Yellen flies flag for easy money

MARKETS cheered yesterday as Federal Reserve chair nominee Janet Yellen mounted her defence of the Fed’s radical quantitative easing (QE) to the US Senate, raising hopes that the country’s ultra-loose monetary policy will be continued.

Yellen, known for her dovish stance which favours low interest rates, used her testimony to defend QE, which has so far seen over $3.5 trillion poured into the economy.

“We have made good progress, but we have farther to go to regain the ground lost in the crisis and the recession,” she told senators. US stocks were buoyed by the testimony: the S&P climbed 0.5 per cent to 1,790.62 today, while the Dow Jones rose 0.4 per cent to close at 15,876.22. The spot price of gold also jumped upward to finish at $1,286 an ounce as Yellen confirmed her commitment to easing.

Yellen’s elevation from her current position as vice chair to replace Ben Bernanke in the top job still depends on the approval of those senators, who must vote to approve the President’s nomination. She denied during the discussions that the Fed had become a “prisoner of the market”, with investors conditioned to the Fed’s monthly $85bn ($53.5bn) of asset purchases. However, she later added: “We’re using policies that have never really been tried before,” conceding that “it is a work in progress and miscommunication is possible”.

She also denied there is a current bubble in asset prices, saying unequivocally: “At this stage I do not see risks to financial stability. We do not see broad buildup in leverage that poses a risk to financial stability.” But she did admit that low rates can serve to “induce risky behaviour”.

Dodging a question on when interest rates would begin to head away from their current historically low level Yellen argued that rates could not return to normal “unless the economy is normal”.

Paul Ashworth, chief US economist of Capital Economics said the testimony gave no better idea of when the Fed might begin to taper its QE by trimming asset purchases: “Given all the recent flip-flopping we’re unsure of exactly what would be enough to convince the Fed to act at any particular meeting. November’s labour market figures could yet end up being the deciding factor.” Nick Beecroft, chairman of Saxo Capital Markets, said her remarks were loyal to the current chair’s stance: “She stuck diligently to the Bernanke mantra.”