Janet Yellen has turned a cold shoulder to the pleas of emerging markets by signalling that only a domestic slowdown will influence US monetary policy, in comments that suggest there will be no relief for those countries being battered by the Fed's cut in its asset purchases.
In her first appearance before Congress as Federal Reserve chairwoman, Ms Yellen noted emerging market turmoil for the first time, saying the Fed was "watching closely the recent volatility". However, she showed no sympathy for complaints that the Fed had failed to co-ordinate its policy with other countries.
India’s central bank governor, Raghuram Rajan, last month hit out at the US for “washing their hands” of emerging markets. He is one of several central bankers to have increased interest rates following a turbulent start to the year that saw a sharp sell-off in emerging markets currencies.
"Our sense is that at this stage these developments do not pose a substantial risk to the US economic outlook," said Ms Yellen. "We will, of course, continue to monitor the situation." In her prepared remarks, Ms Yellen pledged "a great deal of continuity" with the stimulative policies of her predecessor, Ben Bernanke.
Rising steadily
Markets cheered the chairwoman's performance before the House financial services committee with the S&P 500 rising steadily as she spoke. It was up more than 1 per cent at 1,818 by lunchtime in New York.
Ms Yellen ignored patchy recent US economic data in her remarks, forecasting moderate growth this year and next, and highlighting the need to look beyond the unemployment rate when judging the economy.
"I was surprised that the jobs reports in December and January showed that job creation was running a little under what I had anticipated," she said in response to a question. "But we have to be very careful not to jump to conclusions about what those reports mean."
Confidence
Her remarks suggest the Fed has enough confidence in the economy to keep tapering its asset purchases, now at $65 billion a month, and signal that new forms of forward guidance about interest rates will rely less on the unemployment rate.
“The recovery in the labour market is far from complete,” she said. “Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed, and the number of people who are working part-time but would prefer a full-time job remains very high.
“These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the US labour market.”
That is another indication the Fed will continue to keep interest rates close to zero even after the unemployment rate – currently at 6.6 per cent – drops below its 6.5 per cent threshold for considering a rate rise. Ms Yellen’s remarks suggest that she still thinks there is labour market slack beyond the unemployed. “It seems to me, based on the evidence I’ve seen, that some portion of that does reflect discouragement about job opportunities,” she said. – ( Copyright the Financial Times Limited 2014)
