WRAPUP 2-Fed's No. 2 sees scope for further monetary easing

Tue Nov 29, 2011 4:29pm EST

Related Topics

* Yellen says Fed can offer more support for U.S. economy
    * Says need policies to promote recovery in housing market
    * Housing, consumers unlikely to help much in near term

    By Ann Saphir
    SAN FRANCISCO, Nov 29 (Reuters) - Janet Yellen, the Federal
Reserve's influential vice chair, said on Tuesday the U.S.
central bank has room to ease monetary policy further, possibly
by providing more information on the path of interest rates.
    Another top official, Atlanta Federal Reserve Bank
President Dennis Lockhart, said he sees a benefit in providing
more information on the policy assumptions underlying Fed
forecasts. He made clear, however, that he believes the current
policy stance is appropriate.
    With its usual economic lever of interest rates already
pressed close to zero and its balance sheet triple the size of
its pre-crisis norm, the central bank has been considering how
it can better use communications as a policy tool.
    The Fed has been debating for months ways to provide more
clarity on when it might eventually tighten monetary policy,
although officials have differed on how best to proceed.
    Yellen said turmoil in financial markets stemming from both
Europe's banking crisis and general uncertainty about the
outlook had increased the risks to the global economy, and that
the Fed could offer additional support to U.S. growth.
    "The scope remains to provide additional accommodation
through enhanced guidance on the path of the federal funds rate
or through additional purchases of long-term financial assets,"
she told a conference sponsored by the San Francisco Federal
Reserve Bank.
    A number of communications shifts are being discussed,
including a controversial proposal from the Chicago Fed
president to allow for temporarily higher inflation. Officials
are also considering offering explicit forecasts for the
overnight federal funds rate.
    The deputy governor of Sweden's central bank, Lars
Svensson, urged the Fed to begin providing forecasts for
short-term rates as a way to push borrowing costs lower.
    "Publishing a policy-rate path would be the most direct way
to affect interest-rate expectations, especially since central
banks should have better information about their intentions
than anyone else," he told the San Francisco Fed conference.For his part, Lockhart repeated his view that the Fed's
present policy stance was appropriate, although he said no
options should be taken off the table.
    "I am skeptical that further asset purchases will produce
much gain in terms of increased economic activity," he told
business students at the University of Georgia in Atlanta.
    Still, Lockhart, who will rotate into a voting seat on the
Federal Open Market Committee next year, appeared warm to the
idea of offering more explicit policy guidance, calling it a
"worthy priority."
    Yellen, who is leading a subcommittee on communications at
the Fed, did not tip her hand. But previously she has said it
might be fruitful to use the Fed's existing quarterly forecasts
as a platform for further transparency.MORE HELP NEEDED
    Yellen also called for policies to spur a faster recovery
in the battered U.S. housing market, although she did not
provide any specific recommendations.
    In September, the Fed decided to dip its toes back into the
housing market by reinvesting proceeds of maturing mortgage and
housing agency debt from its portfolio back into the
mortgage-backed securities market.
    Yellen said the contribution to the U.S. recovery from
housing, which is usually key to economic rebounds, is likely
to remain tepid in the near term, and that consumer spending is
also not likely to be a key source of growth due to high
household debt levels.
    "The recovery in the United States and other advanced
economies has been proceeding too slowly to provide jobs for
millions of unemployed people," she said.
    The U.S. economy grew just 2 percent in the third quarter,
and the jobless rate has hovered near 9 percent all year. While
the pace of recovery appears to be accelerating, the debt
crisis in Europe poses a threat, as does the possibility that
U.S. fiscal policy will tighten in the new year.
    More broadly, Yellen worried about risks to global growth,
with weak performance in advance economies being compounded by
softening expansions in the emerging world.
    "In effect, we face a dearth of aggregate demand, not just
among advanced economies, but also for the global economy as a
whole," Yellen said.
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