2017-07-12 15:06:02
Yellen Says Economy Is Robust but Fed Will Stay Flexible

WASHINGTON — Janet L. Yellen, the Federal Reserve chairwoman, delivered an upbeat message to Congress on Wednesday on the state of the American economy, highlighting the strength of job growth and indicating that the Fed remains on course to begin reducing its bond holdings in the fall.

She added, however, that the Fed was paying close attention to the recent weakness in inflation. While emphasizing that she expected prices to start rising more quickly, Ms. Yellen said persistent weakness could lead the Fed to raise interest rates more slowly.

Her testimony before the House Financial Services Committee lifted stock prices and lowered bond yields in the first hours of trading on Wednesday. Investors tend to celebrate any sign that the Fed might slow the pace of its retreat.

Representative Jeb Hensarling, the Texas Republican who heads the committee, gave Ms. Yellen an unusually warm reception for the opposite reason, applauding the Fed for moving ahead with rate increases and describing the Fed’s plans to start reducing bond holdings later this year as “more good news.”

These biannual hearings can be combative affairs, but steady economic growth and the Fed’s commitment to retreat from its stimulus campaign have drained a lot of the tension from recent sessions. On Wednesday, the sharpest comments were about President Trump and about small-scale issues, like the regulation of a particular Missouri bank.

Representative Maxine Waters of California, the committee’s ranking Democrat, began her opening remarks by criticizing Mr. Trump. “Since Day 1, the story of the Trump administration has been one of chaos and turmoil,” she said.

Representative Sean Duffy, a Wisconsin Republican, responded that Democrats liked to congratulate the Fed for economic growth, but that Mr. Trump deserved the credit. “The real change has been that we have a new president in the White House,” he said.

The economy is now in the ninth year of one of the longest economic expansions in American history. The economy added 180,000 jobs a month during the first half of 2017, about the same pace as the first half of last year, even as the unemployment rate has fallen back to pre-crisis levels.

In her opening remarks on Wednesday, Ms. Yellen said growth had picked up after a slow start to the year on stronger consumer spending and business investment. “A strengthening in economic growth abroad has provided important support for U.S. manufacturing production and exports,” she added.

House Democrats remain strongly supportive of Ms. Yellen, but several did ask her whether the Fed was heading for the exits a little too quickly. One reason for concern is that inflation remains below the Fed’s 2 percent annual target, and lately it has slowed.

Lael Brainard, a Fed governor, said on Tuesday at a conference in New York that she shared those concerns.

“I will want to assess the inflation process closely before making a determination on further adjustments to the federal funds rate in light of the recent softness,” she said.

Ms. Yellen, too, said the Fed was keeping a close eye on the latest inflation data, but she reiterated the Fed’s position that it expected prices to start rising more quickly. She has some time to decide whether to hit the brakes. Analysts do not expect the Fed to raise rates any sooner than its final meeting of the year, in December.

Ms. Yellen declined to specify when the Fed intended to start reducing its bond holdings.

“The exact timing of this I don’t think matters a great deal,” she said.

Ms. Yellen also noted that broader measures of the labor market were improving. The unemployment rate, 4.4 percent in June, counts people actively seeking work. One of the broader measures adds people who are not job hunting but say they would like to work and part-time workers who want full-time work. This group made up 8.6 percent of the work force in June; a decade ago, in June 2007, it was 8.4 percent.

The unemployment rate among African-Americans stood at 7.1 percent in June, the lowest rate since April 2000 — although well above the national rate.

Despite those strong numbers, however, wage growth remains weak. Average hourly earnings increased 2.5 percent during the 12 months ending in May. A broader measure including benefits rose 2.25 percent during the 12 months ending in March, the Fed said in a biannual policy report sent to Congress with Ms. Yellen’s testimony.

Another concern: Only 62.8 percent of adults were either working or looking for work in June, compared with the 66 percent participation rate a decade ago.

Representative Andy Barr, Republican of Kentucky, told Ms. Yellen that in his view some people were deciding not to work because of the generosity of government benefits.

“Many employers say to me that they simply can’t compete with the government for labor,” he said.

Ms. Yellen responded that in her view, demographic changes were the primary reason for the decline in labor participation. “To my mind, the major factor here is an aging population,” she said.

On another issue, Ms. Yellen and House Republicans appeared to find common ground.

Mr. Hensarling applauded the Fed for publishing in its report to Congress an analysis of several formulas for determining the proper level of its benchmark rate.

Republicans want the Fed to pick a single formula. Ms. Yellen on Wednesday reiterated her opposition, asserting that there are many rules and that “there is no clear way to decide which ones are better than others.” The rules, she said, are best consulted for guidance.

But Mr. Hensarling’s comments hinted at a potential compromise. He asked Ms. Yellen to include in the next report a discussion of why the Fed’s course differed from the recommendations of the formulas, and she expressed a willingness to do so.

As is often the case at these biannual hearings, the questions ranged widely.

Representative Steve Pearce, a New Mexico Republican, asked Ms. Yellen whether the Fed was concerned about the federal debt and, if so, why it made little mention of the issue in its latest monetary policy report.

Ms. Yellen responded that the debt is a big problem — a problem, she gently noted, that is the responsibility of Congress to address.

“I believe a key thing that Congress should be taking into account in designing fiscal policy is the need to achieve sustainability in the debt path over time,” she said.

Ms. Yellen’s term as Fed chairwoman ends in February, and she avoided several questions about her plans. The Trump administration is in the early stages of its selection process and has not ruled out Ms. Yellen’s reappointment, although the choice of a new Fed chief is regarded as the more likely outcome.

Asked at one point whether this might be her final appearance before the House committee, Ms. Yellen responded, “It may well be.”

She will appear before the Senate Banking Committee on Thursday.