Monetary policy accommodation is at an appropriate level, and when combined with Fed moves to hike liquidity should help financial conditions improve and avoid stagflation, according San Francisco Federal Reserve Bank president Janet Yellen.

“I believe that the Fed’s liquidity operations, combined with its 325-basis-point cut in the federal funds rate — a substantial easing of monetary policy — are having a beneficial effect on financial markets,” she said according to prepared text of a speech she delivered at the Northern California Regional Financial Planning Conference yesterday.

“Although overall financial conditions are still far from normal, there are some rays of hope that the strains may be easing a bit. Over the past couple of months, for example, spreads in the markets for conventional GSE-sponsored securitized mortgages and in corporate borrowing markets have declined,” Yellen said. “Moreover, credit default swap spreads on many exposed financial institutions, a measure of their perceived chance of default, are down substantially. Treasury rates have moved up, suggesting reduced aversion to risk. And the major stock indexes have regained some ground.”

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