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Yellen: New era, new language

By Mark Hamrick · Bankrate.com
Wednesday, March 19, 2014
Posted: 4 pm ET

New Fed Chair Janet Yellen had more than a coming-out party at her first news conference since becoming head of the nation's central bank. In some ways, she had to speak a new language as agreed to by her Federal Open Market Committee colleagues. Her meeting with reporters followed a two-day policy-setting session where it was decided to continue unwinding the extraordinary measures put in place since the financial crisis began more than five years ago.

More vague monetary policy

As for the change in language, the policymaking group dropped adherence to a specific unemployment rate target -- or "threshold," as officials like to say -- of 6.5 percent. With the unemployment rate reported at 6.7 percent in February, officials needed to come up with another way of talking about their desire to boost both employment and inflation. In its place, Yellen said the committee will be watching a "broad range of indicators."

Some positives, but more work to do

On two positive notes, Yellen said that:

  • A gauge known as "U6," which combines unemployment and "underemployment," has dropped more rapidly than the unemployment rate itself.
  • Labor market participation, or the number of people looking for work, had recently "ticked up." However, long-term unemployment remains "exceptionally high," she said.

The 6.5 percent thing

The 6.5 percent unemployment benchmark had been adopted by the Federal Reserve in December 2012. With another $10 billion reduction in asset purchases, Yellen said the bond-buying program can be expected to end this fall. It may be "a considerable period" or "six months or that kind of thing" when rates begin to rise after asset purchases end, she added.

Yellen sought to allay any fear in financial markets that an interest rate increase could be looming sooner rather than later. Yellen said the shift "does not indicate any change in (the committee's) policy intentions." Most members of the FOMC are looking for the first such rate hike next year.

What's taking so long?

As for the stubborn recovery, Yellen noted that "headwinds from the economy have taken a long time to dissipate." She mentioned a number of factors:

  • Many households are continuing to wrestle with their finances, with credit difficult to obtain.
  • Many home prices remain underwater.
  • Fiscal policy, or federal spending, continues to be an economic drag.

The impact of these factors, she said, might be that it will take longer to bring short-term interest rates back to normal.

New sheriff in town

After succeeding Ben Bernanke in January, what about being the new boss? Yellen said she "feels the weight of responsibility more keenly" since moving up from vice chair.

"We are committed to exactly the same set of goals," she said.

As for practical differences, Yellen said the "conduct of business is pretty much the same as usual." She acknowledged that she didn't directly answer a reporter's question about how she might be different from Bernanke. That is something it might take more time for everyone to understand.

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Samuel J Wolf
March 20, 2014 at 1:38 pm

I am retired. I receive social security but have no other source of income.
My plan was to live off social security and interest on my bank holdings. For at least five years interest has been close to non existent. I have had to draw from my savings. The lower my savings get, the smaller amount of interest I will get if and when interest rates are allowed to rise subject to normal market factors.
Thank you, Sam Wolf