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Fed chief says economy still needs aid

Janet Yellen’s remarks suggest the Fed is unmoved by critics who say monetary policy has done all that it can to help.

J. Scott Applewhite /Associated Press

Janet Yellen’s remarks suggest the Fed is unmoved by critics who say monetary policy has done all that it can to help.

WASHINGTON — Janet L. Yellen, the Federal Reserve chairwoman, told a Senate committee Tuesday that the economy continues to grow slowly, the Fed plans to continue to help, and the basic situation is not likely to change soon.

“Too many Americans remain unemployed; inflation remains below our longer-run objective; and not all of the necessary financial reform initiatives have been completed,” Yellen said in prepared testimony to the Senate Banking Committee.

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Yellen’s remarks suggest the Fed’s leadership remains largely unmoved by the increasingly vocal arguments of some Fed officials and outside economists that monetary policy has done what it can to revive the economy, and that the Fed is in danger of waiting too long and risking future inflation before it begins to raise interest rates.

The central bank plans to end one part of its stimulus campaign, the expansion of its bond holdings, in October, but Yellen made clear that it plans to keep short-term interest rates near zero for some time. She noted the Fed’s recent efforts to plan its eventual retreat “do not imply any imminent change in the stance of monetary policy.”

Yellen appeared before the committee to present the Fed’s biannual report on monetary policy. She will testify before a House committee Wednesday.

The economy shrank sharply in the first quarter, but Yellen reiterated the Fed’s view that growth has resumed — though she added “this bears close watching” — and its forecast that the economy would continue to grow “at a moderate pace over the next several years.”

The decline of the unemployment rate to 6.1 percent in June, meanwhile, exceeded the Fed’s expectations. Some Fed officials and outside economists argue the labor supply is approaching normal levels and say the Fed should move more quickly to raise interest rates.

Yellen maintained her view that the unemployment rate is overstating the progress of the labor market. Some people who stopped looking for work are likely to return as the economy improves, she said. Wage growth also remains weak, suggesting employers still find it easy to replace workers.

Inflation also remains sluggish, suggesting the economy continues to operate below capacity.

“With wages growing slowly and raw material prices generally flat or moving downward, firms are not facing much in the way of cost pressures that they might otherwise try to pass on,” the Fed said in a report accompanying Yellen’s testimony.

But Yellen added that the Fed was ready to respond if it concluded it had overestimated the slack in the labor market, a more substantial acknowledgment of the views of her critics than she has made before.

While Yellen said that concerns about financial stability were not sufficient, at present, to warrant a shift in monetary policy, the Fed remained watchful of the potential for destabilizing bubbles in various markets. Valuations “remain generally in line with historical norms,” but there is evidence of overconfidence in sectors including junk bonds, she said.

The Fed, in its biannual report accompanying the testimony, also cited social-media and biotechnology stocks as potentially overvalued.

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