Federal Reserve Chair Janet Yellen veered off script Thursday morning during her remarks before the Senate Banking Committee – and that impromptu remark was the most important thing she said in eight hours (and counting!) of congressional testimony this month.
Yellen began the biannual hearing with the same speech that she presented before the House Financial Services Committee two weeks ago. But when she got to the Fed’s outlook for the economy, she inserted this comment:
“Mr. Chairman, let me add as an aside that since my appearance before the House committee, a number of data releases have pointed to softer spending than many analysts had expected. Part of that softness may reflect adverse weather conditions, but at this point, it's difficult to discern exactly how much. In the weeks and months ahead, my colleagues and I will be attentive to signals that indicate whether the recovery is progressing in line with our earlier expectations.”
The departure from the script is significant, not only because the goal of these hearings for policymakers is generally to say as little as possible in the most boring way possible. The message from the Fed’s top officials has been relentlessly upbeat in the first few months of the year, even as the economic data have proven surprisingly weak. In speech after speech, they have reiterated that the recovery will pick up this year and highlighted the number of jobs created since the central bank began pumping money into the economy in fall 2012. (Boston Fed President Eric Rosengren has been a notable exception.)
The rosier outlook was the justification for the Fed to begin scaling back – or “tapering” – its massive bond-buying program known as quantitative easing this year. It has since reduced its monthly purchases to $65 billion a month and is expected to end the program altogether in the fall.
But the drumbeat of disappointing data is becoming difficult to ignore. Job growth was anemic in December and January, and February is likely to underwhelm as well. In the two weeks since Yellen testified before the House, there have been reports showing consumer spending declined, existing home sales fell to the lowest level in a year and a half and manufacturing activity U-turned.
Some of the softness may be the result of this year’s brutal winter. But the weak data could also reflect a weak economy, and Yellen’s decision to acknowledge that suggests the Fed is taking the possibility seriously. She came back to the topic after a question from Democratic Sen. Chuck Schumer of New York:
MS. YELLEN: Well, Senator, as I mentioned in my opening remarks, we have seen quite a bit of soft data over the last month or six weeks. It was -- you know, the employment report relatively low, below-expectation growth in payrolls, in some of the housing numbers, in retail sales and industrial production. So it's really quite a range of data that has been soft recently.
SEN. SCHUMER: Right.
MS. YELLEN: Now I think it's clear that weather has played -- unseasonably cold weather has played some role in much of that. There are many ways in which weather would have affected these series. What we need to do and will be doing in the weeks ahead is to try to get a firmer handle on exactly how much of that set of soft data can be explained by weather and what portion, if any, is due to a softer outlook than we would have --
SEN. SCHUMER: And if it's not mostly weather, would you consider pausing or changing the rate of tapering?
MS. YELLEN: So as we have said in our statement -- and I would agree -- asset purchases are not on a preset course.
SEN. SCHUMER: OK.
MS. YELLEN: So if there's a significant change in the outlook, certainly we would be open to reconsidering. But I wouldn't want to jump to conclusions here.
When will we get a clearer picture of the recovery? The answer is unlikely to emerge before the Fed’s policy-setting committee meets again in March. But Yellen reiterated that the winding down of the Fed’s stimulus program is “not on a preset course.” And that’s another way of saying that tapering the taper – or stopping it altogether – is not off the table.