NEW YORK - Federal Reserve Board Vice Chair Janet Yellen said that the U.S. economy still has "uncertainty" so the Fed must be flexible and can either do further asset purchases if needed or else it has the tools to "exit" if needed.
"There are scenarios" with a "less strong recovery" than expected, said Yellen. Should such a scenario materialize, the Fed could step in with further accommodation such as more asset purchases, she said.
However she appeared to imply Fed decisions will be data-dependent, without using such words, as the future decisions will dependent on the economic outlook, she said.
"One concern" of Americans on the asset purchases was that "it would be inflationary", Yellen said, but she said she feels, speaking on her own behalf, that the "Fed has tools to exit" current policy accommodation and "tighten monetary policy when appropriate," she added.
She spoke in an audience question-and-answer period during a dinner meeting of the NYU Money Marketeers meeting. Her appearance occurred after last week's weak March jobs data.
Yellen spoke about the labor force participation rate and noted that given "the climate we have seen in the last number of months in the unemployment rate, I had considered the hypothesis that unemployment is declining as people are dropping out of the labor force" but added that "I don't think that conclusion would stand up."
"There is a genuine improvement" in unemployment, she added. "There is a cyclical element that is pushing down participation" with part of that the aging of the baby boomer crowd but also "there is also a trend decline in participation," she added.
One bit of drama was when one market participant preceded his question by asking the assembled audience of roughly 200: Who felt that they were experiencing inflation of 2%; the entire crowd kept their hands down, implying they felt they were experiencing higher inflation.
Yellen noted the disparity between GDP and unemployment was a "puzzle" for the Fed and could affect its outlook and also monetary policy.
One market participant noted that the U.S. was in a "terrible financial state" but with ultra-low U.S. interest rates, "there is no market signal being given right now." But Yellen said the economic conditions during the crisis had warranted such ultra-low rates.
She also urged Congress and the Obama administration to "put in place a medium-term plan for deficit reduction that is credible" as the current U.S. fiscl situation is "unsustainable."
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