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Janet Yellen: Federal Reserve could pause the taper if slowing growth is more than bad weather

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The Federal Reserve could halt the taper of its bond purchases if recent weak economic indicators reflect not just bad weather but underlying slow growth, Chairwoman Janet Yellen said Thursday morning.

Yellen said at a Senate Banking Committee hearing that if there's a "significant change in the outlook, certainly we would be open to reconsidering" the process of winding down the monthly large-scale asset purchases, which the Fed has decreased by $10 billion at each of its past two meetings to $65 billion.

She made similar remarks at a House hearing earlier in February. That appearance, required by law, was supposed to be followed days later by the Senate hearing. But it was canceled by a snowstorm that halted activity in Washington. Bad weather is to blame for the underwhelming news about economic growth before and since then, according to Yellen.

"We have seen quite a bit of soft data over the last month or six weeks," Yellen acknowledged, citing disappointing reports regarding job growth, housing and industrial production that some analysts attributed to especially harsh winter conditions in many parts of the country.

"It’s clear that weather has played – unseasonably cold weather – has played a role in much of that," Yellen said. But if future indications are that weather isn't entirely to blame, slowing or halting the taper is an option.

Fed members have said all along that the monthly bond purchases are not on a preset course and depend on incoming economic data, Yellen noted.

In her first appearance before the upper chamber as the top official at the central bank, Yellen also addressed another major question surrounding the Fed's plans for monetary policy, namely, whether it plans to update its forward guidance for its interest rate policy now that the unemployment rate, at 6.7 percent, is near the 6.5 percent rate threshold the Fed previously set for considering raising rates above zero.

Yellen said members of the Fed had not settled on an approach to clarify just how long after unemployment hits 6.5 percent that rates would remain near zero. With broader measures of unemployment, such as those that include people who are working part time or out of work for 27 weeks or longer, still highly elevated, Yellen noted, the time for tightening monetary policy is still in the future.

"The unemployment rate is not a sufficient statistic for the state of the labor market," Yellen said in response to a question from Sen. Charles Schumer, D-N.Y. She warned that "there is no hard-and-fast rule about what unemployment rate constitutes full employment." Instead, the Fed will have to look at "broad range" of indicators.

Nevertheless, Yellen told Sen. Dean Heller, R-Nev. that "if I had to choose one metric, the unemployment rate is probably the best” for determining the health of the economy. An unemployment rate of between 5 and 6 percent likely suggests that the economy is running near full capacity, in the Fed's view.

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Joseph Lawler

Economics Writer
The Washington Examiner