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Fed's Yellen maintains dovish message in lawmaker letters

Janet Yellen, President Barack Obama's nominee to lead the U.S. Federal Reserve, is sworn in to testify at her U.S. Senate Banking Committee
Janet Yellen, President Barack Obama's nominee to lead the U.S. Federal Reserve, is sworn in to testify at her U.S. Senate Banking Committee

WASHINGTON (Reuters) - Janet Yellen, President Barack Obama's nominee to lead the Federal Reserve, stressed the need to keep interest rates low and the benefits of the central bank's bond buying in remarks released on Tuesday, underscoring her commitment to spur hiring.

In two letters to lawmakers, Yellen, currently the Fed's vice chair, maintained the dovish tone of her testimony to the Senate Banking Committee last week, arguing that an ultra-easy monetary policy was essential to restore U.S. economic growth.

The committee will vote on Thursday on whether to send her nomination to the full Senate for final approval. She is expected to win confirmation relatively easily, despite unease among many Republicans over the Fed's aggressive policies.

Yellen, nominated to succeed Fed chair Ben Bernanke when his term expires on January 31, would be the first woman to lead the U.S. central bank if confirmed to the post.

Her comments to Massachusetts Democratic Senator Elizabeth Warren and Louisiana Republican Senator David Vitter echoed a statement from the Fed's policy-setting Federal Open Market Committee in October, when officials decided to keep buying bonds at a $85 billion monthly pace.

"While a strong majority of the FOMC judges that asset purchases have been effective in fostering its economic objectives, the committee is aware of the potential costs and risks associated with asset purchases," she told Vitter, responding to questions he had submitted in writing after last week's hearing.

The Fed has held benchmark interest rates near zero since late 2008 and has quadrupled the size of its balance sheet to $3.9 trillion through three massive rounds of asset purchases aimed at holding down long-term borrowing costs.

It has also promised not to start raising rates at least until the U.S. unemployment rate hits 6.5 percent, provided the outlook for inflation remains under 2.5 percent. The jobless rate in October was 7.3 percent.

Critics worry these unprecedented measures could stoke asset bubbles or an unwanted level of inflation, something Yellen assured senators last week that she would take care to prevent.

Warren asked in her letter if it would be helpful to lower the Fed's unemployment rate threshold - something that a number of economists, and some Fed officials, argue would be a potent way to do more to encourage consumer and business spending.

Yellen did not answer the question directly, but she repeated the Fed's talking point that the threshold was not a trigger for action, and rates could stay lower for longer.

"Monetary policy is likely to remain highly accommodative long after one of the economic thresholds for the federal funds rate has been crossed," she said.

Obama's Democrats hold 12 of the 22 seats on the banking panel and control 55 of the 100 votes in the Senate. Yellen is expected to comfortably pick up enough bipartisan support to secure the 60 votes that would be needed to overcome any procedural hurdles.

(Reporting by Alister Bull, editing by Chizu Nomiyama and Diane Craft)

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