NEW YORK (MNI) – The following is the second and final section of
the text of Federal Reserve Vice Chairman Janet Yellen’s prepared
remarks Wednesday to the Committee for Economic Development 2010
International Counterparts Conference:

In announcing its intention to purchase an additional $600 billion
of longer-term Treasury securities, the FOMC committed to review the
purchase program regularly in light of incoming information and to make
adjustments as needed to meet our objectives. The Committee, of course,
recognizes that at the appropriate time, as the economy more fully
recovers, the Federal Reserve will need to remove this extraordinary
monetary accommodation in order to maintain price stability and keep
inflation expectations well anchored. I am confident that the Federal
Reserve has both the commitment and the tools to achieve this unwinding.

I strongly supported the Federal Reserve’s recent action because I
believe it will be helpful in strengthening the recovery. But it is
hardly a panacea. Thus, a fiscal program that combines a focus on
pro-growth policies in the near term with concrete steps to reduce
longer-term budget deficits could be a valuable complement to our
efforts. Indeed, some budget experts are exploring the idea of
explicitly coupling fiscal stimulus in the near term, when unemployment
is high and resource utilization is low, with specific deficit-reducing
actions that take effect at scheduled future times, when output and
employment are expected to have moved closer to their potential.
Although a plan of this type might be challenging to develop and
implement, it could provide an effective means to support economic
activity in the short run while moving toward fiscal sustainability over
time.

International Implications of U.S. Policy Choices

Because the focus of this conference is on fiscal adjustments and
the global economy, let me now try to place this discussion of U.S.
fiscal and monetary policies into the current international context.
The process of long-run fiscal consolidation in the United States would
likely entail higher national saving relative to investment, which
should have the direct effect of restraining U.S. imports and shrinking
the U.S. trade deficit. More generally, by lowering interest rates,
fiscal consolidation should diminish net capital inflows into the United
States, thereby reducing the current account deficit in this country and
current account surpluses elsewhere. The resulting pattern of
international debt accumulation and capital flows would be more balanced
than at present, promoting a more sustainable pattern of growth in the
global economy. Indeed, such a rebalancing program was strongly
endorsed by the leaders of the Group of Twenty at their recent meeting
in Seoul.

Although the fiscal consolidation process is just beginning, the
weakness of private demand in the United States and other advanced
economies, combined with robust growth in the emerging market economies,
has led to a two-speed global recovery that already is creating
pressures toward rebalancing. The advanced economies started their
recoveries in 2009, but economic growth has barely exceeded the growth
rate of potential output; as a result, the level of output in most
advanced economies, including the United States, is still well below its
potential. Forecasts suggest that growth and resource utilization will
remain lackluster in the advanced economies for some time. Furthermore,
inflation pressures in most other advanced countries, as in the United
States, remain quite low, reflecting the existence of substantial
economic slack.

In contrast to the subdued pace of recovery in the advanced
economies, economic activity in the emerging market economies has
rebounded sharply, and the level of output in most of those economies
now well exceeds pre-crisis levels. The consequence is that
policymakers in emerging market countries have turned their attention to
the threat of rising inflation and have begun tightening monetary
policy.

The stronger growth prospects in the emerging market economies,
coupled with the tightening stance of their monetary policies, appear to
be contributing to a resurgence of capital inflows to these economies.
Sizeable differentials in expected returns between advanced and emerging
market economies also seem to be reinforcing these flows and causing
emerging market currencies to rise. In light of their increasing
concerns about inflation, a case can be made that emerging market
policymakers should welcome currency appreciation because it reduces
inflation pressures and, over time, aids global rebalancing. However,
some of them have argued that unduly large and rapid capital inflows may
lead to asset-price bubbles and expose the financial sectors in their
economies to a subsequent reversal of these flows, while rapid currency
appreciation could derail the growth of their export sectors. A number
of emerging market economies have accordingly attempted to counter the
effects of financial inflows through a range of policies, including
foreign exchange intervention and capital controls.

The U.S. fiscal program that I discussed earlier might also
moderate the pressures emerging market economies are experiencing at
present. Stronger U.S. growth would boost our demand for foreign goods
and reduce the incentives for capital flows to emerging markets, thereby
diminishing some of the upward pressure on emerging market currencies.
Thus, the U.S. fiscal program would lessen for a time the natural
mechanisms pushing the emerging markets to rebalance their economies
toward domestic demand, even as it helped put the global economy as a
whole on a more solid footing. However, such developments would in no
way diminish the need for such rebalancing in the medium term. It is
also important for both advanced and emerging market economies to begin
planning now for the structural reforms that will eventually be needed
to promote rebalancing.

Conclusion

As I hope I’ve made clear, the challenge for U.S. policymakers will
be to craft a strategy that puts our fiscal policy on a sustainable path
in the longer term while helping support the recovery in economic
activity in the near term. These goals are challenging to achieve but
not inconsistent. Moreover, making progress on them would not only
provide important benefits to the United States; it would also help
foster a stronger world economy in the near term and a better global
balance in spending, production, saving, and borrowing over time.

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