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Last updated: February 11, 2014 7:50 pm
Janet Yellen has turned a cold shoulder to the pleas of emerging markets by signalling that only a domestic slowdown will influence US monetary policy, in comments that suggest there will be no relief for those countries being battered by the Fed’s reduction of its asset purchases.
In her first appearance before Congress as Federal Reserve chairwoman, Ms Yellen noted emerging market turmoil for the first time, saying that the Fed was “watching closely the recent volatility”. However, she showed no sympathy for complaints that the Fed has failed to co-ordinate its policy with other countries.
Last month India’s central bank governor, Raghuram Rajan, hit out at the US for “washing their hands” of emerging markets. He is one of several central bankers to have to increase interest rates following a turbulent start to the year that saw a sharp sell-off in emerging markets currencies.
“Our sense is that at this stage these developments do not pose a substantial risk to the US economic outlook,” said Ms Yellen. “We will, of course, continue to monitor the situation.”
In her prepared remarks, Ms Yellen pledged “a great deal of continuity” with the stimulative policies of her predecessor, Ben Bernanke.
Markets cheered the new chairwoman’s performance before the House Financial Services committee with the S&P 500 rising steadily as she spoke. It was up more than 1 per cent at 1,819.75 by the close in New York.
The new Fed chairwoman ignored patchy recent US economic data in her remarks, forecasting moderate growth this year and next, and highlighting the need to look beyond the unemployment rate when judging the economy.
“I was surprised that the jobs reports in December and January showed that job creation was running a little under what I had anticipated,” she said in response to a question. “But we have to be very careful not to jump to conclusions about what those reports mean.”
Her remarks on Tuesday suggest the Fed has enough confidence in the economy to keep tapering its asset purchases, now at $65bn a month, and signal that new forms of forward guidance about interest rates will rely less on the unemployment rate.
“The recovery in the labour market is far from complete,” she said. “Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed, and the number of people who are working part-time but would prefer a full-time job remains very high.
“These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the US labour market,” she added.
That is another indication the Fed will continue to keep interest rates close to zero even after the unemployment rate – currently at 6.6 per cent – drops below its 6.5 per cent threshold for considering a rate rise.
The unemployment rate has come down more rapidly than expected, partly because of workers dropping out of the labour market, but Ms Yellen’s remarks suggest she still thinks there is labour market slack beyond the unemployed.
“It seems to me, based on the evidence I’ve seen, that some portion of that does reflect discouragement about job opportunities,” she said.
Treasury yields were higher after her testimony, with the 10-year note at 2.72 per cent, up from 2.67 per cent. The dollar was broadly unchanged, while gold retreated from its early high to stand 0.6 per cent firmer at $1,281.75 an ounce.
“Despite the reaffirmation of the Fed’s tapering agenda, the overall tone of her remarks could be characterised as dovish,” said Millan Mulraine, strategist at TD Securities. “In particular, she reiterated the Fed’s expectation that ‘a highly accommodative policy will remain appropriate for a considerable time after asset purchases end’, which in effect reinforces the message that despite tapering, the Fed is not remotely close to tightening policy.”
Ms Yellen will repeat her testimony on Thursday at the Senate Banking Committee.
Additional reporting by Michael Mackenzie in New York
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