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What’s the Best Way to Stop Creating Jobs? What’s the Best Way to Stop Creating Jobs?

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What’s the Best Way to Stop Creating Jobs?

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Janet Yellen leaves after her confirmation hearing November 14, 2013 on Capitol Hill in Washington, DC.(Photo by Alex Wong/Getty Images)

Janet Yellen has a lonely problem: While the rest of Washington fights to start an economic stimulus program, the new Federal Reserve head is tasked with shutting one down.

Her task is a daunting one. The Fed has long promised to wind down its recession-era stimulus blitz, but if it goes too quickly, the central bank could drop the bottom out from under a still-shaky economy. And if it goes too slowly, the Fed risks putting the economy on course for another crisis.

 

But however Yellen plans to make it work, she's going to have to explain herself—fast. Just eight days into her four-year term as head of the Fed, Yellen heads to Capitol Hill Tuesday to articulate her vision to the GOP-led House Financial Services Committee.

First up on Yellen's to-do list: What to do with a bond buying program that has been underway since Sep. 2012. The Fed began "tapering," or slowing down the pace of asset purchases, in December. After two months of $10 billion cuts, the central bank is currently purchasing $65 billion each month to shore up the economy. The goal of the bond buying program, known as quantitative easing, is to bring down long-term interest rates and spur economic growth. But it could generate financial instability (a bubble) or inflation if it goes on for too long, a concern often voiced by congressional Republicans.

Knowing when "too long" is reached is a challenge for monetary policymakers. Inflation is currently in check, but the last few months of economic data have presented confusing signals about the recovery's strength, made fuzzy by weather interference. Yellen is expected to reiterate in testimony that the central bank will be looking closely at the data when it decides whether to continue tapering when the policy-setting committee meets again in late March. She may also emphasize a longer view, indicating the Fed sees strength below the recent choppy numbers. "I think what she'll point to is [the Fed's policymakers] genuinely believe the underlying fundamentals of the economy are improving," said Richard Moody, chief economist at Regions Financial Corporation.

 

Eventually, the end of bond-buying will cause mortgage rates and other long-term interest rates, like those for cars and student loans, to rise. But Mark Hamrick, Washington bureau chief for Bankrate.com, said after the Fed's decision to cut another $10 billion last month that borrowers are unlikely to feel much impact of tapering for another year.

"These are some of the lowest rates that have been seen in generations sort of across the borrowing spectrum, and that outlook remains probably for the balance of this year," Hamrick said. "What happens after that is very much dependent on what happens with the broader economy."

Another key part of Yellen's job will be determining and communicating when the central bank should raise its benchmark interest rate (this is expected to happen after the bond-buying program has been unwound). The federal funds rate, which the central bank sets and then ripples through interest rates across the economy, has been near zero since Dec. 2008. Like bond buying, the goal of keeping the federal funds rate low is to encourage spending and investment to grow the economy.

And as with bond buying, keeping the rate low for too long risks higher-than-desired inflation. In Dec. 2012, the Fed said it would start to raise the rate some time after the national unemployment rate reached 6.5 percent. Now, the U.S. jobless rate hovers just one-tenth of a percentage point above that level.

 

But the unemployment rate by itself is increasingly viewed as a poor gauge of labor market health, and few think the Fed is ready to raise interest rates in the coming months. The job market is still widely believed to be weak, and the unemployment rate has been on the decline at least partly for "the wrong reasons" -- people leaving the labor market -- which, because of the way the jobless rate is calculated, actually brings down that headline number.

Economists are hoping Yellen will give a better sense Tuesday of when and how the Fed will make the call to raise the federal funds rate. They might be disappointed; Yellen may want to wait until the Fed's next policy-setting meeting, which is set for March 18-19, and accompanying press conference to get into specifics, preferring not to front-run the committee she'll be representing before Congress this week.

Of course, Yellen could always be pinned down on something unexpectedly in the question-and-answer period with members of the House Financial Services Committee. And lawmakers in the other chamber will have a chance to follow up on Thursday, when she appears before the Senate Banking Committee.

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