Yellen Says Fed Needs ‘Firmer Handle’ on Soft Data
Policy + Politics

Yellen Says Fed Needs ‘Firmer Handle’ on Soft Data

REUTERS/Mario Anzuoni

Federal Reserve Chair Janet Yellen said on Thursday the central bank would be on alert to make sure recent signs of weakness in the U.S. economy are due to cold weather and storms, and not signals of a more fundamental slowdown.

"Since my appearance before the House committee, a number of data releases have pointed to softer spending than many analysts have expected," Yellen, who took the reins at the Fed on February 1, told a Senate Banking Committee hearing, referring to a February 11 testimony.

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"Part of that softness may reflect adverse weather conditions, but at this point it's difficult to discern exactly how much," she added. "In the weeks and months ahead, my colleagues and I will be attentive to signals that indicate whether the recovery is progressing in line with our earlier expectations."

After more than five years of ultra accommodative policies in the wake of the recession, the Fed is taking the first steps to wind them down. It modestly trimmed a bond-buying program in each of the past two months and, according to forecasts, it plans to raise interest rates some time next year as long as the economy continues to improve.

While Yellen has made clear there is a high bar for the Fed to shelve its plan to keep trimming the purchases, heavy snow storms and cold snaps have hit U.S. employment, retail sales and manufacturing in recent months.

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The world's largest economy has added less than 200,000 jobs in the last two months, well below expectations, prompting economists and investors to speculate the Fed might not cut the purchases by an additional $10-billion at a policy-setting meeting March 18-19. The bond-buying is now running at $65 billion per month.

On Thursday, Yellen reinforced that the Fed expects to continue drawing down the program and shelve the purchases some time in the fall. She repeated the purchases are not on a pre-set course, and the Fed would reconsider its plan if there were a "significant change" to the economic outlook.

But first the Fed needs to get a "firmer handle" on whether the soft data is due to weather or some more fundamental slowdown, Yellen said.

Interest rates have been near zero since the worst of the financial crisis in late 2008; the Fed has meanwhile swollen its balance sheet to more than $4 trillion in a further attempt to stimulate investment, hiring and growth in the United States.

The severe weather has also depressed residential construction and industrial production in January, and put a damper on home resales last month.