Stimulus Plan to Continue
The most significant announcement made by the new chairwoman, was her plan to continue with the Fed’s stimulus plan. ‘I served on the committee as we formulated our current policy strategy and I strongly support that strategy,’ she said. The main reason for the continual in policy, being that the U.S economic recovery is ‘far from complete.’
This means that cheap money will continue to be available as the Fed continues its quantitative easing program – currently at $65bn a month – which has greatly reassured the markets. Asian and U.S stocks rose across the board, and the Australian dollar rose to a month-high after the statement.
Mrs Yellen also indicated that tapering of the stimulus plan would continue, as ‘further measured steps’, will be taken to reduce Federal support. Volatility in global financial markets caused by tapering was also noted, but the chairwoman remarked that at this point, it does ‘not pose a substantial risk to the U.S economic outlook’. She went on to add that a ‘notable change in the outlook’, could reduce the pace of tapering, as it is ‘not on a pre-set course’.
Interest rate to remain at zero
Despite what has been described as ‘poor growth’ in the job market, unemployment dropped to 6.6% in January. Previously the Fed had committed to begin raising the rate of interest once unemployment hit 6.5%, but the new chairwoman appears to be moving away from this idea – much like the Bank of England and its reworked forward guidance. She said that the rate of unemployment is an isolated figure and does not completely reflect the sector.
She pointed out that the number of long-term unemployed continues to remain high, and that 20.7% of teenagers, 12.1% of African Americans, and 8.4% of Hispanics are still unemployed. The 6.6% unemployment rate was also said to be deceptive as there many people working part-time jobs but would rather – and cannot – work full-time.
Fed expects employment growth
After some poor figures on U.S employment growth, Mrs Yellen spoke of her surprise and admitted; ‘The pace of job creation [is] running under what I had anticipated.’ Throughout 2013, U.S job creation averaged at 194,000 new jobs per month. But this dropped significantly to 75,000 in December, and only rose to 113,000 in January 2014 – still well below forecasts.
The extremely harsh winter – with temperatures plunging to -50C in some areas – has been identified as one of the main causes for the slow growth. The chairwoman maintained a cautious stance, warning that, ‘we have to be very careful not to jump to conclusions in interpreting what those reports means.’ Mrs Yellen said that the Fed has confidence employment will grow, and no new policies are needed to stimulate the sector.
Fed will continue to seek transparency
Last year, the Fed announced – for the first time – inflation and unemployment rate targets, which were recommended by a committee headed by Mrs Yellen. This desire to create transparency in Federal Policy, and thus create confidence, is set to continue into her leadership.
Although the link between unemployment and interest rates looks likely to be re-evaluated (as mentioned above), the Fed will continue to use inflation and unemployment rate targets – and further indicators, as yet undefined, to inform interest rate increases – to improve communication and transparency.
Mrs Yellen is obviously very keen to tread delicately on what is still a very fragile and uneven economic recovery.