Why Holding the Course is Good for Your Business
First words are usually momentous occasions.
But in the case of newly appointed Federal Reserve Chairwoman Janet Yellen, her debut testimony before Congress about the economy, inflation, interest rates and other aspects of monetary policy was mostly just an extension of business as usual, at least as it's been for the past two years or more under previous Chairman, Ben Bernanke.
Small business owners can expect the Federal Reserve to continue with "a highly accommodative policy," Yellen said, meaning it will prolong its program of quantitative easing, which began in 2012. As a result, interest rates are likely to stay low and the stock market buoyant, at least for the immediate future.
Quantitative easing refers to the program of monthly bond purchases by the Federal Reserve meant to bolster assets such as stocks. It's also used to keep down the federal funds rate--that is, the rate banks charge each other for overnight loans.
"I expect a great deal of continuity in the [Federal Open Market Committee's] approach to monetary policy," Yellen said. "I served on the Committee as we formulated our current policy strategy and I strongly support that strategy, which is designed to fulfill the Federal Reserve’s statutory mandate of maximum employment and price stability."
Since late last year, the Fed has been paring back its bond repurchase program which, at its height, amounted to bond buys of $85 billion in treasuries each month, to $65 billion currently.
For 2014 and quite possibly beyond, Yellen said the Federal Reserve will tie the remainder of the quantitative easing plan to what happens in the economy, specifically with labor conditions and inflation. Yellen added the federal funds rate could be expected to remain low (it's now near zero), well into the time when unemployment reaches a rate of 6.5 percent, and particularly if there is no uptick in inflation which has held at around 2 percent. The Unemployment rate is currently at 6.6 percent.
Yellen said she would also continue efforts to strengthen the financial system, in particular by making sure the Volcker rule, a section of the Dodd-Frank Act, is enforced. The Volcker rule restricts bank participation in short-term derivative trades, which in part led to the financial meltdown in 2008. Yellen said she would also make sure the Federal Reserve continues focusing on bank stress tests and increasing capital ratios to insure financial liquidity.
The recovery gained speed in the second half of 2013, Yellen says. Gross domestic product grew at an annualized rate of 3.5 percent, compared to 1.75 percent in the first half of the year. Three-and-a-half million jobs have been added since August 2012.
"Too many Americans remain unemployed, inflation remains below our longer-run objective, and the work of making the financial system more robust has not yet been completed," Yellen said.
Markets jumped following Yellen's testimony, with the Dow Jones Industrial Index increasing more than 188 points, or 1.2 percent in mid-day trading.