(Adds Yellen comments)
By Ann Saphir
SAN DIEGO Feb 22 The U.S. economy still needs
extraordinarily low interest rates, as inflation is
"undesirably low" and growth will likely be sluggish for
several years, a top Federal Reserve official said Monday.
San Francisco Federal Reserve Bank President Janet Yellen
told the University of San Diego's business school that the
U.S. economy will likely grow at a pace of about 3.5 percent
this year and 4.5 percent next year.
"Even though the recession appears to be over, it does not
mean that we are where we want to be. Even with my moderate
growth forecast, the economy will be operating well below its
potential for several years," Yellen said.
The Fed has kept its target interest rate for bank-to-bank
overnight lending near zero since December 2008 to combat the
worst financial crisis and economic downturn since the Great
Depression. It has also injected more than $1 trillion into the
"If it were positive to take interest rates into negative
territory I would be voting for that," she told reporters after
Yellen is not a voting member of the Fed's monetary
policy-setting Federal Open Market Committee this year.
Unemployment, currently at an "unacceptably high" rate of
9.7 percent, will likely only decline to 9.25 percent this year
and 8 percent by the end of next year, she said. It will be
many years before the rate returns to the 5 percent she views
as signaling full employment.
"Accommodative policy is appropriate, in my view, because
the economy is operating well below its potential and inflation
is undesirably low," Yellen said in the speech. "I believe this
is not the time to be removing monetary stimulus."
Speculation on the likely timing of monetary tightening
heated up last week after the Fed raised the interest rate it
charges for emergency bank loans to 0.75 percent from 0.50
percent. But Fed officials have stressed the move, the first
increase in any of the Fed's lending rates since the financial
crisis began in 2007, did not amount to monetary tightening.
Yellen also said the increase in the discount rate
reflected a return to more normal financial conditions.
The increase in the discount rate, she said, was intended
to discourage banks from borrowing from the Fed when they have
other options. The rate currently is set 50 basis points higher
than the high end of the Fed's target for overnight lending, a
gap that may be adequate to reach that goal, she said.
"There's no presumption this is the first of many steps,"
When the time does come for monetary tightening, raising
the interest rate the Fed pays on reserves will take a "lead
role," she said.
Fed officials are in broad agreement over the steps the
central bank needs to take to withdraw the support it currently
extends to the financial system, she said.
Next month the Fed plans to end one of the tools it has
used to help revive the economy -- its $1.25 trillion program
to purchase mortgage-related debt.
With the housing market stabilized but falling far short of
revitalization, ending the program could make the housing
market weaken again, she said. Still, she said, there would be
a high bar to any decision to resume buying mortgage-backed
"It would have to be a serious change in the outlook" to
merit such a reversal, she said.
But only after economic conditions improve and monetary
tightening underway will the Fed possibly sell some of the
assets that currently bloat its balance sheet, she said.
Yellen's speech suggested she thought such moves may be far
in the future. While other Fed officials like Kansas City Fed
President Thomas Hoenig have warned the ballooning federal
deficit could lead to runaway inflation, Yellen played down
"There's no evidence that big government deficits cause
high inflation in advanced economies with independent central
banks, such as the Fed," she said.
In fact, she said, inflation is "already very low and
In comments to reporters after the speech, she said
deflation -- a sustained decline in prices -- is unlikely. And
while the Fed is on the lookout for potential future bubbles,
and in search of new tools to keep such bubbles in check, so
far she sees none on the horizon.
(Additional reporting by Kristina Cooke in New York,
Editing by Chizu Nomiyama)