WASHINGTON (Reuters) - New Federal Reserve Chair Janet Yellen said on Tuesday the labor market recovery is "far from complete" despite a drop in unemployment, yet she said the U.S. central bank expects to continue trimming policy stimulus in measured steps due to broader improvements in the economy.
In her first public comments as Fed chief, Yellen, giving a balanced testimony to a House committee, nodded to the recent volatility in global financial markets, but said at this stage it does "not pose a substantial risk to the U.S. economic outlook."
She emphasized continuity in the Fed's approach to policy, saying she strongly supports the approach driven by her predecessor, Ben Bernanke.
While the unemployment rate has fallen by 1.5 percentage points since the latest bond-buying program began in September of 2012, at 6.6 percent the rate remains "well above levels" the Fed sees as consistent with maximum sustainable employment, Yellen said.
"(T)he recovery in the labor market is far from complete," she said according to prepared remarks to the Republican-controlled House Financial Services Committee.
Yellen, in just her second week on the job, cited the "unusually large fraction" of jobless Americans who have been out of work for more than six months, and the "very high" number of part-time workers who would prefer full-time jobs.
"These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the U.S. labor market," she said.
More than five years after the recession ended, the Fed has embarked on perhaps its most difficult policy shift as it tries to back away from flooding the financial system with ultra-easy money while at the same time convince investors that interest rates will stay near zero well into next year.
Encouraged by momentum in the economy last year, the Fed has trimmed asset purchases twice since December; it now buys $65 billion in Treasuries and mortgage bonds each month, to keep borrowing costs low and encourage investment and hiring.
Yellen said the Fed will "likely reduce the pace of asset purchases in further measured steps at future meetings" if economic data broadly supports policymakers' expectation of improved labor markets and a rise in inflation.
She said the purchases are not on a pre-set course, repeating the Fed's policy line.
A decidedly mixed run of data has raised questions over whether the U.S. economy can sustain the strength it showed in the second half of last year. Unemployment has dropped to 6.6 percent, from 7.9 percent a year ago, yet the fewer than 200,000 new jobs created over the past two months is insufficient to sustain last year's economic growth.
The two months of weak U.S. jobs growth and a recent selloff in emerging markets that also hit Wall Street could complicate things for the Fed.
Yellen said the Fed was "watching closely the recent volatility" adding: "Our sense is that at this stage these developments do not pose a substantial risk to the U.S. economic outlook. We will, of course, continue to monitor the situation."
Noting inflation remains below the Fed's 2 percent target, Yellen said "the recent softness reflects factors that seem likely to prove transitory, including falling prices for crude oil and declines in non-oil import prices."
The Fed will not let inflation run "persistently above or below" its 2-percent goal, she added.
Long concerned with the pain the 2007-2009 recession caused American workers, Yellen is sometimes seen as more dovish than Bernanke and thus willing to do more to stimulate the economy even if inflation could eventually ramp up as a result.
Yet Yellen appeared to want to reinforce the Fed's determination to halt the money-printing presses later this year while ensuring investors that a rise in interest rates remains a long way off.
Her testimony was the Fed's semiannual monetary policy report. It was released ahead of the 10 a.m. ET hearing of the committee.
The committee's chairman, Jeb Hensarling of Texas, is a long-standing critic of the aggressive Fed stimulus, which he argues has enabled a huge run-up in U.S. debt.
Republicans have signaled they want to press Yellen on what they see as the limited effectiveness, and even dangers, of a central bank balance sheet now worth $4 trillion and counting.
One possible pitfall for Yellen would be to get ensnared in debate with lawmakers over fiscal policy, an area over which the Fed has no jurisdiction even though decisions last year in Congress have slowed the recovery. Others include the politically charged area of bank supervision, and persistent worries that the easy-money has stoked potentially dangerous asset-price bubbles.
Yellen, the first woman to chair the Fed in its 100-year history, testifies to the Democrat-controlled Senate Banking Committee on Thursday.
(Reporting by Jonathan Spicer; Editing by Andrea Ricci)