Yellen says Fed should not withdraw stimulus too soon

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(c) 2013, Bloomberg News.

WASHINGTON — Janet Yellen, the nominee for chairman of the Federal Reserve, said Thursday she is committed to promoting a strong economic recovery and will ensure monetary stimulus isn't removed too soon.

"I consider it imperative that we do what we can to promote a very strong recovery," she said in response to a question during testimony Thursday to the Senate Banking Committee in Washington. "It's important not to remove support, especially when the recovery is fragile and the tools available to monetary po

licy, should the economy falter, are limited given that short-term interest rates are at zero."

Yellen's testimony signals that she is prepared to continue the strategies of Fed Chairman Ben Bernanke, whose term as head of the central bank ends in January. His actions have included the $85 billion monthly bond-purchase program, which is pushing the Fed's assets toward a record $4 trillion as officials debate when to begin winding it down.

"It will be a pretty smooth transition," said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Fla. "The evidence that we're seeing now — the continued slack in the economy, the low trend in inflation — suggests the Fed will maintain the course at least for the time being."

Under two hours of mostly genial questioning, Yellen said the benefits of the bond-buying program still outweigh the costs. While calling for stronger regulation to help protect the financial system, she said she'd like to see more progress in the labor market and that she doesn't see an asset price bubble emerging in equities.

Yellen said the central bank's asset purchases "have made a meaningful contribution to economic growth and improving the outlook" and that the program "will not continue indefinitely." She also emphasized her commitment to the Fed's 2 percent inflation goal and strengthening financial regulation.

"A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases," Yellen said earlier in her prepared remarks. "Supporting the recovery today is the surest path to returning to a more normal approach to monetary policy."

Yellen drew questioning from Republican senators for her support of bond purchases and from Democrats for widening income inequality in the United States, yet none of the exchanges became contentious.

"Most senators seemed to treat this as a formality," said Michael Hanson, senior U.S. economist for Bank of America Corp. in New York and a former Fed economist. "The general expectation in Washington seems to be that she will be confirmed."

Yellen said the Fed's key interest rate would remain low even after officials start to pare back on bond purchases.

"As that program gradually winds down, we've indicated that we expect to maintain a highly accommodative monetary policy for some time to come thereafter, and the message we want to send is we will do what is in our power to ensure a robust recovery," she said.

Yellen also said that policymakers could reconsider whether to cut the interest rate it pays on excess reserves, currently 0.25 percent.

"It certainly is a possibility," Yellen said. So far, U.S. central bankers have been concerned that lowering the rate would damage the functioning of the money-market, she said.

The Fed has held its main rate near zero since December 2008, and the Federal Open Market Committee pledges to keep it there as long as the unemployment rate remains above 6.5 percent and the outlook for inflation doesn't rise above 2.5 percent.

Yellen, 67, publicly voiced her views for the first time in seven months on the unprecedented monetary stimulus that she's supported and that some lawmakers have used to justify voting against her. Before Thursday's hearing, her last public address, on regulation, was delivered June 2 and she had not given a speech on monetary policy since April 16.

The FOMC began $40 billion in monthly purchases of mortgage-backed securities in September 2012 and announced $45 billion in Treasury securities to that pace in December. Fed officials have said their $85 billion pace of purchases will continue until the labor market improves "substantially."

Some Fed officials have voiced concern that low rates are overheating prices for assets including farmland, which could heighten risks when they reverse their bond buying. Asked today about stock prices, Yellen said she doesn't see "bubble-like conditions."

"Stock prices have risen pretty robustly but if you look at traditional measures," such as price-earnings ratios, "you would not see stock prices in territory that suggests bubble- like conditions," she said.

The S&P 500 has rallied more than 25 percent this year, putting it on pace for the best annual gain in a decade. The gauge has rebounded 163 percent from a 12-year low in March 2009, adding more than $10 trillion in market value.

The banking committee, consisting of 12 Democrats and 10 Republicans, will vote at a later date on whether to advance Yellen's nomination to the full Senate. She'll need the support of at least 60 senators to win confirmation.

"History says that no Fed chair has ever got fewer than 70 votes, so I would assume that Republicans will cooperate and do the right thing here," said Sherrod Brown, an Ohio Democrat.

Four of the committee's Republicans, including Sen. Mike Crapo of Idaho, the senior member, opposed Yellen when she was considered for Fed vice chairman in 2010.

The other banking committee Republicans who previously opposed Yellen are Richard Shelby of Alabama, David Vitter of Louisiana and Bob Corker of Tennessee. She was supported in 2010 by Sen. Mike Johanns, R-Neb. None of the panel's Democrats have said they'll oppose her nomination.

"I don't know that it's reconcilable philosophically — we're obviously in a very different place," Corker said. He said that Yellen is "a very qualified person, very likable and very transparent and I do appreciate all those characteristics, so we'll see."

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Matthews reported from Atlanta. Contributors: Jeff Kearns and Cheyenne Hopkins in Washington, Caroline Salas Gage in New York and Aki Ito in San Francisco.

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