Fed's Yellen sees scope for further easing

Janet L. Yellen, president and chief operating officer of the Federal Reserve Bank of San Francisco, speaks at the Town Hall Los Angeles forum in Los Angeles, in this file picture taken March 23, 2010.

Credit: Reuters/Mario Anzuoni

By Ann Saphir

SAN FRANCISCO | Tue Nov 29, 2011 1:46pm EST

SAN FRANCISCO (Reuters) - Janet Yellen, the Federal Reserve's influential vice chair, said on Tuesday the U.S. central bank has room to ease monetary policy further, possibly by providing more information on the path of interest rates.

A second top official, Atlanta Federal Reserve Bank President Dennis Lockhart, said he sees a benefit in providing more information on the policy assumptions underlying Fed forecasts. He made clear, however, that he believes the current policy stance is appropriate.

With its usual economic lever of interest rates already pressed close to zero and its balance sheet triple the size of its pre-crisis norm, the central bank has been considering how it can better use communications as a policy tool.

The Fed has been debating for months ways to provide more clarity on when it might eventually tighten monetary policy, although officials have differed on how best to proceed.

Yellen said turmoil in financial markets stemming from both Europe's banking crisis and general uncertainty about the outlook had increased the risks to the global economy, and that the Fed could offer additional support to U.S. growth.

"The scope remains to provide additional accommodation through enhanced guidance on the path of the federal funds rate or through additional purchases of long-term financial assets," she told a conference sponsored by the San Francisco Federal Reserve Bank.

A number of communications shifts are being discussed, including a controversial proposal from the Chicago Fed president to allow for temporarily higher inflation. Officials are also considering offering explicit forecasts for the overnight federal funds rate.

The deputy governor of Sweden's central bank, Lars Svensson, urged the Fed to begin providing forecasts for short-term rates as a way to push borrowing costs lower.

"Publishing a policy-rate path would be the most direct way to affect interest-rate expectations, especially since central banks should have better information about their intentions than anyone else," he told the San Francisco Fed conference.

WORDS? ASSETS? BOTH?

Some Fed officials have expressed a predilection for resorting to purchases of mortgage-backed securities if policy-makers do decide that further easing is needed.

But others appear to favor deeper policy guidance as a way to stimulate economic activity.

In August, the Fed said it expected to hold the federal funds rate at ultra-low levels at least until mid-2013; it has been searching for ways to express that vow in terms of economic variables rather than time.

In a Reuters poll earlier this month, 16 of 19 primary dealers said they expected further Fed easing in coming months, most through changes in communications.

For his part, Lockhart repeated his view that the Fed's present policy stance was appropriate, although he said no options should be taken off the table.

"I am skeptical that further asset purchases will produce much gain in terms of increased economic activity," he told business students at the University of Georgia in Atlanta.

Still, Lockhart appeared warm to the idea of offering more explicit policy guidance, calling it a "worthy priority."

Yellen, who is leading a subcommittee on communications at the Fed, did not tip her hand. But previously she has said it might be fruitful to use the Fed's existing quarterly forecasts as a platform for further transparency.

MORE HELP NEEDED

Yellen also called for policies to spur a faster recovery in the battered U.S. housing market, although she did not provide any specific recommendations.

In September, the Fed decided to dip its toes back into the housing market by reinvesting proceeds of maturing mortgage and housing agency debt from its portfolio back into the mortgage-backed securities market.

Yellen said the contribution to the U.S. recovery from housing, which is usually key to economic rebounds, is likely to remain tepid in the near term, and that consumer spending is also not likely to be a key source of growth due to high household debt levels.

"The recovery in the United States and other advanced economies has been proceeding too slowly to provide jobs for millions of unemployed people," she said.

The U.S. economy grew just 2 percent in the third quarter, and the jobless rate has hovered near 9 percent all year. While the pace of recovery appears to be accelerating, the debt crisis in Europe poses a threat, as does the possibility that U.S. fiscal policy will tighten in the new year.

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