WASHINGTON — Federal Reserve Vice Chair Janet Yellen Tuesday said she is on the side of those who believe the central bank should keep its target interest rate at exceptionally low levels for longer a period than convention dictates due to current economic conditions.
In remarks prepared for delivery at a panel discussion hosted by the International Monetary Fund, Yellen noted that with the fed funds rate close to the zero bound, forward guidance on the future path of interest rates and asset purchases have taken its place as the main tools of monetary policy.
To counter expectations based on past Fed behavior when it comes to raising rates, the policy-setting Federal Open Market Committee in December 2012 announced that it intends to hold short-term interest rates near zero until the unemployment rate drops below 6.5% and so long as inflation in the medium term does not exceed 2.5%.
Yellen is chairing a panel with Bank of England Governor Mervyn King and Columbia University Economist Michael Woodford, and she declared that "I am persuaded, however, by the arguments laid out by our panelist Michael Woodford and others suggesting that the policy rate should, under present conditions, be held 'lower for longer' than conventional policy rules imply."
The aforementioned FOMC thresholds for inflation and unemployment reflect these ideas, she said, adding that the "clarity" of the group's commitment to easing monetary conditions "will itself support spending and employment and help to strengthen the recovery."
Yellen did not go into a full review of the Fed's $85 billion a month in asset purchases to support the recovery, except to say that they have, "on net," provided "meaningful" support.
She did take the time to address financial stability concerns related to the Fed's highly accommodative policies, as the central bank's goal is to encourage a return to prudent risk taking as credit markets normalize.
"I don't see pervasive evidence of rapid credit growth, a marked buildup in leverage, or significant asset bubbles that would threaten financial stability," Yellen said, but then she added, "there are signs that some parties are reaching for yield, and the Federal Reserve continues to carefully monitor this situation."
She noted that vulnerabilities still remain in the financial system, and assured that the Fed is prepared to use "any of our many instruments as appropriate to address any stability concerns."
Yellen opened her remarks with a discussion on the challenges central banks face in setting monetary policy objectives, particularly with regard to properly balancing price stability mandate and employment.
"I see continuity in the abiding importance of a framework of flexible inflation targeting," Yellen said, adding that the FOMC's 2% long-run inflation target, along with its promise of a "balanced approach" in attempts to mitigate deviations of inflation from the target and employment from estimates of its maximum sustainable level, as consistent with flexible inflation targeting.
"Well-anchored inflation expectations have proven to be an immense asset in conducting monetary policy. They've helped keep inflation low and stable while monetary policy has been used to help promote a healthy economy," Yellen said.
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