Fed’s Yellen Plays Down Inflation Risks From Deficit, Fed Purchases
In a speech that said there’s no urgency to tighten monetary plot any time soon, a key central bank official also asserted her reputation as an inflation fighter.
 |
| Dan Francisco Fed President Janet Yellen (Reuters) |
“I don’t believe this is yet the time to be tightening monetary plot,” Federal Reserve Bank of San Francisco President Janet Yellen said Tuesday. The current plot of essentially zero-percent interest rates is “accommodative” and “is currently appropriate… because the economy is operating well below its potential and inflation is subdued.”
Yellen’s comments came from the text of a speech prepared for delivery before an event by Town Hall Los Angeles.
In her speech, Yellen sought to counter the worries she is not as strong an inflation fighter as some would like her to be. “I have personally supported an increase in our butt for the federal assets rate on 20 uncommon occasions,” Yellen said.
Yellen said in her speech there’s small reason to dread inflation from high government deficits as long as the Federal Reserve remains an independent central bank.
“I’m not alarmed by the current enormous deficits” because they are “transitory and recession-related.” Looking further out, even with the bleak picture facing the government, the price pressure picture need not be dark.
“In advanced countries with independent central banks, government deficits do not cause inflation, either in the small run or in the long run,” Yellen said. “As long as monetary authorities have the freedom to struggle inflation without interference, then deficits won’t pull them off course.”
Yellen said that she is expecting at best a gradual recovery and a slow ebb in high levels of unemployment, all of which argues for supportive monetary plot. But she warned that “as recovery takes firm root and economic output moves toward its potential, a time will come when it is appropriate to boost small-term interest rates.”
While Yellen doesn’t currently reside in a voting role on the interest rate setting Federal Open Market Committee, her views on the economy and monetary plot have come under augmented scrutiny agreed that the White House has expressed interest in elevating her to the vice chairman position at the Federal Reserve Board.
The central bank’s current number two, Donald Kohn, is due to step down from the Fed in late June. Kohn has played an instrumental role in the central bank’s unprecedented response to the financial crisis. Economists generally applaud the thought of Yellen as Fed vice chairman, although some have prominent that the official, who has been one of the most vociferous advocates for keeping rates very low for an extended period of time, is a decidedly dovish choice for a top central bank leadership position.
The plot maker spoke in the wake of last week’s Fed choice that once again pledged to keep the central bank’s de facto 0% interest rate plot in house for some time to come. Central bankers prominent then they see signs of more economic improvement, but with unemployment high and inflation low, they are content to wind down emergency lending efforts now and reschedule a tightening of monetary plot to some later date. Many economists believe won’t be until late this year, if not next year, before the Fed raises interest rates.
The plot maker’s outlook on the economy jibbed squarely with consensus outlook on the Fed. “My forecast is that moderate progression will continue, inflation will wait subdued, and unemployment will inch down,” Yellen said.
The economy should “gradually” speed up, with progression in the current quarter ranging between 2.5% to 3%, Yellen said. The official expects a rise of around 3.5% for the current year and 4.5% in 2011.
But inflation is unlikely to be a problem, both because of the hard hit the economy has already taken, and how much current and future progression will be under the economy’s potential progression rate.
Yellen said, “I don’t expect the output gap to completely expire until a small time in 2013,” and, because of this “tremendous” amount of economic floppy, “underlying inflation pressures are already very low and trending downward.” Yellen added “if the economy continues to operate below its potential, then core inflation could go lower this year and next.”
Essential to the longer run inflation picture is the state of the job market. “I’m pleased to see evidence that the job market is turning around” but “agreed my moderate progression forecast, I dread that unemployment will stay high for years,” Yellen said. Now at 9.7%, Yellen sees the jobless level edging down to 9.25% by year’s end, before hitting 8% by the close of 2011. The official deemed this “a very disappointing prospect.”
While Yellen believes it will be some time before the Fed starts to unwind it current policies, she did offer some hints about how she’d like to proceed.
She prominent that the end of Fed mortgage buys this month, the main driver in the huge expansion of the Fed balance sheet, are not likely to distress the economy. “I believe that our program worked” and made mortgages more affordable, and “I am hopeful that mortgages will wait highly affordable even after our buys conclude.”
When it comes to shrinking the Fed balance sheet, Yellen said the Fed faces a “manageable” process in getting its balance sheet smaller. She indicated the first go of a tightening would rest on increases in interest rates.
While Yellen would like the balance sheet to go eventually back to an all Treasurys portfolio, she believes “the FOMC will reduce the size of our balance sheet only gradually over time.” Assets sales are likely to happen only late in the unwinding process, Yellen said.