No taper, says Yellen, but unemployment must be trimmed

As anticipated, nominee for next chairperson of the US Federal Reserve, Janet Yellen has just delivered a very dovish speech to the Senate Banking Committee. There is no set time for tapering, and the biggest problem facing the US economy at the moment is the plight of the long-term unemployed - a "virtually unprecedented" situation, she said.

Yellen started by emphasising that there are dangers on both sides if quantitative easing (QE) is ended too early, and that it is important not to remove support from the economy too soon, particularly when its fragile. Low rates can induce risky behaviour, but the Fed, she said, doesn't "see a broad build up in leverage" that might pose a risk to financial stability at this point. It "would not rule out using monetary policy as a tool to address monetary policy misalignments." She added that she looks forward to the normalisation of monetary policy.

The Federal Open Market Committee is committed to a two per cent inflation goal, she said. "I consider it imperative that we do what we can to promote a strong recovery."

On quantitative easing, Yellen said: "These [asset] purchases have made a meaningful contribution to economic growth and to improving the outlook." She later stressed that QE is not aimed at helping to finance the country's deficit. (A newly published report says that governments have seen a $1.6 trillion windfall from QE.) Moreover, the programme cannot continue forever, she said, dodging a question regarding the Fed's tapering timeline plans. According to Yellen, the purpose of policy is to bring down rates to spur spending in interest-sensitive sectors.

Weak demand for good and services is a major drag on the economy, she went on. Slowing productivity growth is a usual development at this stage of the economic cycle, and should translate into a faster pace of hiring. Part of the "significant decline" in labour participation rate is structural, Yellen added. She persistently stressed the importance of trimming the unemployment rate. Today, jobless data from the US showed that the number of people receiving unemployment benefits was 2.874m last week, with 339,000 filing for it for the first time.

Gold spiked on the Yellen hearing and bonds and utilities are also climbing on her no-taper stance. The S&P 500 is up 0.3 per cent (at 1,786 at pixel time) - that's five points higher than the record hit yesterday.