Fed’s Yellen Says Economy May Be Approaching ‘Inflection Point’
The U.S. economy may be approaching “an inflection point,” with reasons for optimism in rising consumer spending and falling business inventories, said Federal Reserve Bank of San Francisco President Janet Yellen.
“For the first time in a while, there is some good news to savor,” Yellen said in a speech yesterday in Berkeley, California. “But when it comes to assessing the future of the economy, the dominant theme is uncertainty.”
The bank president’s remarks, along with congressional testimony by Fed Chairman Ben S. Bernanke, underscore the fragility of the U.S. economy, which is showing some signs of improving. Bernanke told the Joint Economic Committee yesterday that another financial shock would undercut the central bank’s forecast for a slow recovery this year.
“I see the economy as vulnerable to a number of downside risks, including the possibility of another disruptive financial event,” Yellen said during a speech at the business school of the University of California, Berkeley. The most likely outcome is that growth resumes at a “low, but positive rate” in the final six months of this year and picks up in 2010, she said.
The Fed may be able to offer financial markets additional support, even as the economy rebounds, by issuing interest- bearing Fed bills to private investors, Yellen said. She said the approach, which would require authorization by Congress, might be better than the alternative of increasing the interest rate the Fed pays on bank reserves.
Either move would enable the central bank to effectively tighten monetary policy without reducing its support for credit markets, she said.
Fed Policy
Fed policy makers refrained last week from increasing purchases of Treasuries and mortgage securities as they watch for signs of an easing contraction cash advance no faxing. The Federal Open Market Committee kept the federal funds rate target at a range of zero to 0.25 percent for the third straight meeting, and repeated its intentions to keep the target rate low.
The central bank’s initiatives “appear to be lowering longer-term interest rates and easing financial conditions more generally,” Yellen said.
The Fed will need to remove monetary accommodation quickly enough to avert higher inflation, Yellen said, adding that she sees “little basis” for an inflation problem and a “remote” chance of deflation.
A recovery, once it takes hold, will be “frustratingly tepid,” she said.
Consumer Spending
Consumer spending, which accounts for about 70 percent of the economy, climbed at a 2.2 percent annual pace last quarter, even as gross domestic product dropped at a 6.1 percent annual pace. Business inventories also fell in the first quarter.
“The fact that I can now talk about crosscurrents may mean that the economy is reaching an inflection point,” Yellen said. “I see a lot of downside risk, but at least there is some basis for optimism.”
The San Francisco Fed is one of a dozen regional banks in the Fed system. Each year, four regional Fed presidents participate on a rotating basis as voting members of the policy- setting FOMC, joining Bernanke, Fed governors and the president of the New York Fed. Yellen is a voter this year.