Yellen says US expansion widening as financial risks muted

[WASHINGTON] Federal Reserve Chair Janet Yellen, in what may be her last appearance before Congress as head of the central bank, described a steadily brightening picture for the US economy while downplaying the risks of financial instability.

"The economic expansion is increasingly broad based across sectors as well as across much of the global economy,'' Ms Yellen said in prepared testimony to the bicameral Joint Economic Committee on Wednesday in Washington. "I expect that, with gradual adjustments in the stance of monetary policy, the economy will continue to expand and the job market will strengthen somewhat further, supporting faster growth in wages and incomes.''

In her statement, Ms Yellen repeated that she expects the Fed to continue gradually raising interest rates and trimming its balance sheet. The central bank has raise the target range for the federal funds rate four times in the past two years.

Ms Yellen's term as chair expires in early February, and President Donald Trump has nominated Fed Governor Jerome Powell to take her place. Mr Powell is awaiting confirmation by the Senate. Ms Yellen has announced she will leave the Fed once that happens.

With stocks trading at record highs, Ms Yellen downplayed the threat of financial instability.

"Although asset valuations are high by historical standards, overall vulnerabilities in the financial sector appear moderate, as the banking system is well capitalized and broad measures of leverage and credit growth remain contained," she said.

After her remarks were released, a government report underscored how the economy is picking up steam. Gross domestic product expanded by 3.3 per cent in the third quarter, faster than an initially reported 3 per cent pace, Commerce Department figures showed.

Drawing attention to the milestones of the post-crisis recovery, Ms Yellen noted that 17 million more Americans were employed compared with eight years ago and unemployment had dropped to 4.1 per cent, down from crisis-era peak of 10 per cent.

Her central accomplishment as chair came in engineering a slow, careful exit from the unconventional easing policies the Fed unleashed during the financial crisis and recession that followed.

Still, Ms Yellen acknowledged that many Americans were not benefiting as much as economist had expected.

"Despite these labor market gains, wage growth has remained relatively modest," she said.

Inflation has also bedeviled Fed officials, remaining surprisingly low in the face of a tightening labor market. While acknowledging that structural factors may be weighing down prices in a persistent manner, Ms Yellen stuck by her expectation that inflation would gradually rebound to the Fed's 2 per cent target.

"In my view, the recent lower readings on inflation likely reflect transitory factors," she said. "As these transitory factors fade, I anticipate that inflation will stabilize around 2 per cent over the medium term." The Fed's preferred gauge of inflation stood at 1.3 per cent in the year through September, after excluding food and energy components.

Ms Yellen urged Congress to address the two issues undermining the potential for faster economic growth in the US: the decline in the size of the US workforce relative to population, and disappointing levels of productivity growth.

"Congress might consider policies that encourage business investment and capital formation, improve the nation's infrastructure, raise the quality of our educational system, and support innovation and the adoption of new technologies,'' Ms Yellen said.

BLOOMBERG