The Federal Reserve must continue to boldly use all available tools to fight a deepening recession, a top Federal Reserve policy-maker said on Wednesday, adding that expectations for the economy to begin to grow by the end of 2009 are far from assured.
I'm convinced this is no time to relax our efforts, Janet Yellen, president of the San Francisco Federal Reserve Bank, told the Forecasters Club of New York.
Yellen, who is a voting member of the U.S. central bank's policy-setting Federal Open Market Committee in 2009, said the U.S. economy may see moderately positive real GDP growth rates later this year or early in 2010. But, she added, those forecasts are highly uncertain.
While there are good reasons to think the economy could begin to recover fairly soon, I'm far from confident, she said. She said unemployment will likely continue to increase before peaking in 2010.
We face serious challenges as we try to right the economy.
Yellen said an array of unconventional programs put in place by the government and the Federal Reserve are the best hope for recovery.
For me, this extreme uncertainty about the future creates a very strong case for bold policy actions on a broad front...to stimulate economic activity and prevent inflation from falling any further, she said.
The Federal Reserve last week vowed to pump an additional $1 trillion into the U.S. economy in an aggressive bid to battle a deep recession, partly by buying government bonds for the first time since the 1960s.
In addition to purchasing Treasury debt, the Fed said it would expand an existing program to buy debt and securities issued by mortgage finance agencies by $850 billion to $1.45 trillion, an effort to lower mortgage rates.
Yellen said she supports the approach of targeting a range of credit markets through a variety of programs and said the various Fed and Treasury efforts offer the prospect of more normal financial market functioning this year.
She added that the purchases of longer-term debt would likely have a broader effect a
There are good reasons to expect that the Fed's longer-term asset purchases will also spill over broadly to other credit markets because many types of long-term debt are substitutes for Treasuries and agency MBS in private portfolios, she said.
The Fed also last week began a long-awaited program aimed at making credit more easily available to consumers, the Term-Asset Backed Securities Loan Facility (TALF). Yellen said the TALF could be expanded to include residential mortgage backed securities and commercial mortgage-backed securities.
But Yellen cautioned it is difficult to gauge the size of the impacts of the various programs.
We are using new policy tools and we simply don't have the experience needed to pin down the magnitude of the impacts, she said.
Yellen said fears that inflation will jump once the economy begins to recover may be overdone.
For some time to come, disinflation, and even deflation, will represent greater risks than inflation. With economic activity weakening, economic slack is likely to be substantial for several more years, she said.
We need to be sure that we avoid the kind of deflation that Japan experienced during its lost decade. While I don't think such an outcome is likely, it should be on our list of concerns.
She said core inflation could remain below 1 percent for the next several years.
With regard to an exit strategy from the current unconventional policies, she said a possibility is for Congress to give the Fed the authority to issue its own debt.
Issuing such debt would reduce the volume of reserves in the financial system and push up the funds rate without shrinking the total size of our balance sheet, she said.
(Reporting by Kristina Cooke, Editing by Chizu Nomiyama)