Forex News: Currency Briefing – Fed needs to weigh growth before acting

By: Tsvyata Petkova
Tsvyata Petkova
Tsvyata reports prmarily on foreign exchange market and daily fx rates. Today, she is a leading FX Dealer for… read more.
on Feb 28, 2014
Updated: Oct 21, 2019

Fed Chair Janet Yellen stated she isn’t sure how much of the recent dip in U.S. economic growth is due to the adverse weather, adding that the central bank might consider a pause in its reduction of bond buying if the weakness persists.

“Asset purchases are not on a preset course, so if there’s a significant change in the outlook certainly we would be open to reconsidering, but I wouldn’t want to jump to conclusions here,” Ms. Yellen told the Senate Banking Committee Thursday.
The Fed’s bond-buying program was perceived to drive faster growth by lowering borrowing costs to encourage more spending, hiring and investment. The central bank decided in January to scale back its purchases by $10 billion to $65 billion a month, and Fed officials have signaled they’ll likely continue reducing the purchases this year if the economy improves as they expect.

Thursday marked Ms. Yellen’s second day of testimony, which was originally scheduled for Feb. 13. It was postponed when the committee decided to reschedule the hearing because of a snowstorm that hit Washington.
Since Feb. 13, U.S. economic data has shown signs of weakness. The softness has been broad-based, with retail sales falling 0.4% and industrial production sliding 0.3% in January. The recovery in housing, a crucial gauge for the success of Fed policies, has also shown signs of fraying. Some economists have blamed severe winter weather for the slowdown.

Separately, Ms. Yellen repeated her predecessor Ben Bernanke’s tack on fiscal policy. She said Washington’s belt-tightening had been a drag in the short run, but that the federal government’s growing deficit needs to be addressed in the long run.
Fiscal policy in recent years “has been quite tight and has imposed a substantial drag on spending in the U.S. economy,” Ms. Yellen said.

She added that “fiscal-policy drag” has placed a larger burden on the Fed’s monetary policy.
“I do think the economy is beginning to recover, and we have made progress,” Ms. Yellen said. “At a minimum, I would hope that fiscal policy would do no harm.”
The new Fed Chair played down the lawmakers’ concerns about the Fed’s large balance sheet, which now exceeds $4 trillion. Some economists worry that by printing new money to buy the bonds now on the balance sheet, the Fed has sown the seeds of a financial bubble or higher inflation once the economy picks up steam. But Ms. Yellen said the Fed still has the means to tighten monetary policy despite the size of its holdings.

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Ms. Yellen removed the possibility of lowering the interest rate the Fed pays on excess bank reserves from the current 0.25%. Such a move would have “a very limited effect on bank lending” and might disrupt money markets, she said.
Some economists think the Fed could spur lending and growth by lowering the rate. Ms. Yellen stuck with the Fed’s a party line on this issue, which doubts the usefulness of changing the rate.
Asked about the likely impact of a higher minimum wage on the economy, Ms. Yellen said it would help workers who are earning the minimum wage, but could have some negative impact on employment. While saying there was lots of debate as to how large the impact would be, the Fed Chair didn’t take issue with Congressional Budget Office estimates, disputed by the White House, that as many as half-a-million jobs might be lost if an increase is implemented.
“I do think it’s appropriate for us to make changes, and I fully expect that we will,” the new Fed Chair said. “It is completely appropriate for the board to be fully involved in important decisions, and I fully intend to make sure that we are.”
The relationship between the Federal Reserve and financial markets will be under the microscope Friday when four senior Fed officials sit down with economists and academics at University of Chicago-sponsored event to discuss how the central bank communicates and tries to avoid market tumult.
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