SAN DIEGO, Calif. — Federal Reserve Vice Chairman Janet Yellen expressed the hope Saturday that the Fed will be able to "exit" from its very loose monetary policy, but gave no sense of when that will be possible.
Yellen said that the Fed's ability to raise the rate of interest it pays on excess reserves will play a key role when that time comes.
She was hosting a panel discussion at the annual meetings of the Allied Social Science Associations and reflecting on "how much things have changed" since she last taught macroeconomics in 2003.
"The tools of policy have actually changed a great deal over the last decade," she said. "For example, the Federal Reserve no longer needs to regulate short-term interest rates by varying the quantity of monetary base or bank reserves because we are now allowed to pay interest on reserves."
"And we're quite likely ... we will almost surely rely on varying that level of interest on reserves," Yellen continued, adding, "I hope the day comes when we're ready to exit the period of accommodative monetary policy."
She did not say when that might be a day after St. Louis Fed President James Bullard and Philadelphia Fed President Charles Plosser projected an end to Fed asset purchases by the end of 2013.
Yellen said another thing that has "changed importantly is that communications have taken front and center stage at the Federal Reserve as a tool of monetary policy."
"Shaping expectations about the future path of short-term interest rates and the Fed's balance sheet now play major roles in conducting policy," she observed. "And of course this partly reflects, importantly reflects, the fact that the U.S. economy has been trapped at the zero bound now for over four years and this requires devising new tools to address it, and communications plays a big role."
Yellen recalled that when she last taught macroeconomics the text she used barely made mention of the zero lower bound or "liquidity traps."
She also noted "a good deal of new thinking is taking place concerning the transmission mechanism of how monetary policy impacts the economy" and about "the role of final markets in the transmission mechanism."
"People have raised important questions about the role financial stability considerations should play in our conduct of monetary policy," she added.
Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.