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Yellen: Job market needs to improve

Federal Reserve Chair Janet Yellen told a Senate panel on Tuesday that she sees no reason to change monetary policy, saying the labor market has yet to fully rebound from the recession that followed the 2008 financial crisis.

"Too many Americans remain unemployed; inflation remains below our longer-run objective; and not all of the necessary financial reform initiatives have been completed," she said in remarks before the Senate Banking Committee in the Fed's semi-annual report on monetary policy. She will testify before a House committee on Wednesday.

Yellen said that the U.S. economy continues to make progress toward maximum employment and price stability. She pointed to the fact that the average total nonfarm payroll employment has been about 230,000 per month this year, a better pace than last year. Yellen also noted the unemployment rate has fallen nearly 1.5 percentage points over the past year and stood at 6.1 percent in June, down about 4 percentage points from its peak. Broader measures of labor utilization have also registered notable improvements over the past year.

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Despite these improvements, the recovery isn't complete, Yellen said. "Even with the recent declines, the unemployment rate remains above Federal Open Market Committee participants' estimates of its longer-run normal level."

"Labor force participation is weaker than one would expect based on the aging of the population and the level of unemployment," Yellen said, reiterated the view that she has expressed since becoming Fed chief in February. "These and other indications that significant slack remains in labor markets are corroborated by the continued slow pace of growth in most measures of hourly compensation."

While inflation has improved to 1.8 percent, it is still below the 2 percent Fed goal.

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In a note to investors, economist Ian Shepherdson of Pantheon Macroeconomics said Yellen's comments were generally in line with what analysts had expected and that the Fed is unlikely to hike interest rates anytime soon.

Yellen also expressed little concern that financial markets, which remain near all-time highs, may be overvalued, saying "they remain generally in line with historical norms." By contrast, the Fed's Monetary Policy Report, also released today, did spotlight what it considered overly high valuations for smaller social media and biotechnology firms.

One area that worries Yellen: the nation's "Too-big-to-fail" banks.

"Moving beyond recent developments, important structural vulnerabilities remain that could leave the U.S. financial system exposed to adverse events," she said, while noting that tighter federal regulation and stronger capital requirements has made the banking system safer.