TOKYO — Federal Reserve Board Vice Chair Janet Yellen said on Wednesday that the Fed must unwind asset purchases "in a timely way" when the time comes in order to avoid inflationary pressures.
U.S. short-term and long-term interest rates will rise when the Fed begins to normalize monetary policy by selling off financial assets that it has bought as part of easing, she told an IMF/WB panel discussion on sovereign risk, capital markets and financial stability.
Yellen said despite the large U.S. fiscal deficit, its government debt is still considered a safe-haven asset.
Stronger U.S. economic growth will be "beneficial" for the entire global economy, she said.
The Fed has succeeded in pushing down yields on Treasury notes thanks to low interest rates and stable inflation expectations as well as expectations that the Fed will keep very low rates for a long time amid weak economic growth and high unemployment, said Yellen.
She acknowledged that lower interest rates compared to the rest of the world put some pressure on exchange rates and then international capital flows, making policymaking difficult for some emerging economies, but that it is not the intention of the Fed or any other central bank in advanced economies.
Economic growth differentials and a shift in risk aversion are more important factors that could cause volatile capital flows, compared with central bank quantitative easing and monetary policy differentials, she said.
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