NEW YORK – The federal budget needs to be “on a sustainable long-run trajectory” that allows policy actions to boost growth and create jobs without snuffing out the recovery, Federal Reserve Board Vice Chair Janet Yellen told a group in San Francisco Tuesday.
“It is crucial that the federal budget be put on a sustainable long-run trajectory, and we should not postpone charting that course,” she said, noting that failure would means “serious economic costs and risks in the long term and possibly sooner.”
By taming the budget, policymakers will take control of adjustments. “Significant near-term reductions in federal spending or large increases in taxes would impose an additional drag on the economy at a time when aggregate demand is already weak,” she said. “Indeed, under current law, federal fiscal policy is slated to impose considerable restraint on the growth of aggregate demand next year. We need, and I believe we have scope for, an approach to fiscal policy that puts in place a well-timed and credible plan to bring deficits down to sustainable levels over the medium and long terms while also addressing the economy's short-term needs. I do not underestimate the difficulty of crafting a strategy that appropriately balances short-run needs with long-run considerations, but doing so would provide important benefits to the U.S. economy.”
The nation faces “serious headwinds,” and the Fed is "moving vigorously" to offset them even as households deleverage and corporations resist investing. While growth is expected to pick up in the last half of 2011, unemployment is seen dropping slowly, “remaining painfully high for many years to come.”
Add in the Europe situation, and “these circumstances call for concerted domestic policy actions to boost growth and create jobs.” She reminded, “monetary policy is not a panacea, and it is essential for other policymakers to also do their part.”
She singled out the housing market as needing attention. “Stronger housing demand has the potential to boost recovery. The Congress and the Administration also can support the recovery in the near term while simultaneously putting fiscal policy on a sustainable trajectory in the long term.”
Also, she noted, other countries must also take policy action to set the world economy right.
