Washington: US Federal Reserve chairperson Janet Yellen said on Wednesday the US economy was still in need of lots of support from the central bank given the “considerable slack” in the labour market, and she cited weakness in the housing sector as a fresh risk.
Even as she took note of “appreciable” improvements in the labour market, Ms Yellen told a Congressional committee a high rate of long-term unemployment and a slow rise in measures of labour compensation suggested more room for further gains.
Speaking to US Congress’ joint economic committee, Ms Yellen said that as a result, she expects low borrowing rates will continue to be needed for a “considerable time.”
Yellen’s comments echo her earlier signals that the Fed has no intention of acting soon to raise its key target for short-term interest rates even though the job market has strengthened and economic growth is poised to rebound this year. The Fed has kept short-term rates at a record low near zero since December 2008.
US stocks, which had opened higher, slipped after her prepared remarks were released, while prices for US government debt were little changed. The dollar rose against the euro.
If the Fed increases its borrowing rates, it indicates a complete recovery of the US economy, after a nearly decade and a half long monetary easing that was started in response to the dotcom bubble in early 2000.
Higher interest would slow down foreign fund flow into emerging market economies and commodities markets. This could result in a fall of stock markets in emerging markets such as India and a dip in commodity prices such gold and oil among others.
Ms Yellen also indicated concerns over investors exerting risky behaviour given the extended period of low interest rates. “Some reach-for-yield behaviour may be evident,” Ms Yellen said, pointing to the lower-rated corporate debt markets as an example. The Fed chief repeated the view of the Federal Open Market Committee that despite the expected US economic growth, considerable slack in the labour markets and low inflation warrants a “high degree of monetary accommodation.”
In April, the Fed reduced its monthly bond purchases to $45 billion from $55 billion in a phased withdrawal. The stimulus, lau-nched as part of its quantitative easing 2 will be completely withdrawn by October 2014.
