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Yellen said the Fed will “likely reduce the pace of asset purchases in further measured steps at future meetings” if economic data broadly supports policymakers’ expectation of improved labor markets and a rise in inflation.
She said the purchases are not on a pre-set course, repeating the Fed’s policy line.
A decidedly mixed run of data has raised questions over whether the U.S. economy can sustain the strength it showed in the second half of last year. Unemployment has dropped to 6.6 percent, from 7.9 percent a year ago, yet the fewer than 200,000 new jobs created over the past two months is insufficient to sustain last year’s economic growth.
The two months of weak U.S. jobs growth and a recent selloff in emerging markets that also hit Wall Street could complicate things for the Fed.
Yellen said the Fed was “watching closely the recent volatility” adding: “Our sense is that at this stage these developments do not pose a substantial risk to the U.S. economic outlook. We will, of course, continue to monitor the situation.”
Noting inflation remains below the Fed’s 2 percent target, Yellen said “the recent softness reflects factors that seem likely to prove transitory, including falling prices for crude oil and declines in non-oil import prices.”
The Fed will not let inflation run “persistently above or below” its 2-percent goal, she added.
Long concerned with the pain the 2007-2009 recession caused American workers, Yellen is sometimes seen as more dovish than Bernanke and thus willing to do more to stimulate the economy even if inflation could eventually ramp up as a result.
Yet Yellen appeared to want to reinforce the Fed’s determination to halt the money-printing presses later this year while ensuring investors that a rise in interest rates remains a long way off.
Her testimony was the Fed’s semiannual monetary policy report. It was released ahead of the 10 a.m. (1500 GMT) hearing of the committee.
The committee’s chairman, Jeb Hensarling of Texas, is a long-standing critic of the aggressive Fed stimulus, which he argues has enabled a huge run-up in U.S. debt.
Republicans have signaled they want to press Yellen on what they see as the limited effectiveness, and even dangers, of a central bank balance sheet now worth $4 trillion and counting.
One possible pitfall for Yellen would be to get ensnared in debate with lawmakers over fiscal policy, an area over which the Fed has no jurisdiction even though decisions last year in Congress have slowed the recovery. Others include the politically charged area of bank supervision, and persistent worries that the easy-money has stoked potentially dangerous asset-price bubbles.
Yellen, the first woman to chair the Fed in its 100-year history, testifies to the Democrat-controlled Senate Banking Committee on Thursday.