Detroit Free Press Susan Tompor column

April 11–Federal Reserve Chair Janet Yellen said Monday that the Federal Reserve's intention remains to give the U.S. economy some gas, but not press down too hard on the accelerator.

Now that the U.S. economy is on a healthy footing — and the global economy is slightly more robust — she said the Fed needs to get interest rates closer to a more neutral level that would allow the U.S. economy to grow at a moderate pace.

The U.S. jobless rate was 4.5% in March, down from 4.7% in February, and has sat at or below 5% since September 2015. The low jobless rate, she said, gives the Fed more room to change its focus and adjust its monetary policy toward higher rates. The goal is to raise rates gradually in advance of any inflationary pressures.

“We want to be ahead of the curve and not behind it,” Yellen said.

Yellen engaged in a far-reaching conversation with Susan M. Collins, dean at the Gerald R. Ford School of Public Policy at the University of Michigan, at Rackham Auditorium on Monday afternoon. Yellen spoke to a group of economists, professors and students.

“We have a healthy economy now, but it's been a long time coming,” Yellen said. “We did everything we possibly could to support the economy.”

She noted that she and others at the Fed would never have had expected that the federal funds rate would have remained at 0% for seven years when the Fed first drove down short-term rates back in December 2008 to revive the economy during the depths of the financial meltdown.

“We suffered as a country through a very deep and very long recession in the aftermath of the financial crisis,” Yellen said.

Yellen, who has been involved in leadership roles at the Fed since 2004, said Monday that one of the lessons of the financial crisis was how the nation's financial system had evolved to be highly dependent on short-term borrowing to fund the loans that were being made. The financial system did not control risk appropriately, and she said the nation's banking regulators were too focused on the health of individual institutions and missed the buildup of systemic risk.

She said the nation's banking system is on much safer footing now.

Taking a question from the audience about banking regulation, Yellen acknowledged that community banks do feel overburdened by regulation now. She said more needs to be done to tailor banking supervision to the risk of an organization.

Yellen is viewed by many on Wall Street as a “dove” at the Fed — or someone who values keeping interest rates low to try to reduce unemployment instead of being quick to raise rates in order to combat inflation.

She noted that an earlier job at the San Francisco Fed involved meeting regularly with labor leaders, ordinary people working in the labor market, business leaders and nonprofits. That experience, she said, gave her a chance to understand how talking to people who are experiencing the economy in real time does provide insight. Yellen served as president and CEO of the Federal Reserve Bank of San Francisco from 2004 to 2010.

As the Fed chair, she said she has had more perspective on the relationship between Congress and the Federal Reserve. She said the Fed's independence regarding monetary policy — which is being challenged by some in Congress now — is essential to better decision making and the long-term health of the U.S. economy. She noted that independence regarding monetary policy was put into place by Congress in the late 1970s.

Yellen, the first woman to run the Fed, likely has less than a year to go at the nation's central bank. Yellen was confirmed in January 2014 to a four-year term, which ends in early 2018. President Donald Trump had criticized Yellen's leadership during his campaign, but Yellen has said it's her intention to serve out her term.

On Monday, Yellen gave no indication of the timing for the Fed's future moves and she only explained the Fed's reasoning behind the overall policy toward higher rates.

She pointed to several signs that give the Fed reason to move its monetary policy more back to a neutral range, including that housing is a little bit healthier than it has been.

She said improvements on the jobs picture also gives the Fed room to take action.

Yellen did acknowledge that the unemployment rate itself could be somewhat misleading because some workers did become discouraged during the economic downturn, including younger workers and those who are nearing retirement age. When they couldn't find work, they withdrew from the labor force. But she said the labor force participation rate has been improving lately to some extent.

Now that the economy has recovered, the Federal Reserve — which moved aggressively to shore up the nation's economy due to the Great Recession — is expected to begin unwinding a $4.5-trillion portfolio of Treasury and mortgage-backed securities sometime later this year.

In March, the Fed boosted the short-term federal funds rate — the rate banks pay each other for overnight reserves — by a quarter-point, to a range that will run between 0.75% to 1%. Major banks then increased the prime rate from 3.75% to 4%. It was the third rate hike since December 2015.

Yellen took several questions from the audience and the moderator, including one or two that sparked a lighthearted moment.

When asked what she does to avoid the stress of her job, Yellen noted that she believes strongly in the merits of unplugging electronics and getting a good night's sleep.

“Outside of work, I don't have any stunningly original activities,” she said, adding that she does like to cook and go out to eat with her husband.

Contact Susan Tompor: stompor@freepress.com or 313-222-8876. Follow her on Twitter @Tompor.

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