Labor market still needs Fed support, chair says

Published on NewsOK Modified: July 15, 2014 at 3:45 pm •  Published: July 15, 2014
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WASHINGTON (AP) — Despite recent sizable job gains, Federal Reserve Chair Janet Yellen is signaling that her agency is in no rush to withdraw the massive support it is providing the U.S. economy.

Extra caution is warranted, she said Tuesday, given a number of "false dawns" in this recovery when a hoped-for acceleration in growth has failed to materialize.

"Although the economy continues to improve, the recovery is not yet complete," she told the Senate Banking Committee, delivering the Fed's semi-annual economic report to Congress.

Analysts said that Yellen's remarks indicated that the central bank plans to keep its benchmark short-term interest rate near a record low of zero, where it has been since December 2008, for some time to come.

While many economists believe the Fed will delay its first rate hike until next summer, some had wondered whether a recent string of better-than-expected unemployment numbers might cause that date to be moved up.

Yellen acknowledged the improvement in the labor market, where the unemployment rate fell to 6.1 percent in June. But she said this rate was still above the 5.2 percent to 5.5 percent that Fed officials view as optimal. She said there were still far too many long-term unemployed Americans and wage growth remained weak, all indications of "significant slack" remaining in the job market.

On inflation, Yellen noted that prices by the Fed's favored price gauge were up 1.8 percent in the 12 months ending in May, and she noted that this was still below the Fed's 2 percent target.

"Yellen's message was that we have made progress on the economy, but we still have a ways to go," said Stuart Hoffman, chief economist at PNC Financial. He predicted the first rate hike will not occur until October 2015.

Yellen's comments on Tuesday, which hewed closely to the remarks she made at a news conference following the Fed's June meeting, had little impact on financial markets although stocks of some Internet and biotech companies were jolted by a reference in the agency's Monetary Policy Report that stock valuations of "social media and biotechnology firms appear to be stretched."

While the reference brought back memories of former Fed Chairman Alan Greenspan's famous comment in a December 2006 speech about possible "irrational exuberance" in the stock market, analysts noted that Yellen in her testimony played down worries about asset bubbles.

She told Congress that while prices of real estate, stocks and corporate bonds had risen, those prices remained generally in line with historic norms. She also repeated her view that government regulators had better ways to control asset bubbles than using such a blunt-force instrument as hiking interest rates.

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