US economy, labour market performing below potential: Janet Yellen

Janet Yellen who nominated to be the next chairman of the Federal Reserve said on Thursday that the economy and labour market were performing ''far short of their potential'' and needed to improve before the Fed could start cutting monetary stimulus.

Yellen's testimony prepared for her nomination hearing today, said a strong recovery would ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases. According to her, supporting the recovery today was the surest path to returning to a more normal approach to monetary policy.

Commentators say the remarks showed her commitment to the central bank's strategy of attempting to boost the economy and lowering unemployment which stood at 7.3 per cent, more than four years after the economy pulled out of the longest and deepest recession since the Great Depression. She also stood for capital and liquidity rules to help counter the perception that some banks were too big to fail.

In her prepared remarks, which ran into three pages, Yellen said unemployment was ''still too high, reflecting a labour market and economy performing far short of their potential'' and that inflation was ''expected'' to remain below the 2 per cent goal of the Fed. Highlighting the areas where the economy had improved, she said housing ''seems to have turned a corner'' and the auto industry had made an ''impressive comeback.''

Meanwhile, commentators say, the nomination of Yellen to the next Federal Reserve chair had given critics of the central bank something they rarely had: leverage to force some changes.

As the Senate Banking Committee prepared for a confirmation hearing on Thursday senator Rand Paul (R-Kentucky) planned to delay a vote on Yellen's nomination by the full senate unless Democratic leaders brought up his bill for more expansive audits of the Fed.

Although the senator was not on the Banking Committee, half of the Republicans on the panel co-sponsored his bill.

The so-called Audit the Fed movement had been initiated by the senator's father Ron Paul, the former Texas congressman and Republican presidential candidate, and has strong support with those who want curbs on the central bank's powers or to dismantle it completely.

A similar legislation, which the senior senator had pushed through the House in 2012, had gained significant Democratic support amid bipartisan concern that Fed officials were more inclined to helping big banks than average Americans.

Critics of the Fed now hope the threat they held out would see them win a vote on the audit legislation.