WASHINGTON — Janet L. Yellen, the vice chairwoman of the Federal Reserve, said Wednesday that the lackluster trajectory of the economic recovery might require the Fed to continue its efforts to bolster growth even beyond the end of 2014.
Janet Yellen, vice chairwoman of the Federal Reserve.
In a speech in Manhattan, Ms. Yellen offered a rejoinder to recent remarks by other Fed officials and investors warning that the Fed would need to raise interest rates well before the end of 2014 to prevent an increase in the rate of inflation.
She indicated that the Fed’s leadership, including the chairman, Ben S. Bernanke, remained firmly committed to the central bank’s efforts to suppress interest rates and reduce the cost of borrowing for businesses and consumers.
“I anticipate that the U.S. economy will continue to recover only gradually and that labor market slack will remain substantial for a number of years to come,” Ms. Yellen said, according to an advance copy of her prepared remarks.
She said that by some measures the Fed was not doing enough.
“In effect there has been a significant shortfall in the overall amount of monetary policy stimulus since early 2009” relative to those standards, she said in the speech, delivered to the Money Marketeers club of New York University.
She did not call for a new round of stimulus, however, arguing instead that the shortfall might provide justification for extending current efforts.
The Fed has held short-term interest rates near zero since late 2008, and it has sought to further reduce long-term interest rates through the purchase of more than $2 trillion in mortgage-backed securities and Treasury securities. It said last fall that it planned to maintain both of those policies until at least late 2014.
As the economy has shown signs of faster growth in recent months, some have warned that the Fed was in danger of pushing growth past a sustainable level.
Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said this week that the Fed might need to begin raising rates by the end of this year.
But Mr. Kocherlakota and his allies form a distinct minority on the Fed’s policy-making board, the Federal Open Market Committee. Ms. Yellen, by contrast, hews much closer to the views of Mr. Bernanke, who leads the majority.
Her speech offered an unusually transparent account of how she is balancing various factors in making her decisions about monetary policy.
She said that one economic model used by the Fed suggested that interest rates should be held near zero until late 2015. While others have suggested an earlier increase might be appropriate, she said there still might be reasons to wait, including the insufficiency of current policy and the risk that the economic recovery might falter.
Ms. Yellen was careful to note that the Fed’s decisions would depend on actual economic conditions. If growth were faster than expected, it might become necessary to retreat; if slower, it might become necessary for the Fed to do more.
Her frank account is part of the Fed’s commitment to increased transparency, but it also reflects the central bank’s current dependence on effective communication. The longer the Fed can convince investors that it will maintain its current policies, the longer interest rates will rest at their current, historically low levels.
The Fed could convince investors, as it has until now, by continually expanding its stimulus campaign.
But Ms. Yellen said nothing about doing more, reflecting the reality that the Fed was unlikely to announce new measures unless the economy faltered. And in the absence of new measures, the Fed’s effectiveness rests on the quality of its oratory.
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