WASHINGTON — Federal Reserve Vice Chair Janet Yellen Thursday said the central bank must continue its aggressive measures to support the economic recovery, citing an unemployment rate that remains far above the Fed's comfort levels and a price stability target that is expected to hover at or below its 2% target for "several years."
In a speech prepared for delivery to the Society of American Business Editors and Writers, Yellen also said she favored adjusting the Fed's program of $85 billion a month in asset purchases as the outlook for the labor market evolved.
Yellen's speech was focused on the important role communication now plays in the Fed's conduct of monetary policy, and she noted that further improvements can be made in how the policy-setting Federal Open Market Committee communicates its thinking to the public, "and I expect they will continue."
Right now the Fed is buying $45 billion a month in U.S. Treasury securities and $40 billion in mortgage bonds to spur the recovery and create faster job growth, and Yellen noted that the 7.7% unemployment rate is expected to decline "only gradually," while inflation has been running at or below the FOMC's explicit 2% target as is likely to remain at similar levels for several years.
"In this circumstance, both legs of the dual mandate call for a highly accommodative monetary policy," Yellen said. "With unemployment so far from its longer-run normal level, I believe 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%."
There has been much speculation in the markets regarding exactly when the FOMC will begin to taper and eventually end its open-ended bond buying program, with the group vowing to continue its asset purchases until it sees a "substantial improvement" in the outlook for the labor market.
"In my view, 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," Yellen said.
While some worry that stopping the bond buying could mean a premature end to the Fed's assistance to the recovery, Yellen said the end of the balance sheet policies does not mean the central bank is withdrawing accommodation, but rather that "the FOMC has ceased augmenting that support."
In addition, "there will likely be a substantial period after asset purchases conclude but before the FOMC starts removing accommodation by reducing asset holdings or raising the federal funds rate," she added.
Even when the Fed does begin to trim its swollen balance sheet, Yellen said it will proceed with caution and make adjustments in response to the surrounding environment.
"For example, changes in the pace or timing of asset sales might be warranted by concerns over market functioning or excessive volatility in bond markets," she said.
However, the time when the Fed will begin normalizing its portfolio is "well in the future," Yellen added.
On the subject of communication and how important it is in the conduct of effective monetary policy, Yellen stressed that "the Federal Reserve's ability to influence economic conditions today depends critically on its ability to shape expectations of the future, specifically by helping the public understand how it intends to conduct policy over time, and what the likely implications of those actions will be for economic conditions."
So for instance, as the time for first increase in interest rates draws closer, "in my view it will be increasingly important for the Committee to clearly communicate about how the federal funds rate target will be adjusted," she said.
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