Yellen Says High Degree of Accommodation Still Needed
Comment of the Day

May 07 2014

Commentary by David Fuller

Yellen Says High Degree of Accommodation Still Needed

Here is the opening from this report from Bloomberg:

Federal Reserve Chair Janet Yellen made it clear she believes the economy still requires a strong dose of stimulus five years after the recession ended because unemployment and inflation are well short of the Fed’s goals.

“A high degree of monetary accommodation remains warranted,” Yellen said today in testimony prepared for delivery to the Joint Economic Committee of Congress. “Many Americans who want a job are still unemployed,” and inflation is below the central bank’s 2 percent target, she said.

Data show “solid growth” in the second quarter, bolstering the case for a faster expansion this year, Yellen said. Gains in household wealth from rising home prices, less drag from federal and state and local budgets, and stronger growth abroad should all drive investment and consumption.

The Fed chair cited the slowdown in U.S. housing as a risk, along with “heightened geopolitical tensions” and financial stress in emerging markets.

“While conditions in the labor market have improved appreciably, they are still far from satisfactory,” Yellen said. She called the unemployment rate, which stood at 6.3 percent in April, “elevated,” and said the share of the labor force that has been unemployed for more than six months, as well as those working part-time who would prefer full-time work, “are at historically high levels.”

“We’ve never really seen a situation where long-term unemployment is so large a fraction of unemployment,” she said in response to a question.

David Fuller's view

There was nothing in Yellen’s comments to worry the markets today.  In fact, they were reassuring for investors.  US short-term interest rates will probably not rise until the economy is clearly stronger and 10-year government bonds are closer to 3% than today’s level of 2.587%

Yellen will know that smart machines are the main reason for the “elevated” unemployment rate and the huge number of people who are working part-time rather than full-time which they would prefer.  In fairness to the Chairman, ‘full employment’ is one of her two mandates but more difficult to achieve due to the accelerating rate of technological innovation which this service has so often emphasised.

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