Yellen: It’s Too Soon For 'Spiking The Punch Bowl’

HONOLULU — The Federal Reserve Board’s recent interest-rate cutting campaign doesn’t signal happy hour for credit addicts, San Francisco Federal Reserve president Janet Yellen said late Thursday.

So far, the Fed has lowered rates to counteract a slowing economy and shaky financial markets. Once the economy improves, the Fed should be able to remove that stimulus — or “take away the punchbowl,” in the words of a former Fed chairman — before another asset bubble arises, Yellen told reporters after a speech to Hawaiian financial analysts.

Earlier Thursday, Dallas Federal Reserve Bank president Richard Fisher, who dissented in the Fed’s most recent rate-cutting vote, said economic weakness put the Fed in the position of “replenishing the punch.” But Yellen said the economy isn’t currently in danger of another liquidity-driven asset bubble.

“I don’t think it’s quite fair to say spiking the punchbowl when, on balance, credit conditions still at this point are not, obviously, across-the-board looser,” Yellen said.

Yellen told the financial analysts that the markets won’t float away as long as the Fed acts quickly to raise rates once the economy heals. “When the economy ... is strong enough that it no longer needs this stimulus, I think withdrawing it in a timely fashion will be key to making sure we don’t ignite another bubble in the economy,” he said.

Right now, Yellen predicts a period of slow growth, though not an outright recession. She told reporters she is “not confident” that the U.S. will escape recession because of uncertainties that exist, even though that scenario is her most likely forecast for now.

Yellen said the labor market is weak, but doesn’t appear to be falling off a cliff. “I don’t think we yet have dramatic deterioration in the job market, but it is certainly slowing,” she said.

On the inflation front, expectations will be key in determining to whether the U.S. faces another price panic, she said. So far, energy futures markets predict that prices will flatten out in coming months. If that happens, runaway inflation won’t happen, Yellen said.

“It doesn’t require a reversal, just a leveling off to diminish and take away that inflationary impetus,” she said, adding that food prices and the dollar could follow a similar pattern.

When asked whether the Fed will step in to help bond insurers through their recent turmoil, Yellen said the Fed will stay on the sidelines.

“To the best of my knowledge, the Federal Reserve is not actively involved in trying to work out any type of arrangement for the bond insurers,” Yellen said. “I think that’s not a role for the Fed.”

— Market News International