Yellen Says Fed Should Press on With QE Amid Limited RiskJoshua Zumbrun and Jeff Kearns
Federal Reserve Vice Chairman Janet Yellen said the Fed should press on with $85 billion in monthly bond buying while tracking possible costs and risks from the unprecedented program.
“Turning to the potential costs of the Federal Reserve’s asset purchases, there are some that definitely need to be monitored over time,” Yellen said today in a speech in Washington. “At this stage, I do not see any that would cause me to advocate a curtailment of our purchase program.”
Yellen, the central bank’s No. 2 official, echoed Chairman Ben S. Bernanke’s comment last week that the benefits of the Fed’s historically low interest rates and near-record $3.09 trillion balance sheet outweigh any risk of financial instability.
“I view the balance of risks as still calling for a highly accommodative monetary policy to support a stronger recovery and more-rapid growth in employment,” Yellen said to the National Association for Business Economics annual policy conference, extending a debate on the Federal Open Market Committee about when to taper the bond buying to avert excessive risk taking.
Fed Governor Jeremy Stein said last month that some credit markets, including leveraged loans and junk bonds, show signs of overheating. Kansas City Fed President Esther George has warned that prices of some farm land have hit “historically high levels.”
“At this stage, there are some signs that investors are reaching for yield, but I do not now see pervasive evidence of trends such as rapid credit growth, a marked buildup in leverage, or significant asset bubbles that would clearly threaten financial stability,” Yellen said.
She also said that ending the Fed’s bond-buying too soon could dampen the outlook for growth.
“Ending asset purchases before observing a substantial improvement in the labor market might also create expectations that the amount of accommodation provided would not be sufficient to sustain the improvement in the economy,” Yellen said. “Moreover, a weakening of the economic environment could also create significant financial stability risks.”
U.S. stocks declined as growth slowed in China’s services industry and American lawmakers signaled federal spending cuts will continue for weeks before they can reach a budget agreement. The Standard & Poor’s 500 Index slipped 0.1 percent to 1,516.58 at 9:50 a.m. in New York. The yield on the 10-year Treasury climbed 0.01 percentage point to 1.86 percent.
The Fed vice chairman dismissed concerns the program could complicate Fed efforts to eventually raise interest rates, or that the central bank’s securities purchases could disrupt the functioning of bond markets.
“There is no evidence that the Federal Reserve’s purchases have impaired the functioning of financial markets,” she said. “So long as we pursue our purchases sensibly, I do not expect market functioning to become a problem in the future.”
Yellen said in response to audience questions that the Fed’s $85 billion in monthly asset purchases are adding stimulus to the economy.
“As long as we engage in them, it’s as though we are putting more and more and more accommodation into the system,” Yellen said. “The level of accommodation is increasing as long as those purchases continue.”
“The FOMC has made very clear, but let me try to emphasize again, my own view that once accommodation has peaked,” policy makers intend “to leave that accommodation in place until well into the recovery,” she said.
Yellen has led a committee created by Bernanke to shed light on Fed decision-making and minimize public confusion over its goals. The central bank in January 2012 took one of its biggest steps ever toward greater openness by publishing a mission statement, an inflation target and anonymous forecasts by each FOMC participant for the benchmark interest rate.
Bernanke said in remarks March 1 that attempting to raise interest rates too soon could choke off the economic recovery.
“Premature rate increases would carry a high risk of short-circuiting the recovery, possibly leading -- ironically enough -- to an even longer period of low long-term rates,” Bernanke said in a speech in San Francisco. “Only a strong economy can deliver persistently high real returns to savers and investors.”
The FOMC cut its target interest rate to a range of zero to 0.25 percent in December 2008 and has said it will keep the rate in that range as long as unemployment remains above 6.5 percent and inflation is projected to be no more than 2.5 percent. The committee at its Jan. 29-30 meeting said it will continue its $85 billion in monthly bond purchases until the labor market improves “substantially.”
To gauge what constitutes “a substantial improvement” in the labor market, Fed research shows that the unemployment rate is the best indicator of market conditions, Yellen said. Still, the jobless rate has its limitations because it may decline as discouraged workers drop out of the labor force, not just because of increased hiring, she said.
That means additional labor market indicators such as payroll growth and the broader outlook for economic growth should also be taken into account, Yellen said. She said she would use other gauges such as job losses and gross job flows to better gauge the “underlying dynamics of the labor market.”
“Layoffs and discharges as a share of total employment have already returned to their pre-recession level, while the hiring rate remains depressed,” Yellen said. “Therefore, going forward, I would look for an increase in the rate of hiring.”
Fed officials will know more about the state of the employment market on March 8 when the Labor Department releases its monthly jobs report for February. Economists forecast the unemployment rate will remain at 7.9 percent and employers will add 160,000 jobs, according to the median estimate of a Bloomberg survey.
While the jobless rate has stayed high, the U.S. auto and housing industries have shown signs of responding to accommodation. Home prices rose 6.8 percent from a year earlier in December, according to the Case-Shiller 20 City index, the fastest increase since 2006. New home sales accelerated in January to a 437,000 annual pace, the highest since 2008.
The average 30-year fixed rate mortgage was at 3.51 percent as of Feb. 28, according to a Freddie Mac index, after falling as low as 3.31 percent in November.
Fed easing has boosted equities, with the Standard & Poor’s 500 Index climbing 6.5 percent this year through last week, better than the 4.7 percent gain for the MSCI All Country World Index. The U.S. Dollar Index, which tracks the currency against six of America’s biggest trading partners, reached the highest since August on March 1.
American factories expanded last month at the fastest pace in almost two years. The Institute for Supply Management’s factory index rose to 54.2, the highest reading since June 2011, the Tempe, Arizona-based group said March 1.
Personal spending rose in January even as incomes dropped by the most in 20 years, a report from the Commerce Department showed last week. Household purchases, which account for about 70 percent of the economy, climbed 0.2 percent after a 0.1 percent gain the prior month.
Yellen has spent more time on the FOMC than any of her colleagues. She became vice chairman of the Fed’s board of governors in October 2010 after spending six years as president of the San Francisco Fed. She served as a Fed governor from 1994 to 1997.
In addition to leading the central bank’s communications committee, she has supported Fed actions to use its balance sheet to help the economy complete its recovery from the longest and deepest recession since the Great Depression.