Yellen Says Economy Performing 'Far Short' of Potential
Comment of the Day

November 13 2013

Commentary by David Fuller

Yellen Says Economy Performing 'Far Short' of Potential

Here is the opening from this Bloomberg report which was released after I had recorded the Audio
Janet Yellen, nominated to be the next chairman of the Federal Reserve, said the economy and labor market are performing "far short of their potential" and must improve before the Fed can begin reducing monetary stimulus.

"A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases," Yellen, the Fed's vice chairman, said in testimony prepared for her nomination hearing tomorrow before the Senate Banking Committee. "I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy."

The remarks show Yellen is committed to the central bank's strategy of attempting to boost the economy and lower 7.3 percent unemployment, more than four years after the economy began to recover from the longest and deepest recession since the Great Depression. She also signaled support for capital and liquidity rules to help reduce the perception that some banks are too big to fail.

In three pages of prepared remarks, she said unemployment is "still too high, reflecting a labor market and economy performing far short of their potential" and that inflation is "expected" to remain below the Fed's goal for 2 percent price increases. She also highlighted areas where the economy has improved, saying housing "seems to have turned a corner" and the auto industryhas made an "impressive comeback," she said.

David Fuller's view Janet Yellen's comment is not surprising, although its release before her nomination hearing tomorrow was not generally expected. However, awareness of her pending statement probably triggered Wall Street's late rally in the last half hour of trading. The US stock market uptrend continues to be driven by an ultra accommodative monetary policy, against the background of a slow US economic recovery and also a softer global economy.

I expect Yellen to be confirmed as Chairman of the Federal Reserve. Moreover, if her arrival persuades large institutional investors in US equities not to book their yearend profits just yet, then we will see another upward ratchet in share valuations during a challenging environment for corporate earnings, other than via share buy back programmes.

Meanwhile, the S&P 500 Index now needs a close beneath 1760 to indicate an upside failure. It has been 521 days since the S&P last experienced a 10% correction. However, the number of other stock markets which are similarly levitating higher has been slowly decreasing.

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