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U.S. Federal Reserve Chair Janet Yellen on Tuesday reiterated that the central bank would continue to implement the current easy monetary policy and should be cautious over raising interest rates, as the U.S economy recovery remains incomplete.
Delivering the twice-yearly monetary policy report to Congress, Yellen said that "although the economy continues to improve, the recovery is not yet complete."
"Too many Americans remain unemployed, inflation remains below our longer-run objective," Yellen told lawmakers before the Senate Banking Committee, although the unemployment rate declined to 6.1 percent last month, the lowest level in almost six years.
Yellen said the labor force participation rate and other indicators suggest that "significant slack" remains in the labor market and "a high degree of monetary policy accommodation remains appropriate."
U.S. economy gains momentum
Yellen played down the significance of the sharp contraction of economic activity in the first quarter, saying it was likely the result of "transitory factors" and a number of recent indicators of production and spending suggest that economic growth "rebounded" in the second quarter.
"That negative number substantially understates the momentum in the economy," Yellen noted, referring to a decline of 2.9 percent of real gross domestic product (GDP) in the first quarter, the worst performance in five years.
The latest jobs report confirmed Yellen's view that the U.S. economy was gaining momentum. U.S. employers added 288,000 jobs in June, posting the fifth consecutive month with job gains above 200,000, the Labor Department said earlier this month.
But Yellen cautioned that the economic outlook still "bears close watching," as the housing recovery "has shown little recent progress."
"While this sector has recovered notably from its earlier trough, housing activity leveled off in the wake of last year's increase in mortgage rates, and readings this year have, overall, continued to be disappointing," she said.
Despite these concerns, Yellen believed the housing sector is "not quantitatively important enough to cause us to judge that it will hold back the recovery," she said, adding: "Nevertheless, my overall view is more positive."
FED taper on track
While Fed officials have stressed that the path of the Fed's asset purchases is "not on a preset course," the central bank has stuck to its plan to taper its asset purchase program by 10 billion U.S. dollars every policy meeting this year.
The Fed is currently buying 35 billion U.S. dollars of U.S. treasuries and mortgage-backed securities a month, down from 85 billion dollars last December.
The central bank is on track to end the asset purchase program in October if the U.S. economy progresses as expected, according to the minutes of the Fed's June monetary policy meeting released last week.
Yellen said it would require a "very significant change" in the economic outlook between now and October to alter this strategy.
If "we lost confidence that the labor market will improve for some reason or that inflation would move back to 2 percent," then the plan would require a "rethink" she explained, setting a high bar to change course.
Cautious on interest rate hikes
Yellen gave no indication when the central bank would raise its benchmark short-term interest rate, which has been at a record low of near zero since December 2008. The Fed has said it is appropriate to keep it near zero for "a considerable time" after the asset purchase program ends.
"There's no formula and there's no mechanical answer that I can give you about when the first rate increase will occur. It will depend on the progress of the economy and how we assess it, based on a variety of indicators," Yellen said.
If the labor market conditions continue to improve more quickly than anticipated, the Fed could raise its short-term interest rate sooner than currently expected; if economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated, she argued.
"We need to be careful to make sure that the economy is on a solid trajectory before we consider raising interest rates," Yellen noted. Most market participants predict the Fed will wait until mid-2015 to start raising interest rates.
