–Updating 14:47 ET Story To Include Full Comments On Commodity Prices
By Sheila Mullan
NEW YORK (MNI) – Federal Reserve Vice Chairman Janet Yellen said
Monday she “continued to see a need” for the U.S. monetary policy to be
accommodative “given the extensive resource utilization slack in the
economy”.
However, she believes markets are already anticipating that the
second round of quantitative easing will end as originally planned by
the central bank at the end of June, which is priced in market rates.
“If we never see employment pick up, it is hard to see if there
would be an inflation pickup,” Yellen said during a question and answer
session following a speech at the Economic Club of New York.
Yellen downplayed longer-term inflation concerns, even though, as a
questioner pointed out, the 10-year Treasury Inflation Protected
Securities’ breakevens are at 2.6%, not much lower than the all-time
high of 2.7%.
She said that it is “hard to get a direct read” on inflation from
such TIPS breakevens, as the latter have a “risk premium” built in.
While Yellen does expect some pass-through from commodity prices
should they stabilize at higher levels, she does not expect a major
inflation pickup “if employment does not rise.”
Specifically she was asked, “If commodity prices continue to trend
higher and headline inflation continues to exceed the core, then if core
starts to accelerate — frankly as it has some already — but wages do
not accelerate, how would you view that?
She replied, “As I indicated in my remarks, I think it’s essential
for the Fed to avoid a repeat of the (high inflation) 1970s and 1960s.
And I do think we do have to be focused on movements in core inflation
and inflation expectations, and to be prepared to respond if necessary
to avoid a repeat of the 1970s. That’s something that would be highly,
highly undesirable and I think should be intolerable to the Fed.”
“If commodity prices stabilize, I do expect some pass-through from
higher commodity prices to prices of other goods and services that use
those inputs,” Yellen said. “So it would not surprise me to see some
temporary pickup for a time in core inflation, which is now running
below 2%.”
Yellen added that, “But in the absence of a response in wages, I
find it hard to believe we could end up with a permanent escalation for
core inflation,” she said. “But this is something that we don’t want to
wait until we see inflation pick up from a long-run basis before
responding.”
She said she watches different measures of inflation, including
household surveys and the professional forecasters’ surveys.
Yellen parried on a question about the European Central Bank and
Fed’s diverging policies.
“Both the Fed and the ECB are taking actions” that each sees as
appropriate, Yellen said, adding, “I don’t want to comment on ECB
policy.”
She limited her comments to pointing out “that conditions are
different in different portions of the Euro area,” with Germany seeing
better growth.
Yellen added that she would not “expect significant financial
market” reaction to the end of quantitative easing but that the Fed’s
eventual asset sales “would put pressure on financial markets.”
As a result, “it would be important to give” guidance to the
markets in terms of clear “announcements in advance,” she said.
Yellen said QE succeeded at lowering interest rates.
“I do think that our purchases of longer-term Treasuries” and other
U.S. bonds “worked to lower term rates” and to “push down long-term
rates,” she said.
U.S. financial markets, she believes, are “anticipating” the end of
the second round of quantitative easing at the end of June 2011, which
is “incorporated into” market rates.
** Market News International New York Newsroom: 212-669-6430 **
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