Yellen Says Fed May Need to Use Unconventional Policy Again Some Day -- Update
October 20 2017 - 9:10PM
Dow Jones News
By Harriet Torry
WASHINGTON -- Federal Reserve Chairwoman Janet Yellen warned of
an "uncomfortably high" likelihood that future policy makers would
have to return to the unconventional monetary policy tools deployed
to fight the last crisis, although she said the central bank is now
making "good progress" in scaling them back.
The "probability that short-term interest rates may need to be
reduced to their effective lower bound at some point is
uncomfortably high, even in the absence of a major financial and
economic crisis," she said in remarks released ahead of delivery to
the National Economists Club.
That is because the neutral rate of interest -- the
inflation-adjusted interest rate that is consistent with the
economy expanding at its full potential without overheating -- "is
much lower than in previous decades, " she said.
The Fed leader said the tools the central bank deployed in the
immediate aftermath of the financial crisis helped spur the
economic recovery, meaning the "U.S. economy is much stronger today
than it would have been without the unconventional monetary policy
tools." Such tools included forward guidance on monetary policy,
large-scale asset purchases and the payment of interest on excess
reserves.
"The bottom line is that we must recognize that our
unconventional tools might have to be used again," Ms. Yellen
said.
Ms. Yellen's speech came just before the start of the Fed's
self-imposed "blackout," a 10-day period before an
interest-rate-setting Federal Open Market Committee meeting in
which they don't discuss monetary policy publicly. The Fed's next
two-day policy meeting begins Oct. 31.
At their last policy meeting Sept. 19-20, Fed officials left
rates unchanged and penciled in one more rate rise in 2017. They
expect three rate increases next year, two in 2019 and one in 2020.
The central bank has raised its benchmark rate twice this year, in
March and June, most recently to a target range of 1% to 1.25%.
The Fed chairwoman also commented on the central bank's effort
to reduce the size of its $4.5 trillion balance sheet. The Fed this
month has started to allow progressively larger amounts of Treasury
and mortgage bonds to mature from its holdings and not be
replaced.
Ms. Yellen said the central bank has made progress in scaling
back the so-called accommodation it introduced during the financial
crisis. It has done that in recent years by raising short-term
interest rates from near zero, and, more recently, by starting to
shrink the Fed's large portfolio of mortgage and Treasury
securities.
"In no small part because of our authority to pay interest on
excess reserves, the process of removing policy accommodation is
working well," she said.
Ms. Yellen said officials "do not anticipate a jump in term
premiums as our balance-sheet reduction plan gets under way." The
term premium is the extra yield investors demand for taking on the
uncertainty that comes with longer-dated securities.
The Fed's purchases of Treasury and mortgage securities were
aimed at spurring household and business investment by driving
longer-term interest rates and bond yields down.
"While the available evidence points to a strong reaction of
longer-term yields to our asset purchases, it is conceivable that
those yields will react much more modestly to our balance-sheet
reduction plan," Ms. Yellen said.
Write to Harriet Torry at harriet.torry@wsj.com
(END) Dow Jones Newswires
October 20, 2017 20:55 ET (00:55 GMT)
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