- The Washington Times - Tuesday, February 11, 2014

Janet Yellen, in her first appearance before Congress as the new chair of the Federal Reserve, sparked a major rally in global financial markets Tuesday by pledging to stick with her predecessor Ben S. Bernanke’s plan to gradually end the easy-money policies put in place during the recession.

Major stock indexes from Sydney to Wall Street surged as Ms. Yellen politely sidestepped potential controversies and missteps amid sometimes testy questioning by members of the House Financial Service Committee. She said the Fed would stay the course laid out by Mr. Bernanke to gradually wean the economy and financial markets off the Fed’s lenient policies while continuing to nurture stronger economic growth and job gains with ultralow interest rates.

In a sign that Ms. Yellen passed her first big test both in Congress and in the markets with flying colors, U.S. stock indexes built on their gains throughout the day, with the Dow Jones industrial average vaulting back toward 16,000 with a gain of 193 points. The gain of more than 1 percent on most Wall Street indexes left the Dow at 15,995 at the end of trading.

About the only sign Ms. Yellen gave that the Fed might veer from its campaign to gradually cut its monthly purchases of U.S. bonds, which have been juicing financial markets around the world, by about $10 billion every six weeks came when she acknowledged having been taken aback by recent reports of a sharp slowdown in job growth in the last two months. She said the Fed will closely monitor the situation to see if the slowing trend continues.

“I was surprised that the pace of job creation was running under what I anticipated,” she said, “but we have to be very careful in jumping to conclusions about what those reports mean.”

The Labor Department reported Friday that job growth slowed to 75,000 in December and 113,000 in January after running at a pace close to 200,000 a month earlier in 2013. Ms. Yellen emphasized that the central bank has been slowly winding down its extraordinary easing programs based largely on the expectation that last year’s stronger pace of job growth would continue.

But she said the sharp slowdown in job growth recently may have been caused in part by particularly cold weather, and the Fed will watch to see whether the trend continued in February. The Labor Department’s report on job conditions in February will come out in early March before the next meeting of the Fed’s policy-making committee.

While the Fed was taken aback by the job slowdown, Ms. Yellen did not indicate it would immediately stop its campaign to withdraw liquidity from financial markets unless it finds that the slowing trend is a lasting one.

“What would cause us to pause is a notable change in outlook. We’re looking for continued improvement in the labor market. If data were to raise questions about that,” the Fed might decide to change course, she said.

Ms. Yellen noted that despite the Fed’s strenuous efforts to nurture stronger economic growth and job creation, wages remain stagnant for most Americans in the middle class and low-income groups while inequality has grown as the wealthy have captured most of the growth in incomes since the recession.

“Wages have not kept up with productivity. For the last number of years, we have seen a shift in the distribution of income away from the labor share of work towards capital share,” she said, explaining why wealthy investors and corporate executives who are paid with stock tied to profits have enjoyed the most gains in income.

“It’s not fully understood what accounts for that trend. But it is a disturbing trend because it suggests that workers, even though they are being productive, their wages in real terms are not keeping up with that,” she said. “It is a very worrisome trend in terms of living standards.”

While the Fed is doing what it can to revive stagnant incomes, she noted several times that the central bank does not have the right “tools” to solve the problem, while Congress has much that it could do.

She urged Congress to address rising inequality and lingering high unemployment among low-income and disadvantaged groups by passing legislation to help upgrade the job skills of those groups so they can get jobs with better wages.

The Fed’s low-interest rate policies have helped to spur job growth, and are helping to alleviate some of the hardships borne by lower-wage groups, but it cannot entirely on its own solve their problems, she said.

“This is by no means a panacea to inequality, but I think we will see gains throughout the economy” as the Fed continues to nurture stronger growth, she said.

Ms. Yellen declined to give Congress advice on the often-contentious issues of budget deficits and spending, insisting that deficits and debt are primarily a long-run problem driven by growing spending on health care and other entitlement programs for the nation’s aging population.

“Long-run deficits that are projected to rise in an unsustainable way is a trend that has a negative effect on the economy. The larger deficits that we’ve had in recent years in part reflect the weakness of the economy.”

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