Yellen Says Fed Should Boost Jobs, Curb Disinflation
Federal Reserve Bank of San Francisco President Janet Yellen said prospects for a “tepid” recovery require that policy makers boost employment and guard more against inflation becoming too low rather than too high.
“We face an economy with substantial slack, prospects for only moderate growth, and low and declining inflation,” Yellen said today in a speech in San Francisco. Until the time comes to raise interest rates, “we need to defend our price stability goal on the low side and promote full employment,” she said.
Yellen, without calling for more monetary stimulus from the Fed, said “tight credit” may restrain growth for “some time to come.” The central bank in March authorized $1.45 trillion in purchases of mortgage-backed securities and other housing debt this year, and last month decided to taper off its $300 billion program buying U.S. Treasuries through October while debating a similar move with MBS.
“I expect the recovery to be tepid,” Yellen, who votes at interest-rate meetings this year, said in remarks to the CFA Society of San Francisco, a group of financial analysts.
“The gradual expansion gathering steam will remain vulnerable to shocks,” and the jobless rate will stay “elevated for a few more years,” she said, speaking one year after the Fed and the Treasury Department allowed Lehman Brothers Holdings Inc. to go bankrupt, intensifying the financial crisis.
Speaking to reporters, Yellen said she favors a tapering of the MBS purchases similar to the decision on Treasuries, “whatever level the MBS program is at or reaches when it comes to an end.” She declined to comment on whether the program will either be expanded or stopped short.
Main Rate Cut
The Fed cut its main interest rate in December almost to zero and switched to asset purchases as the primary tool of monetary policy. Central bankers have since reiterated that they will keep rates low for an “extended period,” and Yellen said in June that rates may stay near zero for several years.
Yellen said today the Fed’s moves “appear to be helping,” while the extent of their impact is “highly uncertain.” The Fed is mandated by Congress to promote stable prices and maximum employment.
There’s a “fear,” which is “real, growing and disruptive,” that the Fed will be unable to withdraw its $1 trillion expansion of credit and will print money to support the federal deficit, she said.
‘Loud and Clear’
“That’s why it’s so important for me to say the following loud and clear: We at the Fed are and will remain fiercely independent from politics,” Yellen said. “We have the means, we certainly have the will, to tighten policy when the time is right.”
That’s likely to happen before inflation rises to 2 percent because of the lag time following a monetary-policy decision, Yellen told reporters after the speech.
The central bank must be more mindful of asset-price bubbles now, she said. Low Fed rates “probably” helped inflate the housing bubble, Yellen said in response to an audience question.
The U.S. faces the possibility that inflation, excluding food and energy costs, will drift further below the Fed’s long- term objective of around 2 percent, Yellen said.
Treasury 10-year notes fell for the first time in four days amid speculation the rally that pushed yields to their lowest levels in two months can’t be sustained. The yield on the benchmark 10-year note climbed eight basis points, or 0.08 percentage point, to 3.42 percent at 5:50 p.m. in New York, according to BGCantor Market Data.
Improving Economy
In its Beige Book report last week, the Fed said that 11 of its 12 regional banks reported signs of a stable or improving economy in July and August, adding anecdotal evidence that the worst U.S. recession in seven decades is over. Five districts, including San Francisco, home to the biggest regional economy, “mentioned signs of improvement,” the report said.
“A wide array of data” supports the view that the recession has ended and the economy will expand in the second half, Yellen said. The growth this year will come from a “diminished pace of inventory liquidation by manufacturers, wholesalers and retailers,” she said.
Gross domestic product shrank at a 1 percent annual rate from April to June, following a 6.4 percent pace of contraction in the first three months of the year.
‘Low Gear’
The labor market “may keep the recovery in low gear for a while,” said Yellen, 63, a former Fed governor and top economic adviser under President Bill Clinton. Unemployment, a slowdown in wage growth and workers’ insecurity will “undoubtedly” restrain consumer spending and may result in “sluggish spending growth,” she said.
Yellen said potential losses on commercial real estate loans at small and mid-size banks represent a possible “financial contagion” that’s one of the biggest threats to economic recovery. “The likelihood of continuing losses by financial institutions will add new fuel to the credit crunch,” Yellen said.