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Investments

Yellen: Fed needs to detect asset bubbles when they’re forming

No evidence of asset price misalignments at this time

Federal Reserve Building

Janet Yellen, vice chair of the Federal Reserve Board of Governors, appeared every bit the monetary policy dove that investors expected during her first big hearing in front of the Senate Banking Committee as Fed Chair nominee.

Yellen reiterated her approach to Fed policy, showing a commitment to using the low federal funds rate and the ongoing $85 billion in monthly asset purchases to drive an economic recovery. The fed views economic success against the backdrop of two key indicators -- unemployment and price stability.

Yellen eschewed suggestions from Senators that a souped up market – driven by recent Fed asset purchases and low interest rates – has caused a new bubble to inflate in areas such as housing.

"The Fed needs to detect asset bubbles when they are forming," Yellen said. "By and large, I would say I don’t see evidence at this point of asset price misalignments at a level that would threaten financial stability."

Yellen went on to ensure Senators that the Fed has a variety of tools at its disposal to pull back aggressive monetary policies should price misalignments or other issues surface.

The nominee then pointed to the housing market as a primary beneficiary of Fed policies.

"A number of different studies have been done to assess what the contribution of our asset purchases has been," Yellen told the panel. "These purchases have made a meaningful contribution to economic growth and to improving the outlook."

The Fed vice chair noted that MBS purchases and other interventions spurred lower mortgage rates, which "have been instrumental – and a positive factor in generating the housing recovery."

"Housing prices after falling are moving up," she said. "That is helping many households, including a large fraction of households that found themselves underwater on their mortgages … it is now improving their household balance sheets," Yellen explained.

But the big question the markets had for Yellen going into the meeting received a less direct answer from the nominee. 

When asked when the Fed will begin tapering its monthly purchases of MBS and Treasurys, Yellen answered indirectly, saying the labor market has yet to reach the Fed's benchmark for triggering a pullback.

"At each meeting, we are attempting to assess whether or not we are seeing meaningful progress in the labor market," Yellen said.

There's no set time for the Fed to reduce its pace of monthly asset purchases, Yellen admitted.

When asked about the risk of artificially inflating the market using monetary policies, Yellen assured panelists the Fed is committed to reaching its goals without putting other parts of the economy at risk. She also admitted QE will eventually reach its limit.

"I would agree that this program cannot continue forever," the Fed chair nominee said. "There are costs and risks associated with the program. We are monitoring those very carefully. The committee is focused on a variety of risks and recognizes that the longer this program continues, the more we will need to worry about those risks."

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