Yellen Says Fed May Need to Use Unconventional Policy Again Some Day --
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.
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