US economy still subpar, Yellen says in testimony

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Posted: Thursday, November 14, 2013 12:00 am

WASHINGTON (AP) - Janet Yellen says the economy has regained ground lost to the deepest recession since the 1930s. But she says unemployment remains too high at 7.3 percent and notes that the Fed is still trying to accelerate the economy's recovery.

In testimony prepared for her confirmation hearing Thursday, Yellen said the economy is still performing far below its potential. And she pointed out that inflation is running below the Fed's 2 percent target.

"For these reasons, the Federal Reserve is using its monetary policy tools to promote a more robust recovery," Yellen said in her testimony. "I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy."

Yellen offered no hints that she would deviate from the low-interest rate campaign of the outgoing chairman, Ben Bernanke. Her comments amount to a defense of the extraordinary measures the Fed has used under Bernanke to try to keep long-term borrowing rates near historic lows to encourage spending and promote growth. These measures have included three rounds of bond purchases.

Critics have warned that the Fed's support programs run the risk of igniting inflation or inflating price bubbles in assets like stocks or homes. Yellen said a strong recovery would ultimately allow the Fed to begin to normalize its policies. This would include reducing its reliance on its $85 billion-a-month in bond purchases, which have been intended to keep long-term rates down.

Some economists saw Yellen's comments as a sign that the Fed won't move at its next meeting in December to reduce its bond purchases - a process often called "tapering." Rather, the Fed could delay any tapering beyond March, when many have predicted it would begin.

"This is a strong signal that the Fed is not going to reduce its support for the economy any time soon," said Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University.

Jim O'Sullivan, chief economist at High Frequency Economics, said Yellen's statement definitely had a "dovish tone." He said, "There is certainly no hint about imminent tapering."

On regulatory policy, Yellen said she was committed to using the Fed's powers to "reduce the threat of another financial crisis."

She said she believes strict rules on the capital reserves that banks most hold to protect against losses are crucial to preventing the failures of large institutions that could destabilize the financial system.

"Our country has come a long way since the dark days of the financial crisis, but we have farther to go," Yellen said in her prepared remarks.

The Fed released Yellen's brief three-page opening statement the day before her confirmation hearing before the Senate Banking Committee. She is expected to win approval by the committee and by the full Senate to succeed Bernanke, whose second four-year term as chairman will end Jan. 31.

© 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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