Yellen Says Jobs Outlook Warrants Accommodative Policy
Two of the Federal Reserve’s top policy makers endorsed the central bank’s view that borrowing costs are likely to stay low through late 2014 as the Fed misses its goal for full employment and inflation remains in check.
“I consider a highly accommodative policy stance to be appropriate in present circumstances,” Vice Chairman Janet Yellen said yesterday in a speech in New York. “I haven’t seen any set of information that should suggest to me we should change that view,” William C. Dudley, president of the Federal Reserve Bank of New York, said today in Syracuse, New York.
Central bankers next meet in two weeks to debate policy for an economy that Dudley and Yellen said may be sapped by government spending cuts and the European debt crisis. An unexpected increase in claims for jobless benefits highlighted Fed concerns that the labor market is weakening after payroll growth in March was the slowest in five months.
At the same time, policy makers gave no sign that a third round of large-scale assets purchases, known as quantitative easing, is imminent, said John Ryding, a former Fed researcher who is chief economist at RDQ Economics LLC in New York.
“The jobs number injects more uncertainty about where the economy is, but I don’t see any great angst over it, and I don’t see any rush to put QE3 back on the table,” Ryding said.
Dudley voiced concern that more bond purchases could spark anxieties about inflation. Yellen said that an expiration of the Fed’s current program to extend the maturities of the assets on its balance sheet wouldn’t amount to a tightening of policy.
Jobless claims increased 13,000 in the week ended April 7 to 380,000, the highest since Jan. 28, data from the Labor Department showed today. The median forecast in a Bloomberg News survey called for 355,000 claims.
U.S. stocks rallied as signs the Fed will maintain stimulus overshadowed the increase in jobless claims. The Standard & Poor’s 500 Index climbed 1.4 percent to close at 1,387.57.
Dudley, in a speech to business leaders at the Syracuse Technology Garden, said recent “upbeat” data on the U.S. economy suggest that “the recovery may be getting better established.” Still, “it is still too soon to conclude that we are out of the woods, as underlined by the March labor-market release.”
Most Pessimistic Estimate
U.S. employers added 120,000 jobs in March, less than the most pessimistic estimate in a Bloomberg News survey of economists. Joblessness fell to 8.2 percent from 8.3 percent as people stopped looking for work, bolstering Fed Chairman Ben S. Bernanke’s view that the declining unemployment rate overstates gains in the labor market.
“Over the next several years, I anticipate that we will fall far short in achieving our maximum employment objective,” Yellen said. Still, “considerable uncertainty surrounds the outlook, and I remain prepared to adjust my policy views in response to incoming information,” she said.
The end of the so-called Operation Twist program in June won’t amount to a tightening of monetary policy because the level of accommodation is dependent on the amount of assets the Fed holds, she said. The Fed announced in September it would replace $400 billion of short-term debt with longer-term securities to reduce borrowing costs.
“If we were to end the maturity-extension program in June as currently planned and not to announce further actions beyond that, I would not see that as a tightening,” Yellen said in response to a question. The Fed is “quite willing and committed to take whatever actions are necessary” to achieve its goals, she said.
Dudley played down the prospects for a third round of large-scale asset purchases, saying it might “create more anxiety on the part of some that it would lead to future inflation.”
The world’s largest economy expanded at a 3 percent annual rate in the fourth quarter of last year. The pace is forecast to slow to 2.2 percent for the first quarter of this year and to average 2.3 percent in 2012, according to a Bloomberg News survey of economists. The unemployment rate is forecast to fall to 8 percent by the end of this year.
“I see no good reason to doubt that our nation’s high unemployment rate indicates a substantial degree of slack in the labor market,” Yellen said in her speech. Growth “will be sufficient to lower unemployment only gradually from this point forward, in part because substantial headwinds continue to restrain the recovery.”
The Fed vice chair rejected arguments that the high level of unemployment is caused largely by a mismatch between worker skills and employers’ needs, and that a weak housing market is discouraging job-seekers from selling their homes and moving in search of work.
Yellen said she’s concerned that structural unemployment may rise if “the labor market heals too slowly.” More than 40 percent of the unemployed have been out of work for at least six months, and they “could become less employable as their skills deteriorate,” she said.
Yellen, 65, said she’s not concerned that additional asset purchases would leave the Fed unable to control inflation when necessary. The Fed has bought $2.3 trillion of bonds in two rounds as it sought to reduce long-term borrowing costs and boost the recovery.
“I feel fully confident that, regardless of the size of our balance sheet,” the “Fed has the tools, and has thought through carefully how to use the tools, to exit,” she said.
‘Long Way to Go’
Some policy makers have signaled resistance to further easing. Atlanta Fed President Dennis Lockhart said yesterday that the March jobs report doesn’t alter his view that the economy is growing moderately, and he would be “reticent” to support additional purchases of assets by the central bank.
“I am still not convinced that another round in this time frame would achieve a great deal,” Lockhart said to reporters in Stone Mountain, Georgia.
San Francisco Fed President John Williams said April 4 that the “probability of needing to do additional stimulus is lower.”
St. Louis Fed President James Bullard, who doesn’t vote on policy this year, said the economy will probably grow by 3 percent this year and the unemployment rate may drop to 7.8 percent by year-end.
Speaking in a Bloomberg Radio interview, Bullard said he “wouldn’t go too far” with last week’s “mediocre” jobs report.
The Fed said yesterday in its Beige Book report that the economy expanded “at a modest to moderate pace” from mid- February through late March as manufacturing, hiring and retail sales showed signs of strength in the face of higher fuel prices.
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