Yellen: Fed should focus on jobs, even if inflation edges past target

WASHINGTON Thu Apr 4, 2013 7:01pm EDT

Federal Reserve Vice Chair Janet Yellen addresses the 29th National Association for Business Economics Policy Conference in Washington March 4, 2013. REUTERS/Gary Cameron

Federal Reserve Vice Chair Janet Yellen addresses the 29th National Association for Business Economics Policy Conference in Washington March 4, 2013.

Credit: Reuters/Gary Cameron

WASHINGTON (Reuters) - The Federal Reserve should focus its energies on bringing down an elevated U.S. unemployment rate even if inflation "slightly" exceeds the central bank's target, Fed Vice Chair Janet Yellen said on Thursday.

Yellen, who is seen as a potential successor to Chairman Ben Bernanke, says she looks forward to the day when policymakers can abandon unconventional tools like asset purchases and return to the conventional business of lowering and raising interest rates, currently set at effectively zero.

But she made that clear that time is not near, saying eventual "normalization" of policy by the Federal Open Market Committee is still far in the future.

"Progress on reducing unemployment should take center stage for the FOMC, even if maintaining that progress might result in inflation slightly and temporarily exceeding 2 percent," Yellen told a meeting sponsored by the Society of American Business Writers and Editors.

Yellen said she favored adjusting the pace of Fed bond purchases, currently running at $85 billion a month, in response to changes in economic conditions.

The U.S. economy showed signs of strength in the first quarter, with many economists predicting an annualized growth rate above 3 percent. However, March figures have been more subdued, prompting some analysts to revise down their forecasts for employment growth in a report due out on Friday.

The economy generated 236,000 jobs in February, while the jobless rate fell to 7.7 percent.

Yellen said an eventual end to the central bank's bond-buying stimulus will not mean interest rate increases are imminent, stressing the weak nature of the recent economic recovery.

"Adjusting the pace of asset purchases in response to the evolution of the outlook for the labor market will provide the public with information regarding the committee's intentions and should reduce the risk of misunderstanding and market disruption as the conclusion of the program draws closer," she said.

In a speech that stressed the benefits of clear communication, Yellen documented a shift in monetary policy that has moved from a highly secretive approach to one where openness and dissent is welcomed.

"I hope and trust that the days of 'never explain, never excuse' are gone for good, and that the Federal Reserve continues to reap the benefits of clearly explaining its actions to the public," she said.

Asked about Japan's announcement of a massive $1.4 trillion monetary stimulus overnight, Yellen suggested it was appropriate for the central bank to take steps to fight a prolonged bout of deflation.

"Taking an aggressive approach to try to end deflation is something I certainly understand," she said.

"What Japan is doing is something that's in their own best interest, it's something that if successful will be good for stimulating growth in the global economy and it will be good for us too."

(Editing by Leslie Adler)

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Comments (4)
chinaxu wrote:
Crazy lady, the asset purchases are NOT bringing down unemployment, but they most definitely ARE creating inflation. I don’t know if it’s willful ignorance or self-interest that is fueling the Feds.

Apr 04, 2013 12:48am EDT  --  Report as abuse
Hefty (crazy?) stuff to say for a central banker! There is no free lunch, growth must come from the real economy. Letting inflation rise means savers have less buying power tomorrow, they may shift some spending to today, but then tomorrow the problem will be even larger.

Furthermore The FED has been doing one round of easing after another, and the unemployment rate is not coming down fast. In an economy weighed down by so much regulation and uncertainty, getting the interest rate down another 25 basis points (if that is even possible) will do nothing.

The problem is with the folks in DC. If they could get rid of some of the most damaging parts in the most damaging regulations (Sarbanes-Oxley, Dodd-Frank, EPA), fix the immigration system and lower the corporate tax rate to international standards, this would make the job of the Fed to keep inflation in check while trying to achieve some growth a hell of a lot easier. I seem to remember that the economy does have its own recuperative powers.

If the very smart people in DC could try to maybe just do nothing, instead of purposefully creating damage, that would be the second best option, given that it is hard to imagine these career politicians in DC to actually fix something.

Apr 05, 2013 3:02am EDT  --  Report as abuse
minipaws wrote:
I wouldn’t worry about inflation either if I was a Fed official. All government employees will get pensions that can be 75+% of their incomes and include Cost of Living Raises.

Apr 05, 2013 6:01am EDT  --  Report as abuse
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