Chair Yellen’s testimony focused on the progress made towards the Fed’s objectives of maximum employment and price stability. Over this past year the unemployment rate has fallen 1.5 percent and there have been sizable gains in nonfarm payroll employment, averaging over $200,000 per month. The financial sector continues to become more resilient, banks have boosted their capital and liquidity positions, and there has been modest growth in wholesale short-term funding in the financial markets.
After giving her testimony, Chairwoman Yellen fielded questions brought forth by the Committee. Sen. Mike Crapo (R-ID) inquired as to when the Fed would increase the interest rate, to which Yellen responded that an increase won’t occur until next year at the earliest. Additionally, while quantitative easing (QE3) is projected to end this October, Sen. Dean Heller (R-NV) inquired as to whether the Federal Reserve will resort to it again in the future. Chair Yellen expressed a hope that there would be no need for a QE4, but said that it will remain an option.
Sen. David Vitter (R-LA) asked whether or not Chair Yellen supported proposed legislation that would require one of the Federal Reserve’s seven governors to have community-banking experience. While she agreed that the board would benefit from having the experience of a community banker, she disapproved of requiring it through legislation. Sen. Vitter also inquired as to the Federal Reserve’s efforts to reduce the chance that big banks would require a bailout in a crisis. Chair Yellen responded that it could be partially addressed later this year with the “liquidity coverage ration” rule that would require banks to hold safe assets that can be converted to cash quickly.
It’s important to note that despite what progress has been made in our nation’s economic recovery, there are still issues to be addressed.
The housing sector - while not as bad as it was immediately following the housing bubble - continues to produce disappointing readings. In addition, the unemployment rate is still above the Federal Open Market Committee (FOMC) participants’ estimates, labor force participation is too low, and inflation is below the FOMC’s goal of 2 percent. The GDP also poses a potential cause for concern after declining sharply in the first quarter.
Chair Yellen attributed the decline to be a result of transitory factors and said recent indicators suggest that growth has rebounded in the second quarter; still this merits a watchful eye.