Fed’s Yellen Says More Easing May Be Warranted
Federal Reserve Vice Chairman Janet Yellen said “stalled” improvement in the labor market and weakening financial conditions may call for the central bank to boost its record monetary easing.
“Scope remains for the FOMC to provide further policy accommodation,” Yellen said in Boston yesterday. “It may well be appropriate to insure against adverse shocks that could push the economy into territory where a self-reinforcing downward spiral of economic weakness would be difficult to arrest.”
The policy-setting Federal Open Market Committee meets June 19-20 to consider further steps to aid the economy after employment growth in May cooled to the slowest pace in a year. Two regional Fed bank presidents who vote on policy, San Francisco’s John Williams and Atlanta’s Dennis Lockhart, said yesterday the central bank should be prepared to take action if the economy deteriorates. Fed Chairman Ben S. Bernanke is scheduled to testify on the economy in Congress today.
Yellen’s speech “is a prelude to the Fed clearly considering additional easing,” said Diane Swonk, chief economist in Chicago at Mesirow Financial Inc., which oversees about $61.7 billion in assets. “The Fed is keeping its powder dry, but is at least signaling that it’s willing to act.”
Yellen laid down three conditions for action: if the outlook entails “little or no improvement in the labor market over the next few years,” downside risks are “sufficiently great,” or the inflation rate threatens to drop “notably below” the Fed’s 2 percent goal. The personal consumption expenditures price index rose 1.8 percent for the 12 months through April.
Stocks climbed yesterday on speculation policy makers in Europe and the U.S. will take steps to boost growth. European Central Bank President Mario Draghi said officials stand ready to act as the euro region’s growth outlook worsens.
The Standard & Poor’s 500 Index rose 2.3 percent to 1,315.13 in New York. Yields on the benchmark 10-year Treasury note climbed nine basis points, or 0.09 percentage point, to 1.66 percent and touched 1.67 percent, the highest level in a week.
Yellen said the economy “remains vulnerable to setbacks” and the central bank could try to spur growth “either through its forward guidance or through additional balance-sheet actions.” The Fed has said interest rates are likely to stay “exceptionally low” at least through late 2014.
Using communications about the expected path of interest rates is “likely to be weaker the longer the horizon of the guidance, implying that it may be difficult to provide much more stimulus through this channel,” she said. The Fed adopted the 2014 time horizon in January, extending an earlier date of mid- 2013.
The U.S. central bank could also undertake another round of asset purchases or continue its Operation Twist program, set to expire this month, to lengthen the maturities of bonds on its balance sheet, Yellen said. The Fed purchased $2.3 trillion of bonds in two rounds of so-called quantitative easing.
“It is for this reason that the FOMC emphasized, in its statement following the April meeting, that it would ‘regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability,’” Yellen said.
A report from the Labor Department last week showed that the unemployment rate rose to 8.2 percent in May from 8.1 percent in April, and the economy added 69,000 jobs, compared with a gain of 275,000 in January.
“It’s going to be a prolonged recovery,” Yellen said in response to audience questions after her speech. “Recent data we’ve seen on the economy are pretty disappointing,” and the labor market appears to have “stalled.”
Yellen said the economy is expanding at a “moderate pace” of about 2 percent and that “significant headwinds will continue to restrain the pace of recovery so that the remaining employment gap is likely to close only slowly.”
Among the headwinds are a 35 percent decline in home prices that has cut into household wealth, looming fiscal tightening and strains in financial markets caused by the European crisis. As a result, “a highly accommodative monetary policy will be needed for quite some time to help the economy mend,” she said.
Inflation will “remain at or below” the Fed’s 2 percent goal “for the foreseeable future,” Yellen said. Longer-term inflation expectations that haven’t climbed above that objective have “freed the FOMC to take strong actions,” she said.
The Fed said yesterday that the U.S. economy maintained a moderate pace of growth from early April to late May as factory output rose and the real-estate market improved.
“Overall economic activity expanded at a moderate pace,” the Fed said in its Beige Book business survey, which is based on reports from its 12 district banks. “Hiring was steady or increased slightly.”
The report, which gives central bankers anecdotal evidence on the health of the economy two weeks before they meet, contrasts with recent data showing manufacturing and the labor market cooling.
Policy makers this week voiced opposing views on whether the central bank should step up its record easing. The Fed has already kept its benchmark rate near zero since December 2008.
Atlanta’s Lockhart said extending Operation Twist is an “option on the table.” Williams of San Francisco said the central bank must “stand ready to do even more if needed to best achieve our statutory goals of maximum employment and price stability.”
Williams and Lockhart both vote on the FOMC this year under the Fed’s rotating system, along with Cleveland’s Sandra Pianalto and Jeffrey Lacker of Richmond. Fed Washington-based governors, along with New York Fed President William C. Dudley, have permanent votes.
Chicago’s Charles Evans said “soft” economic data warranted “extremely strong accommodation,” while Richard Fisher of Dallas said more Fed purchases of bonds would be “pushing on a string.” James Bullard of St. Louis said there’s time to assess the economy and a policy change isn’t needed now.
Before the Fed undertakes additional easing measures, policy makers would need to consider the “limitations and costs” of its remaining tools, Yellen said.
Yellen also said that “some have expressed concern” that further expanding the Fed’s balance sheet could “interfere” with its ability to tighten monetary policy. The vice chairman said she disagreed, though it “could in theory reduce confidence” in the Fed and cause inflation expectations to climb.
“On the other hand, risk-management considerations arising from today’s unusual circumstances strengthen the case for additional accommodation,” she said.
To contact the editor responsible for this story: Chris Wellisz at firstname.lastname@example.org
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