New York Times - Economy

Yellen Says Economic Expansion Has Gained Strength

“ 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,” she said.

In response to questions from members of both political parties, however, she declined to assess whether the Republican tax plan would achieve that goal. She said that it was up to Congress and the White House to evaluate the details of proposed changes.

“Looking at the likely impact of the particular proposals that may be under consideration is something that we haven’t done carefully at the Federal Reserve,” Ms. Yellen said.

She also said changes in fiscal policy could affect how quickly the Fed raises rates.

Fed officials have drawn a careful distinction between tax cuts that increase economic capacity — for example, by encouraging business investment — and tax cuts that provide a short-term sugar high, such as cuts in personal income taxes that would likely increase spending.

The Fed estimates that the economy is already growing at something close to the maximum sustainable pace. A short-term stimulus, therefore, would likely raise inflation. In turn, the Fed could seek to offset faster inflation by raising interest rates more quickly.

“We welcome strong growth,” Ms. Yellen said. “The Fed is not trying to stifle growth. We’re worried about trends that could push inflation above our 2 percent objective.”

Ms. Yellen also addressed questions about financial regulation, largely echoing Mr. Powell’s testimony at his confirmation hearing Tuesday.

Like Mr. Powell, Ms. Yellen defended stronger regulation of large banks. She said it would be “very dangerous” to roll back the stringencies introduced after the 2008 crisis.

She also reiterated Mr. Powell’s view that the Fed supported legislation that would ease the regulatory burden on smaller banks. She even borrowed a phrase from Mr. Powell, endorsing the idea of “tailoring” regulations to the size of the bank.

Ms. Yellen’s assessment of economic conditions was perhaps the most upbeat in her four years as the Fed’s chairwoman, reflecting the improvement of economic conditions during her term. The unemployment rate has fallen to 4.1 percent, while inflation remains below 2 percent.

The Commerce Department reported Wednesday that the American economy expanded at a 3.3 percent annual rate in the third quarter, higher than its previous estimate of 3 percent.

Ms. Yellen noted that the economy had shaken off the disruptions caused by hurricanes this fall. She said the Fed’s policymaking group, the Federal Open Market Committee, planned to continue raising the benchmark interest rate, winding down its own efforts to stimulate faster growth.

“With ongoing strengthening in labor market conditions and an outlook for inflation to return to 2 percent over the next couple of years, the F.O.M.C. has continued to gradually reduce policy accommodation,” Ms. Yellen said. “We continue to expect that gradual increases in the federal funds rate will be appropriate to sustain a healthy labor market and stabilize inflation.”

Inflation remains below the Fed’s 2 percent annual target. Indeed, this is likely to be the sixth straight year the Fed falls short of that target. But Ms. Yellen said she expected inflation to rise as the labor market continues to tighten. She noted that businesspeople now uniformly tell the Fed that they are having trouble finding enough qualified workers. That suggests businesses are under pressure to offer high wages, leading to higher prices.

Members of the committee took the opportunity to praise Ms. Yellen. Democrats were particularly effusive in applauding her performance at the Fed.

“I would say your tenure has been an unqualified success by every metric,” said Representative Carolyn Maloney, Democrat of New York.

She described Ms. Yellen as “one of the most successful Fed chairmen in history.”

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