Janet Yellen gave her first congressional testimony as the first-ever female Chair of the Federal Reserve on Tuesday, and the major theme on her new tenure was clear: steady as she goes. Speaking before the House Financial Services Committee, Yellen held fast to the Federal Reserve’s positive outlook on the economy and signaled the continuation of the Fed’s taper of bond buying.
On the United States' economic prospects headed into the next few years, Yellen appeared to be optimistic. In her prepared testimony (of which Felix Salmon has a helpful annotation here), Yellen wrote that she anticipates that "economic activity and employment will expand at a moderate pace this year and next" and that "the unemployment rate will continue to decline." The big takeaway, then, is that based on the trends in data available, Yellen expects continual improvement for the U.S. economy. Nothing Earth-shattering.
She cited the uptick in economic activity at the end of last year, highlighting growth in U.S. economic output (3.5 percent growth in GDP the second half of 2013), and the 1.25 million jobs added since July in her argument that the “economic recovery gained greater traction in the second half of last year.” Despite that optimism, however, Yellen noted that the unemployment rate remains higher than what the Fed considers to be full employment, which means that the recovery is not yet complete.
Still, the economy is about where Yellen's predecessor Ben Bernanke thought it would be at this point, so she pledged to continue to taper the Fed's bond buying, unless things get really bad. "Let me emphasize that I expect a great deal of continuity in the [Federal Reserve's] approach to monetary policy," Yellen wrote, affirming her support for Bernanke's policy. In other words, let's not try anything crazy right now.
Yellen even hinted at a further taper in the near future, as the Fed’s bond purchases “are not on a preset course, and the Committee’s decisions about their pace will remain contingent” on economic outlook. That contingency, of course, also means that the Fed could pull back on its taper if the economy takes a downturn. If the U.S. begins to head toward another economic decline, the Fed will change course.
A lengthy question-and-answer session with members of Congress followed Yellen’s testimony. Of course with hearings like this often come questions that have less to do with Yellen and her role as Fed chair and more with Congressional politicking (yes, Obamacare did come up), but Yellen did offer a few insights.
She stressed her belief that current unemployment was primarily cyclical rather than structural, meaning that she believes the elevated rate of unemployment is due to sluggish growth. She didn’t dismiss, however, that a part of the decline in labor force participation is due to structural shifts in age – e.g., baby boomers retiring – and that a portion of unemployed discouraged workers have dropped out of the labor force altogether, bringing the unemployment rate down without a proportional increase in the number of added jobs.
Yellen also warned against reading too much into the most recent jobs report even though it fell below expectations; she came out in support of increased financial regulation like Dodd-Frank; and was adamantly opposed to an "Audit the Fed" bill in Congress.
The hearing was expected to last three hours, and Yellen promised to stay as long as Congress would have her. But a TL;DR version of her testimony came early during the Q&A:
"I believe I am a sensible central banker," Yellen said.
Her testimony and handling of Congressional questions suggests that yes, she is indeed.