UPDATE 1-Fed’s Yellen defends QE2, says creating 3 mln jobs

(Recasts lead, adds background, details)

By Mark Felsenthal

DENVER, Jan 8 (BestGrowthStock) – U.S. Federal Reserve Vice Chair
Janet Yellen on Saturday defended the central bank’s
controversial program to buy assets in order to stimulate the
economy, citing an internal study showing the full program will
result in a gain of 3 million jobs.

“It will not be a panacea, but I believe it will be
effective in fostering maximum employment and price stability,”
Yellen said while participating on a panel at an economics
conference.

The Fed’s latest plan to buy assets announced in early
November — dubbed QE2 because it is the Fed’s second round of
quantitative easing — had sparked sharp criticism
domestically, internationally, and even within the Fed itself,
for weakening the dollar and risking dangerous inflation.

Yellen, whose defense appeared aimed at mollifying all of
those critics, said a simulation approximating the most recent
asset-buying program was shown to generate about 700,000 new
jobs.

That exercise assumed buying $600 billion in longer-term
Treasuries, holding them for about two years, and then
unwinding the position over the following five years.

The study also suggests that inflation is currently a
percentage point higher than would have been the case, implying
that if the Fed had not bought longer-term securities after
cutting interest rates to near zero in December 2008, the
economy would now be close to a damaging deflationary spiral.

Yellen, who became the Fed’s vice chair in October, was
known to be a strong supporter of aggressive steps to bolster
economic growth in her preceding position as president of the
San Francisco Fed. She said concerns that QE2 will cause
inflation, imbalances, or a damaging competitive currency
devaluation are misplaced.

Addressing one default cited by detractors, that the
program is falling short in its goal of lowering yields on
longer-term Treasury securities, Yellen said that while rates
are higher than at the outset of the program, they are lower
than they otherwise would have been. She also said yields are
more elevated because investors now expect a more robust
recovery.

An apparent scale-back by investors of expectations that
the Fed will not expand the program beyond its scheduled end
mid-year supports the argument that the purchases have helped
keep rates lower, Yellen said.

She stressed that the Fed’s policy-setting Federal Open
Market Committee does not want inflation to be higher than
about 2 percent and can and will act quickly to respond to any
rising inflation.

“The committee remains unwaveringly committed to price
stability and does not seek inflation above the level of 2
percent or a bit less than that, which most FOMC participants
see as consistent with the Federal Reserve’s mandate,” she
said.
(Reporting by Mark Felsenthal; Editing by Leslie Adler)