Yellen blames weather for US slowdown

Suggests the central bank will go ahead with its taper plans

Unusually harsh winter weather appears to be behind recent signs of weakness in the US economy, Federal Reserve Chair Janet Yellen said on Thursday, suggesting the central bank was poised to press forward in ratcheting back its stimulus.

Testifying to the Senate Banking Committee, Yellen said the Fed would watch carefully to ensure weather was indeed the culprit, but she reiterated that it would take a "significant change" to the economy's prospects for the Fed to put plans to wind down its bond-buying program on hold.

Heavy snowstorms and cold snaps have hit US employment, retail sales and manufacturing. The world's largest economy added fewer than 200,000 jobs combined in December and January, well below expectations. Some investors think the Fed could alter its plans if a report on February hiring next week shows similar weakness.

"It's really quite a range of data that has been soft recently. I think it's clear that ... unseasonably cold weather has played some role in much of that," Yellen, the Fed's former vice chair who took the reins on February 1, told lawmakers.

"What we ... will be doing in the weeks ahead is to try to get a firmer handle on exactly how much of that set of soft data can be explained by weather and what portion, if any, are due to a softer outlook," she said.

After more than five years of ultra easy monetary policy in the wake of the 2007-2009 recession, the Fed is taking the first small steps to move towards a more normal footing. It trimmed its bond buying by $10 billion in each of the past two months, and it expects to raise interest rates some time next year as long as the economy continues to improve.

Yellen reinforced the notion that the Fed was aiming to end the purchases some time in the fall, although she said they were not on a "preset course."

Asked by New York Senator Charles Schumer if the Fed would consider changing the rate of taper if weather turned out not to be the main factor in recent economic weakness, Yellen said the central bank would be open to reconsidering if the outlook changed significantly.

"But I wouldn't want to jump to conclusions here," she said.

The Fed has held rates near zero since late-2008 and it has pumped up its balance sheet to more than $4 trillion with its asset purchases. It is currently buying bonds at a pace of $65 billion per month, and will decide its next move at a meeting on March 18-19.

Reaction in financial markets was muted, with US stocks up modestly and the dollar drifting lower against the euro.

"I think the prevailing wisdom remains that there is a high hurdle to deviating from the current $10 billion per meeting taper trajectory," Stephen Stanley, chief economist at Pierson Securities, wrote to clients.

WORRISOME BUBBLES

Senators on the committee also asked about financial regulation and the possibility that the accommodative monetary policy could inflate asset-price bubbles.

Yellen acknowledged that such low borrowing costs "can give rise to behavior that poses threats to financial stability."

"Therefore we need to be looking at that very carefully and we are doing so in a very thorough way," she said.

The debate is heating up over whether the Fed should stand ready to raise rates earlier than expected to head off risky behavior that could imperil financial stability.

The central bank is monitoring the growth of credit and leverage for "potential worrisome trends," Yellen said.

"I would say at this stage I don't see concerns, but there are pockets of a few things that we've identified that do concern us," she said.

"For example, underwriting standards and leveraged lending clearly appear to be deteriorating. We have addressed that with supervisory guidance and special exams and will continue to be very vigilant in that area."