reserve doesn’t have a target for equity price.

Energy markets and supplies are most at risk as geopolitical tensions remain high, and could have an impact on the U.S. economy, said Yellen. She added that although U.S. financial systems are not directly impacted by the increased tensions, global unrest can cause risk aversion sentiment to rise, which can have an impact on the sector and the U.S. economy.

Technological changes play a role in widening the wage gap, but overall systemic weaknesses in the economy is having the biggest impacting the labor market, said Yellen.

She added that as the economy improves, they are expecting to see a general improvement in the labor market. Technological advances create “some winners and losers,” but she also said she thinks there are there are opportunities for technology and traditional jobs to grow together.

Because the U.S. recession was the result of a financial crisis, the recovery has taken much longer than other post-war economic downturns, said Yellen.

Yellen said that she expected the housing sector to show signs of a recovery and is surprised that it hasn’t already. She explained that higher mortgage rates last year halted the initial progress made in the sector and it hasn’t been able to get back to those levels.

Looking at some of the factors, Yellen said that fewer mortgage approvals and supply issues in the construction sector could also be factors that have hampered the housing recovery, however, she couldn’t give a clear answer as to why the sector is not stronger.

By Neils Christensen of Kitco News; nchristensen@kitco.com



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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