Yellen says Fed will maintain course on trimming stimulus

Federal Reserve Chair Janet Yellen said on Tuesday the US central bank was on track to keep reducing its policy stimulus, even as she acknowledged the labor market recovery was "far from complete."

In her first public comments as Fed chief, Yellen said the central bank would need to keep its eye on a broad range of labor market indicators, not just the unemployment rate, as it continued to assess the health of the jobs market.

Yellen, in testimony prepared for delivery to a congressional committee, nodded to the recent volatility in global financial markets, but said at this stage it does "not pose a substantial risk to the US economic outlook."

She emphasized continuity in the Fed's policy strategy, saying she strongly supports the approach driven by her predecessor, Ben Bernanke. Under Bernanke, the Fed bought trillions of dollars worth of bonds to drive long-term borrowing costs lower. In December, it started to scale back its latest asset purchase program.

While the US unemployment rate has fallen by 1.5 percentage points since the latest bond-buying program began in September of 2012, at 6.6 percent the rate remains "well above levels" the Fed sees as consistent with maximum sustainable employment, Yellen said.

"(T)he recovery in the labor market is far from complete," she told the House Financial Services Committee.

Encouraged by momentum in the economy last year, the Fed has trimmed asset purchases twice since December; it now buys $65 billion in Treasuries and mortgage bonds each month.

Yellen said the Fed will "likely reduce the pace of asset purchases in further measured steps at future meetings" if economic data broadly supports policymakers' expectation of improved labor markets and a rise in inflation.

She said, however, the purchases are not on a pre-set course, repeating the Fed's policy line.

Prices for U.S. government bond fell and the dollar rose against the euro and the yen as investors digested Yellen's comments. U.S. stock futures were up in volatile trade.

"It's very obvious she is working from the same playbook as Bernanke," said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York. "The Fed will continue cut its bond purchases by $10 billion at each policy meeting the rest of the year."

No honeymoon period for Yellen

New Fed chairs sometimes set monetary policy on a different path, as Paul Volcker did in 1979. But Yellen, who was vice chair under Bernanke, was a co-author of the Fed's current accommodative policy and effectively wrote the book on how the central bank communicates, so she will probably change little so soon after taking the reins.

More than four years after the end of the 2007-2009 recession, the Fed has embarked on perhaps its most difficult policy shift as it tries to back away from flooding the financial system with ultra-easy money. While it expects to keep interest rates near zero until well into next year, it has begun scaling back its bond-buying stimulus, though the measured pace could frustrate some Republicans who think the program is reckless.

One possible pitfall for Yellen would be to get ensnared in debate with lawmakers over fiscal policy, an area over which the Fed has no jurisdiction even though decisions last year in Congress have slowed the economic recovery. Others include the politically charged area of bank supervision, and the persistent worries that the Fed's easy money has stoked potentially dangerous asset-price bubbles.

"She hasn't been in the limelight really — even as vice chair she has made speeches here and there but she hasn't been really in the hot seat," said Scott Anderson, chief economist at Bank of the West in San Francisco.

"I don't think there's going to be any honeymoon period for her," he added. "I think she will get some pointed questions."

Yellen, the first woman to chair the Fed in its 100-year history, will testify to the Democratic-controlled Senate Banking Committee on Thursday.

Early test

Encouraged by momentum in the economy last year, the Fed has trimmed asset purchases twice since December. It is now buying $65 billion in Treasuries and mortgage bonds each month in its bid to keep long-term borrowing costs low and encourage investment and hiring.

But two months of weak US jobs growth, a disappointing reading on factory activity, and a recent selloff in emerging markets that also hit Wall Street will be fodder for the House committee. Its chairman, Jeb Hensarling, a Republican of Texas, is a long-standing critic of the aggressive Fed stimulus, which he argues has enabled a huge run-up in the United States' debt.

Republicans have signaled they want to press Yellen on what they see as the limited effectiveness, and even dangers, of a central bank balance sheet now worth $4 trillion and counting.

Yellen is expected to calmly point to the longer-term trend of improvement in the labor market, including the quick drop to 6.6 unemployment, and to low but stable inflation as reasons for cautious optimism and for steady reductions in the stimulus.

Long concerned with the pain the recession caused American workers, she will also probably stress that policy will remain broadly accommodative for some time.

She is not, however, expected to tip her hand on how the Fed might re-craft its delicately worded promise to keep rates low based on levels of employment and inflation. The Fed has said it would not consider raising rates at least until the jobless rate hit 6.5 percent, as long as inflation was well contained.

Yellen will chair her first meeting of the Fed's policy-setting committee in mid-March, and will hold a press conference after the close of the two-day meeting.

Yet after eight years of Bernanke at the helm of the world's most influential central bank, the testimony could set the stage for at least four years under Yellen.

Said Zach Pandl, senior rates strategist at Columbia Management: "The testimony will help clarify how she plans to govern the (Fed's policy-setting) committee, and how much airspace there was between Bernanke and Yellen on the big policy questions."

(Additional reporting by Ann Saphir in San Francisco; Editing by Dan Burns and Leslie Adler)