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Yellen: Economy’s on the mend

By Mark Hamrick · Bankrate.com
Wednesday, June 18, 2014
Posted: 4 pm ET

Like a physician tending to a patient who emerged from intensive care, Federal Reserve Chair Janet Yellen used her news conference to express confidence in the economic recovery. Even so, she cautioned that "there is uncertainty about monetary policy."

© JONATHAN ERNST/Reuters/Corbis

That's her reminder that even the smartest minds don't know exactly how the medicine, or record low interest rates and trillions of dollars of asset purchases, will eventually be handled.

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Growth outlook chopped

After the Federal Open Market Committee issued its updated economic projections, Yellen noted that the group's outlook for growth this year was downgraded. It now looks for gross domestic product this year of 2.1 percent to 2.3 percent. That's compared with the March outlook calling for 2.8 to 3 percent growth. Yellen said the forecast was "down notably from the March projections, largely because of the unexpected contraction in the first quarter." The FOMC is sticking with a 2014 growth outlook of 3 percent more. Translation: The patient will recover.

Is the market out of control?

With the stock market continuing to notch record highs, Yellen avoided waving off investors from buying in. She acknowledged that volatility in the financial markets has been low. She said the Fed is continuing to monitor the markets for signs of excessive risk-taking, but indicated that there are no danger signs flashing in the equities market. As for what's contributing to low volatility, we "don't know if overconfidence and complacency is one of those reasons," she said.

What about inflation risk? Prices have been on the rise recently, as indicated by the consumer price index of 2.1 percent. Yellen said that some of the recent data "has been noisy," but the Fed believes that inflation will remain below its target over the next couple of years.

Keep the faith

As for reasons why we should have faith that the recovery will continue to gather steam, Yellen cited a list of developments she sees as positive. They include: monetary policy, easing credit, diminishing fiscal drag, households becoming comfortable with their debt levels, rising home prices, rising equity prices and an improving global economy.

Reporters wanted to know if inflation did come roaring back, would the Fed be comfortable with allowing it to overshoot its longer-term target?

Yellen's answer: "Inflation continues to run well below our objective."

She said that the economy remains "still some ways away from maximum employment," which it regards as an unemployment rate at 5 percent or so. As result, she said there's currently "no trade-off between two objectives since they both call for a highly accommodative monetary policy."

Adverse reaction to the medicine?

Could all of this end badly? Yellen said some "risk-taking behavior could unwind in a sharp way and provoke a sharp increase in interest rates." That's a kind of economic nightmare scenario that could be uncomfortably close to the experience of the 2007-2008 financial crisis. Yellen stated the obvious by saying "it's something to avoid."

As to the broader picture, Yellen said something that won't comfort her mostly Republican critics in Congress: "I don't see financial stability concerns shaping monetary policy in an important way right now."

Follow me on Twitter: @Hamrickisms.

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