Federal Reserve Bank of San Francisco President Janet Yellen said the U.S. economy will operate below potential this year and next and still needs low interest rates to gain strength.
“When the day comes to start raising rates again, we have tools at the ready,” Yellen said in the text of a speech today in San Diego. “For the time being, the economy still needs the support of extraordinarily low rates.”
Policy makers are withdrawing the unprecedented programs that helped halt the deepest financial crisis since the Great Depression. The Fed last week raised the discount rate charged to banks for direct loans, while also citing its pledge to keep its benchmark federal funds rate low for an “extended period.”
“This is not the time to be tightening monetary policy,” said the 63-year-old regional bank chief, who has led the San Francisco Fed since 2004. “But eventually the economy will gain enough momentum and won’t need today’s extraordinarily low interest rates.”
“I’m afraid that the economy will continue to operate well below its potential throughout this year and next,” said Yellen, a former Fed governor and head of the White House Council of Economic Advisers in the Clinton administration, who does not vote on the Federal Open Market Committee this year. “Even though the recession appears to be over, it does not mean that we are where we want to be.”
Corporate Investment
The Standard & Poor’s 500 Index fell 0.1 percent to 1,107.74 at 11:44 a.m. in New York. The yield on the 10-year Treasury note increased one basis point, or 0.01 percentage point, to 3.79 percent.
The world’s largest economy expanded at a 5.7 percent annual pace in the fourth quarter of last year, the fastest pace in six years, as factories cranked up assembly lines and companies increased investment in equipment and software, the Commerce Department reported on Jan. 29.
The figure “overstates the underlying momentum of the economy,” which remains hindered by unemployment of 9.7 percent as of January, the “bleak spot” of commercial real estate, and a financial system that will “take a long time to fully heal,” Yellen said. She said she expects economic growth of 3 percent in the current quarter and about 3.5 percent for the year.
Yellen said the jobless rate will probably fall to about 9.25 percent by the end of this year and should be about 8 percent by the end of 2011. “It seems quite possible that core inflation will move even lower this year and next,” she said.
Balance Sheet
Top Fed officials are debating how and when to shrink the central bank’s $2.28 trillion balance sheet, with some policy makers pushing to start selling assets in the “near future,” minutes of their Jan. 26-27 gathering show.
Policy makers unanimously agreed that Fed assets and banks’ excess cash will need to shrink “substantially over time,” according to the records released last week.
As the Fed’s purchases of mortgage-backed securities end, “there is a risk that the housing market could weaken again,” Yellen said.
By Vivien Lou Chen – businessweek.com
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