No Surprises From Yellen in Senate Hearing

Federal Reserve chair points to labor market slack, doesn't provide date for raise in federal funds rate.

Federal Reserve Board Chair Janet Yellen testifies before the Senate Banking, Housing and Urban Affairs Committee on July 15, 2014 in Washington, D.C.

Despite the economy's "solid trajectory,” the Federal Reserve will keep interest rates low, chair Janet Yellen said Thursday.

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Offering no surprises to lawmakers, Federal Reserve Chair Janet Yellen said Tuesday the central bank will continue to try stimulating the economy by maintaining interest rates near zero, a move that allows for easier borrowing and spending.

A “high degree of monetary policy” is needed still given remaining slack in the labor market, Yellen said in the first day of her semiannual testimony on monetary policy before lawmakers on Capitol Hill. She reiterated much of what she’s already said about job market improvement and, as expected, did not provide a concrete date for when the central bank will raise interest rates.

[READ: Interest Rates to Remain Low Even as Labor Market Improves]

“Even with the recent declines, the unemployment rate remains above Federal Open Market Committee participants' estimates of its longer-run normal level,” she said before the Senate Banking Committee. “Labor force participation appears weaker than one would expect based on the aging of the population and the level of unemployment.”

Despite a “disappointing” housing sector, stagnant wages and first quarter GDP weakness, Yellen said the economy does appear to be on a “solid trajectory,” citing a solid pace of monthly job growth. At the same time, inflation remains below the FOMC’s 2 percent objective, and Yellen said she expects it to move back up “in coming years.”

Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut, called her testimony “extremely plain vanilla.”

“She probably will employ a strategy of trying to survive these congressional appearances without creating waves, rather than attempting to send clear policy signals to financial markets,” he said in a research note to clients following the testimony.

Responding to questions from Sen. Chuck Schumer, D-N.Y., Yellen said there’s room for faster wage growth before the central bank needs to worry that it’s creating overall inflationary pressure for the economy.

Yellen also declined to give a definite date for when the FOMC will begin to raise the federal funds rate but reiterated the decision is dependent on a number of factors.

“If the labor market continues to improve more quickly than anticipated by the committee, resulting in faster convergence toward our dual objectives [of full employment and price stability], then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned,” she said. “Conversely, if economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated.”

[OPINION: 5 Reasons Why We Have Yet to See Inflation]

GOP lawmakers have expressed concerns about the regulation of smaller financial institutions, and the committee's top Republican, Sen. Mike Crapo of Idaho, decried what he called the "disproportionate [regulatory] burden" community banks face.

In a response to questioning from Sen. David Vitter, R-La., who introduced a bill that would require a community banker to fill one of the vacant seats on the Fed board, about whether she supports such a measure, Yellen said she favors the idea but does not support requiring it via legislation and worries about earmarking seats for specific purposes.

Yellen has previously said that a one-size-fits-all approach to regulation isn’t appropriate, so smaller community banks require tailored supervision.

Minutes from the FOMC's most recent meeting on June 17-18 show that most participants anticipate a federal funds rate hike sometime in 2015 and that the central bank plans to wind down its monthly bond buying program – known as quantitative easing, meant to lower borrowing costs and increase the money supply – in October.

“Even after the committee ends these purchases, the Federal Reserve's sizable holdings of longer-term securities will help maintain accommodative financial conditions, thus supporting further progress in returning employment and inflation to mandate-consistent levels,” Yellen said.