Fed’s Yellen Sees Scope for Further Asset Purchases to Spur U.S. Recovery

Photographer: Andrew Harrer/Bloomberg

Janet Yellen, vice chairman of the U.S. Federal Reserve. Close

Janet Yellen, vice chairman of the U.S. Federal Reserve.

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Photographer: Andrew Harrer/Bloomberg

Janet Yellen, vice chairman of the U.S. Federal Reserve.

Federal Reserve Vice Chairman Janet Yellen said the central bank has leeway to spur the U.S. recovery and reduce unemployment by buying more assets or clarifying its plan to sustain record-low borrowing costs.

“The Federal Reserve has some scope for action,” Yellen said today. “We are actively considering methods that we could use to provide greater clarity” on the central bank’s pledge to keep rates low through at least mid-2013, and new purchases have the potential to “flatten the yield curve.”

Fed officials are divided over how to reduce a U.S. jobless rate that’s hovered near 9 percent or higher for more than two years. Four officials have dissented at policy making meetings this year, with Chicago Fed President Charles Evans calling for more stimulus while Richard Fisher of Dallas, Charles Plosser of Philadelphia and Narayana Kocherlakota of Minneapolis voted against further easing.

Economic growth in the U.S. and other advanced economies “has been proceeding too slowly to provide jobs for millions of unemployed people,” Yellen said in a speech at a San Francisco Fed conference. She called for “urgent” international action to combat a “dearth” of global demand and “critical challenges” that include signs of slowing growth in emerging markets.

The Obama administration and Congress need a “credible” plan to bring the deficit down to sustainable levels, and there’s a “strong case” for more steps to be taken to remedy a “dysfunctional” U.S. housing market, she said. In addition, Asia has room to boost domestic demand, while Europe needs to take “forceful” steps to quell its fiscal and financial crises.

Stronger Recovery

“We at the Federal Reserve are moving vigorously to promote a stronger economic recovery,” the 65-year-old policy maker said. “However, monetary policy is not a panacea, and it is essential for other policy makers to also do their part.”

“This is a very dangerous moment” for the global economy “and it really calls for global policy coordination,” Yellen said after her speech at the San Francisco Fed’s annual Asia Economic Policy Conference. Now, there’s “an urgency to move forward on it.”

Data released since the Fed’s most recent gathering show the U.S. jobless rate fell in October to a six-month low of 9 percent from 9.1 percent a month earlier. An 80,000 increase in payrolls followed gains in the prior two months that were revised up by 102,000, according to the Labor Department.

Less Than Estimated

The economy expanded less than previously estimated in the third quarter, reflecting a drop in inventories that points to a pickup in growth as 2011 comes to a close. Gross domestic product climbed at a 2 percent annual rate from July through September, down from a 2.5 percent prior estimate, Commerce Department figures showed last week.

Stocks in the U.S. rose today following a report that U.S. consumer confidence increased by the most since 2003. The Standard & Poor’s 500 Index gained 0.5 percent to 1,198.39 at 12:56 p.m. in New York. The yield on the 10-year Treasury note rose 2 basis points, or 0.02 percentage point, to 1.99 percent.

Minutes of the Fed’s Nov. 1-2 meeting show a few members of the policy-setting Federal Open Market Committee shared the view that further policy accommodation may be necessary.

At this month’s meeting, Fed officials left the benchmark interest rate in a range of zero to 0.25 percent, where it’s been since December 2008, and affirmed their pledge to keep the rate very low through at least mid-2013. The central bank also continued its so-called Operation Twist program to buy $400 billion of longer-term securities and sell an equal amount of short-term debt.

More Asset Purchases

Additional asset purchases would constitute a third round of so-called quantitative easing after the Fed bought $2.3 trillion in housing and government debt in two rounds from December 2008 to June 2011.

“There are some costs associated with expanding the size of our balance sheet,” Yellen said. “And so there are costs and benefits to be weighed in doing that.”

“It is not to the world’s interest to have a U.S. economy that is faltering,” she said. “Strong growth in the U.S. economy, I believe, makes a positive contribution to growth throughout the world.”

Yellen was president of the San Francisco Fed from 2004 through last year, when she became the Fed’s vice chairman. The former economist at the University of California at Berkeley previously served on the Fed’s Board of Governors from 1994 to 1997 and chaired President Bill Clinton’s Council of Economic Advisers between 1997 and 1999.

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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