Yellen Q&A: Accommodative Policy to Be in Place for Some Time

WASHINGTON — The ultra-easy monetary conditions created by the Federal Reserve to spur a faster economic recovery will remain so for a significant period of time, even when the central bank decides to end its aggressive bond buying, Federal Reserve Vice Chair Janet Yellen said Monday.

Taking questions from the audience following a speech at a National Association for Business Economics conference, Yellen also made clear that the Federal Open Market Committee will hold rates down so long as unemployment remains above its 6.5% threshold and there are no inflation worries.

With regard to the open-ended program of buying $45 billion a month in U.S. Treasury securities and $40 billion a month in mortgage bonds, Yellen had this to say:

"We keep adding accommodation so long as we engage in them (asset purchases), it's as though we are putting more and more and more accommodation into the system."

So, "the level of accommodation is increasing as long as those purchases continue," she added.

The Fed vice chair said that "once accommodation has peaked — so when asset purchases come to an end think of it as the level of accommodation has now risen and peaked — the Committee's intention is to leave that accommodation in place until well into the recovery."

"I think the quantity of thresholds that we've offered, with respect to the federal funds rate, should make it completely clear that as long as inflation is well-behaved the Committee has no intention of beginning to raise its target for the federal funds rate until unemployment has declined to 6.5%," she added.

Yellen stressed that this is a threshold for "possible action," and not an automatic rate-hike trigger.

"The Committee has made clear that it intends to hold on its balance sheet all the assets that we acquire through this purchase program until after we begin raising the federal funds rate," she said.

While the Fed would sell it assets at a slow, gradual and predictable rate, "we would not consider selling assets off until after the federal funds rate is increased."

So that accommodation is expected to be in place "for a long time."

Yellen said the Fed has not provided quantitative guidelines regarding how long the central bank will continue its asset purchases, but, "We are continuing to add, more and more accommodation as long as that program continues," she reiterated.

Regarding the effectiveness of the Fed's actions, Yellen said both types of purchases are viewed as being "reasonably efficacious in taking duration out of the market and pushing down premiums." This is in turn is being reflected in lower borrowing costs.

However, she said the Fed's purchases of mortgage-backed securities are having "a somewhat larger impact," — compared to buying Treasuries — pushing down mortgage rates and fueling a faster recovery in the housing market.

Asked why strong growth in corporate profits have not translated into a stronger rebound in the labor markets, Yellen had the following response:

"Businesses have been very careful to control costs, and we know that they are doing everything that they possibly can to be sure of a strong bottom line."

More recently, "part of it — I think — reflects uncertainty in the environment to make long term decisions," she added. "I would say it's just a shortage of aggregate demand," with the slow growth of sales meaning the employment is rising at "a very modest pace."

"So our objective is to get demand growth going." Yellen said.

She said the slow growth in demand also reflects households tightening their belts, the cut back in government spending and the impact of the recession in Europe.

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER