PARIS — San Francisco Federal Reserve Bank president Janet Yellen said Friday that the U.S. economy is “particularly exposed” to downside risks, especially from the slumping housing sector and strained financial markets.
But the U.S. also faces inflation pressures, particularly in the short term, Yellen said in the prepared text of remarks to a monetary policy conference here at Banque de France’s symposium on globalization and monetary policy.
“The U.S. economy is particularly exposed to downside risks from the unwinding of the housing bubble and disruptions in financial markets. There is some slack now in the U.S. labor market and, if these downside economic risks materialize, quite a bit more slack could emerge,” she said.
Further weakness in the job market could put some downward pressure on inflation, Yellen said. But she noted that there are other pressures in play, including the impact of globalization and rising energy prices.
“It is this unpleasant combination of risks to both inflation and employment that the [Federal Open Market Committee] must balance as it assesses the appropriate path for monetary policy going forward,” the Fed president said.
Yellen said she expects price pressures to ease over time. But she warned there are risks to that forecast, so calm inflation expectations are not a given.
“The Fed certainly cannot afford to take for granted that inflation expectations will remain well-anchored. At the same time, there are downside inflationary pressures” relating to the economic slowdown, she said.
Yellen said it would be “a mistake” to downplay the role of monetary policy and the credibility of central banks in holding down price pressures.
“Credibility accounts for why inflation appears generally to have become less persistent,” she said.
The FOMC will decide on its next policy move on March 18. Yellen is not a voting member of the rate-setting committee in 2008.
— Market News International