The US economy has improved but still needs the support of “unconventional policy tools,” US President Barack Obama’s nominee to head the Federal Reserve said in statement released on Wednesday on the eve of her confirmation hearing.
Janet Yellen, currently Vice-Chairwoman of the Federal Reserve, was due to testify on Thursday before the Senate Banking Committee, the first step toward confirmation. Yellen was expected to read the statement, which was released by the Fed, at the beginning of the hearing.
If confirmed, she faces the immediate task of guiding the Fed through the long tapering of its unprecedented loose monetary policies.
The Fed under Yellen will have to wean the United States — and the world economy — from years of easy money. Acting too fast could send the still-unsteady US economy into recession, but failing to tighten could swell destabilising speculative bubbles or fuel inflation.
Yellen said a strong recovery would ultimately enable the Fed to reduce its reliance on “unconventional policy tools such as asset purchases.” The rate-setting central bank has been buying Government-backed bonds at a monthly pace of $85 billion — some $1 trillion a year — since 2012, in addition to holding benchmark interest rates near zero since 2008.
Yellen is to say that supporting the ongoing recovery is the surest path to returning to a more normal approach to monetary policy.
Yellen, 67, credited Fed Chairman Ben Bernanke for stabilising the financial system, arresting the steep fall in the economy and restarting growth since 2008.
The recession was severe but could have been far worse, she said in her prepared statement. While today the economy is significantly stronger and continues to improve, unemployment is still too high, “reflecting a labour market and economy performing far short of their potential.”
She noted that inflation has been running below 2 per cent and is expected to continue at that rate for some time. Housing has turned a corner, the auto industry has made an impressive comeback and the country has created 7.8 million jobs since the post-crisis low for employment in 2010.
The crisis revealed weaknesses in the US banking system, but she believes financial institutions, the Fed and other regulators have made considerable progress in strengthening the financial sector.
“Today, banks hold more and higher-quality capital and liquid assets that leave them much better prepared to withstand financial turmoil,” she said, noting that she is committed to using the Fed’s supervisory and regulatory role to reduce the threat of another financial crisis.
“I believe the Federal Reserve has made significant progress toward its goals but has more work to do.” If confirmed, Yellen will take office after Bernanke’s term expires January 31.