Here Are Three Things We Learned From Janet Yellen's Testimony to Congress
WASHINGTON (TheStreet) -- Federal Reserve Chairwoman Janet Yellen's testimony Tuesday on Capitol Hill provided few surprises, but there were a few comments worth noting that caught the attention of investors.
In her question and answer session with Democratic and Republican members of the House Financial Services Committee, Yellen delivered a familiar speech on the central bank's monetary policy, but she also shed some newsy light on recent weakness in monthly jobs reports, so-called tapering and the labor force participation rate.
The first thing we learned is that when asked about the two most recent jobs reports, Yellen admitted that she was surprised the pace of job creation during December and January was running under what she anticipated.
This has been a concern among investors the past month as the Fed's economic stimulus program heavily relies on U.S. labor data. Simply, softening jobs reports leads market participants to broadly interpret, first, that the economic recovery may be slowing, and, second, that this would force the central bank to remain highly accommodative (purchasing longer-term Treasuries and mortgage-backed securities) to support the economy.The Fed, though, since December has started to pull back its monthly asset purchases as a signal that it believes the economy is improving meaningfully enough that it can expand without the central bank's help. In December, the Federal Open Market Committee announced the central bank would scale back asset purchases by $10 billion, and by another $10 billion in January to put monthly buying at $65 billion. We also learned that when asked what it would take for the Fed to pause tapering of its monetary stimulus program, Yellen said there would need to be a "noticeable change" in economic outlook. The chairwoman's decision not to specifically quantify what would trigger a pause is calculated to keep markets somewhat uncertain. In other words, one bad economic report won't necessarily convince the market that the Fed will fundamentally shift its monetary policy. Another highlight from Yellen's question and answer session came when asked whether the falling trend in the labor force participation rate is a structural problem. Yellen agreed, pointing out that that the Baby Boomer generation was aging, and, dropping out of the work force at a more rapid pace than the addition to the labor force from the youngest individuals. Structural unemployment refers to a lack of individuals with skills necessary to fill job demands. The third new bit of information we learned on Tuesday came when Yellen went further to say that she thinks cyclical factors also are contributing to the drop in the participation rate. Typically this is an argument central bankers have avoided saying with certainty. Yellen didn't display the same ease that predecessor Ben Bernanke delivered after years of testimony that ranged from sharp, complex questions to highly political, accusatory questions. She fumbled a couple times when asked about basic labor data -- like how many hours worked a week count as part-time employment (under 35 hours), and what is the current U-6 unemployment rate (12.7% seasonally adjusted). But the new Fed chair will have plenty of time to settle into her new role and become accustomed to politicians pressing for monetary policy explanations that most central bankers would otherwise find routine. As for the market's reaction to Yellen's first testimony as head of the central bank: the S&P 500
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