Yellen mounts defense of the Fed

Federal Reserve Chairwoman Janet Yellen is mounting a staunch defense of the Fed’s policies before a skeptical Republican Senate panel Tuesday.

Appearing before the Senate Banking Committee, Yellen gave little sign that the Fed is getting closer to raising rates for the first time since the financial collapse. She suggested, instead, that the economy would still benefit from extremely low interest rates.

{mosads}“Despite [economic] improvement, too many Americans remain unemployed and underemployed, wage growth is still sluggish, and inflation remains well below our longer-run objective,” she said in prepared testimony.

Yellen’s testimony Tuesday is her first before a Congress fully controlled by Republicans, many of whom are highly critical of the direction the Fed has taken since the financial meltdown of 2008.

Her appearance also comes as markets are intensely watching every move from the Federal Reserve, trying to discern when the central bank will decide to again increase interest rates, having wrapped up its final round of stimulus at the end of 2014.

During its last several policy meetings, the Fed has shown it can be patient when it comes to raising interest rates, a point Yellen reiterated Tuesday. With inflation in check, she said, there is room to further aid the economy before hiking rates.

The roadmap Yellen laid out for lawmakers indicated the Fed is a few steps away from an interest rate increase. Currently, the central bank believes a rate hike will not be appropriate for “at least the next couple of [policy] meetings.”

Yellen said the central bank will “at some point begin considering” a rate increase. And before the Fed decides to hike rates, it will update its policy statement to give markets notice.

But even then, Yellen cautioned that a change in the Fed’s policy outlook should not be interpreted as a decisive move. Rather, updated language showing it is preparing to hike rates should simply be read as a sign the bank believes the economy has improved to the point that it could increase rates at upcoming meetings.

Once the economy has improved, Yellen said the Fed will hike rates when it believes inflation is beginning to move back toward its 2 percent objective. Inflation is currently declining, although the Federal Reserve expects prices will begin to rise in the future as growth accelerates.

While Yellen pumped the brakes on any rate hike in her testimony, she struck a positive tone on the overall economy. She said the U.S. has been “improving along many dimensions,” as the jobless rate has fallen and economic growth has climbed.

She justified intense policy accommodation as a way to further improve an economy that is well on its way to recovery. The most serious threats to the U.S. recovery, she added, were likely to come from elsewhere in the globe.

“Foreign economies are confronting a number of challenges that could restrain economic activity,” she warned.

Economic slowdown in China and laggard recovery in Europe both could weigh on America’s comeback.

However, one area that the Fed no longer identifies as an economic risk is Washington. Officials at the central bank have often warned in recent years that fiscal policy battles in Congress could upend the U.S. economy. But Yellen’s latest testimony made no mention of risks inherent in policymakers’ debates.

Yellen’s testimony also made no mention of growing efforts among lawmakers to alter the Fed’s operations or increase oversight over the central bank. Fed officials, including Yellen, have publicly criticized Audit the Fed legislation that would subject the bank’s monetary policy to external review, and she will likely face some questions on that effort from GOP lawmakers Tuesday.

In opening remarks, Senate Banking Committee Chairman Richard Shelby (R-Ala.) struck a tough tone. He argued that now, there is an “even greater need for additional oversight by Congress and reforms” to the institution.

“The role of Congress is not to serve on the Federal Open Market Committee,” he added. “But, it is to provide strong oversight and, when times demand it, bring about structural reforms.”