Janet Yellen: Job Market Needs Low Rates

622x350Janet Yellen, the Federal Reserve Chair spoke to community development professional in Chicago on Monday, March 31 and made it clear that for the health of the job market we need low interest rates for quite some time to get the market back on track. Even thought the Federal government is scaling back their monthly bond buying purchases later in the year, Yellen stressed that do not have plans to raise the short term rate at any time in the new future. The Fed purchasing the bonds has been in an effort to keep long-term interest rates as low as possible.

Yellen comforting the public in this way has put investors at ease. She was clearly indicating that the Fed does not have plans to raise short-term rates. Many investors feared that this would come up by the middle of next year. Yellen’s remarks indicate that there is more time before short-term rates are affected. The reasoning of the fed may be that a short-term increase would have big consequences for borrowing costs and stock prices. This was Yellen’s first major speech since taking the office of the Federal Reserve Chair and she stated that she thinks, “this extraordinary commitment is still needed and will be for some time, and I believe that view is widely held by my fellow policymakers at the Fed.”

Just after Yellen spoke at the conference stocks began to rise. At the close of the day Monday the Dow Jones industrial average was up 134 points. Yellen also noted during her speech that the U.S. job market is still not improving as fast as it should. Because of this less than stellar recovery the market needs low interest rates to encourage citizens to borrow and spend.

Big Issues Facing Janet Yellen as New Fed Chairman

opening_remarks03__01__300On February 1st, Ben Bernanke will no longer be the Federal Reserve Chairman, and we will begin the reign of Janet Yellen, the newly appointed Federal Reserve Chairperson. Considering that the Fed just celebrated its 100th birthday and employs more Ph.D. economists than any other institution in the world, you’d think that the Fed would have monetary policy down pat. However, it doesn’t. Yellen herself admits that setting interest rates is often a shot in the dark. “I consider it essential, in making judgments about the stance of policy, to recognize at the outset the limits of our understanding regarding the dynamics of the economy and the transmission of monetary policy,” she said in a 2012 speech at NYU.

Yellen’s humble attitude will certainly well assist her as Chairperson, since just about every single issue she’ll deal with will be wrought with uncertainty. Is the U.S. economy stagnating, or threatening to overheat? How quickly should the Fed taper its purchases of long-term Treasury bonds and mortgage-backed securities? When should it begin to raise the federal funds rate, which has been nailed to the floor at zero to 0.25 percent since the end of 2008?

These dilemmas are generally looked at through a hawk-vs-dove monetary prism, but they are  deeper and more interesting. The three big questions that Yellen will have to deal with answering will be thus: What is the most optimal amount of Fed control and oversight? How is the best way to manage economic and industry bubbles? What is the right proportion of mystery and transparency the Fed must maintain?