Economic tailwinds from a strong second half of 2014 are likely to knock down the unemployment rate even further in coming months, Federal Reserve Chair Janet Yellen said in testimony Tuesday before the Senate Banking Committee.
Yellen delivered her first semi-annual update on the U.S. economy for this year, and the first before a Republican-led Congress. She was hit with tough questions from both sides as Democrats are unhappy about too little Wall Street regulation and Republicans too much.
The testimony also came as financial markets are increasingly nervous about when the Fed hikes its benchmark federal funds rate for the first time since December 2008, a move that will progressively raise borrowing costs across the economy for the purchase of cars, homes, business equipment purchases and a range of other lending.
The Fed chair was upbeat about the improving economy, which Yellen said is likely to have grown at an annual rate between 3 percent and 3.75 percent over the second half of 2014. The Commerce Department Friday releases its revised estimate for growth during the last three months of 2014 and the full year.
Although growth “is not anticipated to be sustained at that pace, it is expected to be strong enough to result in a further gradual decline in the unemployment rate,” Yellen said in opening remarks. “Consumer spending has been lifted by the improvement in the labor market as well as by the increase in household purchasing power resulting from the sharp drop in oil prices.”
However, Yellen cautioned, housing construction remains a drag on growth and construction activity “remains well below levels we judge could be supported in the longer run by population growth and the likely rate of household formation.”
Financial markets watched Yellen’s words closely for signs of when the federal funds rate will go up. While higher costs are not usually welcome, in this case it’s a sign of progress in the ongoing recovery from the worst financial crisis since the Great Depression.
“There is no spin here, it is our confidence in the economy” that determines the rate hikes, Yellen said during the question and answer period, adding that “When we raise rates it will signal confidence in the underlying fundamentals.”
Yellen did warn that weakness in the global economy is a concern.
“Growth in Europe has been slow. Growth in China is slowing,” she noted. “It affects our outlook, both through trade flows and through developments in financial markets.”
Under tough questioning, the Fed chair did not show her cards as to whether the so-called liftoff for rate increases will come in June, as many mainstream economists had expected, or whether concerns about Europe and elsewhere globally might delay that rate hike until September or beyond.
Because inflation remains well below the Fed’s target of 2 percent and that the labor force participation rate remains below normal, the Fed’s view that it can be patient means that it is “unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of (Fed) meetings,” Yellen said.
Many economists still think June is the liftoff date for the Federal Open Market Committee to raise rates.
“With this we think Yellen has laid the groundwork for the removal of the ‘patient’ language with the March 18 policy statement by saying that this does not necessarily mean the FOMC will hike rates at the next meeting—the timing of the liftoff will depend on the economic data,” wrote economists at RDQ Economics in New York. “We continue to expect the data on the labor market and inflation will lead the Fed to lift rates at the June FOMC meeting.”
Tuesday’s hearing was the first since Chairman Richard Shelby, R-Ala., took over the Senate Banking Committee. He was civil to the chair, despite voting against Yellen her to become the Fed vice chairman, and opposed her nomination to become Fed chair.
The toughest questioning came from Massachusetts Democratic Sen. Elizabeth Warren, the new voice of the liberal wing of her party. She frequently interrupted Yellen, demanding simple yes or no answers to complicated questions. Warren repeated a demand to meet with Yellen over a reported leak of market-moving information from the Fed.
“I just want to be able to get a briefing on what happened,” Warren scolded, prompting Yellen to interrupt by noting “we are trying to work with your staff on the process.”
Warren also criticized Fed General Counsel Scott Alvarez for publicly criticizing one of the rules in the 2010 revamp of financial regulation known as the Dodd-Frank Act. Warren asked whether it was the Fed view, and if not why was its top lawyer taking a different stand?
“I personally, and the board (of governors), considered Dodd-Frank to be an important piece of legislation,” Yellen said, never answering Warren’s question.