–U.S. Economy Faces ‘Serious Headwinds,’ High Unemployment
–Europe Needs ‘Forceful Action’ on Fiscal, Financial Stresses
By Steven K. Beckner
SAN FRANCISCO (MNI) – Federal Reserve Vice Chairman Janet Yellen
said Tuesday that the Fed has “scope” to provide additional monetary
stimulus either through “enhanced guidance” on how long it will keep
the federal funds rate near zero or through more large-scale asset
purchases.
Yellen said the Fed is “moving vigorously” to counter “serious
headwinds” and a “dearth of aggregate demand.” And she suggested the
U.S. central bank will need to pursue very easy policies
indefinitely, predicting that unemployment will remain “painfully
high for many years to come.”
However, she said monetary policy is “not a panacea” and called
on other authorities to spur economic growth both domestically and
internationally in remarks prepared for delivery to a conference sponsored
by the San Francisco Federal Reserve Bank,
Yellen stressed the need for a “credible” long-term budget deficit
reduction package, warning that failure to produce one would pose
“serious economic costs and risks.” But at the same time she
cautioned that too much near-term fiscal tightening would threaten the
recovery.
Echoing the Group of 20’s Cannes communique of early November,
Yellen urged Asian surplus countries to spur domestic demand and
to follow more “flexible” exchange rate policies.
“The Federal Reserve continues to provide highly accommodative
monetary conditions to foster a stronger economic recovery in a context
of price stability,” she said. “Moreover, the scope remains to provide
additional accommodation through enhanced guidance on the path of the
federal funds rate or through additional purchases of longer-term
financial assets.”
Yellen said “growth in advanced nations, including the United States,
faces serious headwinds.”
“Households are still deleveraging, corporations are reluctant to
invest, and fiscal consolidation is needed over time to place public
finances on a sustainable course,” she said. “Despite some pickup in
growth in the United States during the second half of the year, the
outlook is for unemployment to diminish only slowly, remaining painfully
high for many years to come.”
She added that “downside risks to global growth have increased
significantly because of rising financial market pressures, reflecting
an intensification of stress in European banking and sovereign debt
markets as well as broader concerns about the outlook.”
“These circumstances call for concerted domestic policy actions to
boost growth and create jobs,” Yellen said. “We at the Federal Reserve
are moving vigorously to promote a stronger economic recovery.”
“However, monetary policy is not a panacea, and it is essential for
other policymakers to also do their part,” she said.
Yellen said there is also “a strong case for additional measures to
address the dysfunctional housing market … . The Congress and the
administration also can support the recovery in the near term while
simultaneously putting fiscal policy on a sustainable trajectory in the
long term.”
Yellen also had strong words for Democrats and Republicans on
fiscal policy in the wake of the failure of the congressional Super
Committee to agree to reduce the rate of growth of deficit spending by
$1.2 trillion over 10 years as agreed in early August.
“It is crucial that the federal budget be put on a sustainable
long-run trajectory, and we should not postpone charting that course,”
she said. “A failure to put in place a credible plan to address our
long-run budget imbalance would expose the United States to serious
economic costs and risks in the long term and possibly sooner.”
“Timely enactment of a plan to put the federal budget onto a
sustainable trajectory will make it easier for individuals and
businesses to prepare for these adjustments,” Yellen continued. “In
addition, the sooner our longer-term budget problems are addressed, the
less wrenching the adjustment will have to be and the more control that
policymakers — rather than market forces or international creditors —
will have over the timing, size, and composition of the necessary
adjustments.”
However, she warned, “too much fiscal tightening in the near term
could harm the economic recovery.”
“Significant near-term reductions in federal spending or large
increases in taxes would impose an additional drag on the economy at a
time when aggregate demand is already weak,” she said. “Indeed, under
current law, federal fiscal policy is slated to impose considerable
restraint on the growth of aggregate demand next year.”
Yellen said “We need, and I believe we have scope for, an approach
to fiscal policy that puts in place a well-timed and credible plan to
bring deficits down to sustainable levels over the medium and long terms
while also addressing the economy’s short-term needs.”
Yellen, who has participated in recent G20 meetings also
directed pointed comments at other nations, particularly China.
“In light of the various factors weighing on aggregate demand in
the United States and other advanced economies, I believe it is crucial
for emerging market economies, particularly in Asia, to take further
steps to boost domestic demand, providing support for their own growth
and that of the global economy,” she said.
Pointing to large trade surpluses in China and other Asian
countries, she said “these surpluses suggest that, on balance, the Asian
economies continue to add more to global supply than to global demand.”
She singled out China, noting that consumption as a share of output in
that country “has fallen steadily over the past decade to about
one-third of its GDP.”
“China and other emerging market economies have already taken some
steps to promote household consumption, but the progress on this front
has been slow and further measures are warranted,” she said.
Yellen recommended that Asian countries boost demand through
“increased public spending on social services, such as education, health
care, and retirement benefits;” by shifting government support from
manufacturing toward encouraging service-sector development, and by
directing more development spending to those countries’ poorest regions.
She also urged China to let its currency appreciate more against
the dollar.
“Exchange rate adjustments will play a crucial role in boosting
emerging Asia’s contribution to global demand,” she said. “Indeed, the
G-20 leaders welcomed China’s determination to increase exchange rate
flexibility and to carry out its plans to increase convertibility of the
renminbi capital account.”
“Such flexibility is crucial if Asian domestic demand is to be
expanded without exacerbating inflationary pressures,” she said.
“Exchange rate appreciation channels demand toward foreign products,
thereby creating the scope for policies to expand domestic demand
without exacerbating inflationary pressures.”
“More generally, exchange rate flexibility makes it easier for
monetary policy to respond to domestic considerations and to achieve
price stability,” she said. “Perhaps most important, since the ultimate
goal of economic growth is to improve standards of living, allowing the
currency to appreciate can help ensure that a greater proportion of
output is devoted to household consumption, enabling social welfare to
improve at a faster pace.”
** Market News International **
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