Fed’s Yellen: US on right track, but low rates still needed

SAN FRANCISCO, April 15 (BestGrowthStock) – The U.S. economic
recovery is underway, but subdued inflation and a “terribly
high” jobless rate mean the Fed’s pledge to keep interest rates
at near-zero for an extended period is still justified, a
senior Fed official said on Thursday.

San Francisco Federal Reserve President Janet Yellen said
her own thinking has turned the corner, and she’s now confident
“the economy is on the right track,” according to remarks
prepared for delivery before a meeting of Financial Executives
International.

“I expect the pace of recovery to gain momentum over the
course of this year and next as households and businesses
regain confidence, overall financial conditions continue to
improve, and lenders increase the supply of credit,” she said,
in the prepared text.

“Even as we applaud the economic turnaround, it’s important
not to lose sight of just how fragile this recovery is and how
far we yet have to go before things return to normal.”

The Fed lowered its key short-term interest-rate target to
near zero in December 2008 and pumped more than $1 trillion
into the economy to stave off the worst downturn in decades.
Those efforts, along with government spending, have helped the
economy avert the worst, she said.

“The latest indicators show a broadening and deepening of
the recovery, and point to solid, if not spectacular, expansion
in the first half of this year,” she said, adding she expects
the economy to grow at a pace of about 3.5 percent this year
and 4.5 percent next year.

Still, she said, the unemployment rate remains at the
historically high level of 9.7 percent and likely won’t dip to
lower than 8.0 percent by the end of next year. That, coupled
with an outlook for a decline in inflation to 1.0 percent later
this year and next, means the economy is still in need of
support from rock-bottom interest rates.

“Such an accommodative policy is appropriate because the
economy is operating well below its potential, inflation is
subdued, and such conditions are likely to continue for a
while,” Yellen said. “At some point though, as the economy
continues to expand, the Fed will have to pull back some of
this extraordinary stimulus.”

Both businesses and consumers are increasing their
spending again, although they’ll likely do so gradually, she
said.

“Shoppers, after hunkering down during the recession, are
clearly in a better mood,” she said. Business spending,
especially in high tech, is also coming back.

But checks to growth remain. As the effects of stimulus
spending begin to wane, public officials will have to start
cutting spending and boost taxes in an austerity push that will
slow growth, she said.

And even with very low interest rates, she said, “credit
flows remain extremely weak.”

When the time does come to tighten monetary policy, the Fed
will not need to trim its swollen balance sheet before it can
effectively do so, she said.

Rather, she said, the central bank can raise the interest
it pays on reserves to boost all short-term rates. Trimming the
balance sheet will come later, she suggested, and will be
gradual and deliberate.

“We’ve emerged from the worst financial and economic
crisis most of us have ever seen,” she said. “That should give
us confidence that we can move forward, put more Americans to
work, keep inflation in check, and return to the economic
vibrancy that our nation is known for.”

Investment Analysis

(Reporting by Ann Saphir)

Fed’s Yellen: US on right track, but low rates still needed