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Federal Reserve Chair Janet Yellen on Tuesday said the U.S. labor market is healing but still needs support from the nation’s central bank.
In testimony for a hearing before the Senate Banking Committee, Yellen noted that hiring has picked up compared to last year, averaging 230,000 net new jobs per month this year. The unemployment rate has dropped from 7.5 percent to 6.1 percent over the past year -- faster than the Fed expected.
But perhaps most importantly, Yellen acknowledged that broader measures of labor market health have registered “notable improvements.” She has frequently argued that the traditional measure of unemployment does not capture the true strain in the job market. Many workers may be in part-time jobs when they would rather have full-time positions, or they may have given up looking for work because they are discouraged by their prospects.
The broadest measure of labor market distress shows 12.1 percent of the labor force is unemployed, underemployed or discouraged -- down about 2 percentage points from a year ago. Though the numbers are moving in the right direction, Yellen said Tuesday they remain too high. Some economists believe that is why wage growth has remained weak despite stronger hiring.
“These and other indications that significant slack remains in labor markets are corroborated by the continued slow pace of growth in most measures of hourly compensation,” Yellen said in her prepared remarks.
Her comment also signaled that she is not worried about the recent rise in inflation readings. She said that food and energy prices -- which the Fed tends to discount because they are highly volatile -- helped boost the data and noted that inflation remains below the central bank’s target despite the increase.
“Given the economic situation that I just described, we judge that a high degree of monetary policy accommodation remains appropriate,” she said.
The Fed has kept its benchmark short-term interest rate near zero since 2008 in hopes of spurring demand among consumers and businesses. But as the recovery strengthens, the central bank has begun preparing to reverse course.
The first step is to wind down its trillion-dollar bond-buying program, which was designed to propel the economy over a speed bump. The Fed has been slowly phasing it out over the year, and Yellen said Tuesday that it expects to end the purchases altogether in October.
Fed officials have been “constructively working” on what to do next, Yellen said, particularly on the technical aspects of raising interest rates when the central bank’s balance sheet has ballooned to more than $4 trillion. But she stressed that the timing of the first interest rate increase since the recession will depend on how the pace of the recovery.
“There’s no formula or mechanical answer I can give you for when the first rate increase will occur," she said. "It will depend on the economy.”
Yellen cited a number of concerns, including a housing market that has yet to bounce back after mortgage rates shot up last year over concerns that the Fed might withdraw its support more quickly than investors expected. The slowdown in real estate highlights the stakes facing the central bank: Move too fast or too abruptly, and the fragile recovery could falter.
On the other hand, critics say there are risks if the Fed moves too slowly. Years of ultra-low interest rates have boosted stock markets to record highs -- levels some worry are unsustainable -- and encouraged investors to seek returns in increasingly risky pockets of the market. Yellen said “valuations appear stretched” in some areas, including lower-rated corporate debt, but that broad prices for stocks and corporate bonds remain in line with historical norms.
The Fed has gone through considerable turnover since Yellen took the helm in February -- and more change could be on the horizon. The central bank’s top ranks include a seven-member board of governors based in Washington and 12 regional bank presidents from across the country. Two seats on the board are vacant, and Senate Banking Committee Chairman Tim Johnson (D-S.D.) on Tuesday urged the White House to fill them quickly.
“It is important that the Fed maintain a full complement of governors to effectively carry out its monetary policy and regulatory functions,” he said. “I hope for the swift nomination of well-qualified candidates with expertise in community banking, as well as tough and effective oversight experience.”
Yellen said she would welcome the appointment of a community banker to the board but that she opposed requiring it by legislation.
Meanwhile, the Dallas Morning News reported that Dallas Fed President Richard Fisher is among the leading candidates to run the University of Texas system. Fisher has been a vocal critic of the central bank’s bond-buying program.