By Steven K. Beckner
SAN FRANCISCO (MNI) – Warning that the global economy is at “a very
dangerous moment,” Federal Reserve Vice Chairman Janet Yellen said
Tuesday that policymakers in the United States and other advanced
countries should use what scope they have to spur aggregate demand.
Yellen acknowledged that the Fed has limited scope to further
stimulate the sluggish U.S. economy, but said it can do some good by
further clarifying how long it intends to hold the federal funds rate
near zero and/or by purchasing more long-term assets to lower long-term
rates.
She seemed to imply that the Fed should at least strongly consider
doing those things as she answered questions following a speech at a
conference sponsored by the San Francisco Federal Reserve Bank.
Yellen also stressed the need for more international policy
coordination to keep the global economy from weakening further. And she
vowed the Fed and other central banks will work together to contain the
European debt crisis, which has evolved into an existential crisis for
the euro itself.
In her speech text, Yellen had said that “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.” She elaborated in response to audience questions.
Asked by San Francisco Fed President Williams about the
international coordination of monetary and fiscal policy, Yellen said
she sees “a great value to coordination of policies because I fear we
are in a situation where, throughout a large portion of the global
economy, there is either little that can be done to spur spending or, in
the case of fiscal policies, at least in some countries, the pressures
are so severe that they either force fiscal austerity or limit the
potential for significant expansion of fiscal policy.”
Yellen said “it’s essential in that situation for the efforts of
countries, as they try to control their fiscal situations through
enacting measures, that we not end up with global depression.”
“That’s why I regard this as an especially urgent matter — that
there is a need for aggregate demand in the economy,” she said.
Yellen said it’s not the case that policymakers in the advanced
economies have no scope for additional stimulus. “We do have some scope
for action, and I think we should use the scope that we have,” she said
in an apparent reference not only to the Fed but to macroeconomic
policymakers generally.
“But the limitations on the scope for action in so many countries
is so severe that it really is essential, and for everyone’s benefit, to
have global economic growth at least at a moderate pace, that this is a
very dangerous moment, and it really calls for global policy
coordination.”
Yellen said the Group of 20 has recognized this in its “action
plan,” and what I see in this environment is an urgency to move forward
on it.”
Asked whether U.S. monetary policy can gain any traction in the
absence of constructive fiscal policy, Yellen reiterated that the Fed
does have “some scope for action.” And she repeated that “the main two
things the Fed can do” is to enhance its forward guidance and to do more
quantitative easing.
She said the Fed could “try to use communications policy to
influence market expectations about the path of shorter term interest
rates.”
Noting that since August, the Federal Open Market Committee has
been saying that it expects to keep the federal funds rate near zero
through at least mid-2013, Yellen said “we have opportunities to
elaborate on that guidance in ways that might be helpful to markets in
better understanding what economic conditions would continue to point to
maintaining the federal funds rate at its current exceptionally low
level.”
“That’s guidance that we could potentially clarify in a number of
ways, and we are actively considering methods that we could use to
provide greater clarity about the economic reasoning that leads us
choose that date or it could lead to a different date,” she said. “And
I think that would be helpful in lowering longer term interest rates.”
“Is it a game changer given where interest rates are at this
point?” Yellen asked. “I believe it could have some favorable impact. I
don’t want to exaggerate how much that is.”
Yellen said “the other thing we could do is potentially engage in
further asset purchases.”
“In doing that, depending on what we bought, I would see purchases
of longer term assets as having the potential to push down the term
premium and flatten the yield curve,” she said.
She noted that “some of my colleagues have suggested directing our
purchases if we were to do that to mortgage backed securities, and the
potential objective there would be to have a disproportionate impact on
mortgage rates to foster a greater recovery in housing.”
“So i do see some scope to make a meaningful contribution,” she
added.
Yellen acknowledged that there would be “costs to expanding our
balance sheet … so there are costs and benefits to be weighed.”
In other comments, Yellen said nations are “united in their concern
about the European situation” and about “avoiding severe financial
disruption.”
For the Fed’s part, she said “we continue to voice our concern and
express the need for them to take appropriate actions.”
“I’m not sure what more we can do other than standing ready to
cooperate,” she added. “Certainly the world’s central banks have
indicated a willingness to cooperate.”
In response to another question about China’s currency policies,
Yellen repeated that it needs to allow “real exchange rate
appreciation.” She said one way to do that is to promote more rapid wage
and income growth and in turn greater domestic demand.
** Market News International **
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