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Fed taking ‘forceful action’ on economy, Yellen says

US Federal Reserve Vice Chair Janet Yellen speaks beside AFL-CIO President Richard Trumka at the American Federation of Labour and Congress of Industrial Organisations (AFL-CIO) in Washington February 11, 2013. — Reuters picUS Federal Reserve Vice Chair Janet Yellen speaks beside AFL-CIO President Richard Trumka at the American Federation of Labour and Congress of Industrial Organisations (AFL-CIO) in Washington February 11, 2013. — Reuters picWASHINGTON, Feb 12 — The Federal Reserve’s aggressive easing of monetary policy is warranted given the still-battered state of the US labour market, Fed Vice Chairwoman Janet Yellen said yesterday.

In an address to the politically influential AFL-CIO, the largest US labour group, Yellen, a potential successor to Fed Chairman Ben Bernanke next year, bemoaned the unusually weak nature of the economic expansion.

“The gulf between maximum employment and the very difficult conditions workers face today helps explain the urgency behind the Federal Reserve’s ongoing efforts to strengthen the recovery,” Yellen said.

“We have taken, and are continuing to take, forceful action to increase the pace of economic growth and job creation.”

The US economy contracted slightly in the fourth quarter of 2012 and, while that decline is seen as temporary, continues to grow at or below 2 per cent, far below the rate economists say is needed to bring down the 7.9 per cent unemployment rate.

Yellen pointed to erratic US budget policy as one source of weakness in the recovery.

“I expect that discretionary fiscal policy will continue to be a headwind for the recovery for some time, instead of the tailwind it has been in the past,” she said.

In response to the deep financial crisis and recession of 2007-09, the Fed lowered interest rates effectively to zero and bought over US$2 trillion (RM6 trillion) in mortgage and Treasury securities in an effort to keep down long-term interest rates.

It began a new, open-ended round of US$85 billion monthly bond purchases in September.

Austerity: More harm than good?

Austerity policies in the US and Europe that sharply cut spending to reduce budget deficits could be self-defeating if they derail economic growth, Yellen said.

“Both for the United States and for Europe ... fiscal austerity does raise unemployment, weaken the economy and ... in addition undermines the goals for which it is designed to achieve,” Yellen said.

Yellen argued that the primary cause of high unemployment is a shortage of demand due to the ebb and flow of the business cycle, not structural factors. That suggests monetary policy can be helpful to offset the labour market’s troubles.

Long-term unemployment is a serious problem not only for those affected, but also for the economy as a whole since it could hurt the nation’s growth potential, Yellen said.

Some analysts worry the Fed’s stimulus policies will spark future inflation, but the central bank maintains it has all the tools it needs to remove liquidity from the financial system when the time comes.

Policymakers do not think that is any time soon. They have vowed to keep purchasing assets as long as the US employment outlook fails to make substantial improvement and to keep rates near zero until the jobless rate falls to 6.5 per cent, as long as inflation remains under control.

Yellen said that, when the time comes to tighten monetary conditions, the Fed has the necessary tools, particularly the ability to pay interest on bank reserves to remove liquidity from the financial system.

Asked about the role of a large US trade deficit at a time when some analysts have voiced fears of competitive exchange rate devaluation or “currency wars,” Yellen sounded an optimistic note.

“For quite some period of time now, the US dollar has been depreciating very gradually in real terms and I think it has made a very substantial difference to the US current account deficit that has come down a long way and is no longer on what I would to refer to as an unsustainable course,” Yellen said. “So I think that we have made progress in that regard.” — Reuters 

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