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Yellen: Fed Should Focus On Jobs, Even If Inflation Edges Past Target

Yellen: Fed Should Focus On Jobs
Reuters
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FILE - In this April 16, 2008, file photo, Janet L. Yellen, President and CEO of the Federal Reserve Bank of San Francisco, speaks about foreclosures to the Bay Area Council Outlook Conference in Alameda, Calif. President Barack Obama on Thursday, April 29, 2010, will name Janet Yellen to be vice chairwoman of the Federal Reserve and will fill two other vacancies at the central bank whose decisions influence economic activity, employment and inflation. (AP Photo/Paul Sakuma)

(Adds comments on Japan stimulus)

By Pedro Nicolaci da Costa

WASHINGTON, April 4 (Reuters) - The Federal Reserve should focus its energies on bringing down an elevated U.S. unemployment rate even if inflation "slightly" exceeds the central bank's target, Fed Vice Chair Janet Yellen said on Thursday.

Yellen, who is seen as a potential successor to Chairman Ben Bernanke, says she looks forward to the day when policymakers can abandon unconventional tools like asset purchases and return to the conventional business of lowering and raising interest rates, currently set at effectively zero.

But she made that clear that time is not near, saying eventual "normalization" of policy by the Federal Open Market Committee is still far in the future.

"Progress on reducing unemployment should take center stage for the FOMC, even if maintaining that progress might result in inflation slightly and temporarily exceeding 2 percent," Yellen told a meeting sponsored by the Society of American Business Writers and Editors.

Yellen said she favored adjusting the pace of Fed bond purchases, currently running at $85 billion a month, in response to changes in economic conditions.

The U.S. economy showed signs of strength in the first quarter, with many economists predicting an annualized growth rate above 3 percent. However, March figures have been more subdued, prompting some analysts to revise down their forecasts for employment growth in a report due out on Friday.

The economy generated 236,000 jobs in February, while the jobless rate fell to 7.7 percent.

Yellen said an eventual end to the central bank's bond-buying stimulus will not mean interest rate increases are imminent, stressing the weak nature of the recent economic recovery.

"Adjusting the pace of asset purchases in response to the evolution of the outlook for the labor market will provide the public with information regarding the committee's intentions and should reduce the risk of misunderstanding and market disruption as the conclusion of the program draws closer," she said.

In a speech that stressed the benefits of clear communication, Yellen documented a shift in monetary policy that has moved from a highly secretive approach to one where openness and dissent is welcomed.

"I hope and trust that the days of 'never explain, never excuse' are gone for good, and that the Federal Reserve continues to reap the benefits of clearly explaining its actions to the public," she said.

Asked about Japan's announcement of a massive $1.4 trillion monetary stimulus overnight, Yellen suggested it was appropriate for the central bank to take steps to fight a prolonged bout of deflation.

"Taking an aggressive approach to try to end deflation is something I certainly understand," she said.

"What Japan is doing is something that's in their own best interest, it's something that if successful will be good for stimulating growth in the global economy and it will be good for us too." (Editing by Leslie Adler)

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Before You Go

11 Lies About The Fed
Myth: The Fed actually prints money.(01 of11)
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People commonly say that the Fed itself prints money. It's true that the Fed is in charge of the money supply. But technically, the Treasury Department prints money on the Fed's behalf. Asking the Treasury Department to print cash isn't even necessary for the Fed to buy securities. (credit:AP)
Myth: The Federal Reserve is spending money wastefully.(02 of11)
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Both CNN anchor Erin Burnett and Republican vice presidential nominee Paul Ryan have compared the Federal Reserve's quantitative easing to government spending. But the Federal Reserve actually has created new money by expanding its balance sheet. The Fed earned a $77.4 billion profit last year, most of which it gave to the U.S. government. (credit:Getty)
Myth: The Fed is causing hyperinflation.(03 of11)
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Someconservativeshave claimed that the Federal Reserve is causing hyperinflation. But inflation is actually at historically low levels, and there is no sign that is going to change. Core prices have risen just 1.4 percent over the past year, according to the Labor Department -- below the Federal Reserve's target of 2 percent. (credit:AP)
Myth: The amount of cash available has grown tremendously.(04 of11)
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Some Federal Reserve critics claim that the Fed has devalued the U.S. dollar through a massive expansion of the amount of currency in circulation. But not only is inflation low; currency growth also has not really changed since the Fed started its stimulus measures, as noted by Business Insider's Joe Weisenthal. (credit:AP)
Myth: The gold standard would make prices more stable.(05 of11)
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Rep. Ron Paul (R-Tex.) has claimed that bringing back the gold standard would make prices more stable. But prices actually were much less stable under the gold standard than they are today, as The Atlantic's Matthew O'Brien and Business Insider's Joe Weisenthal have noted. (credit:Getty Images)
Myth: The Fed is causing food and gas prices to rise.(06 of11)
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CNN anchor Erin Burnett claimed in September that the Federal Reserve's stimulus measures have caused food and gas prices to rise. But many economists believe global supply and demand issues are influencing these prices, not Fed policy. And there actually is no correlation between the Fed's stimulus measures and commodity prices, according to some economists Paul Krugman and Dean Baker. (credit:Getty)
Myth: Quantitative easing has not helped job growth.(07 of11)
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Some Federal Reserve critics claim that the Fed's stimulus measures have destroyed jobs. But the Fed's quantitative easing measures actually have saved or created more than 2 million jobs, according to the Fed's economists. In addition, JPMorgan Chase chief economist Michael Feroli told Bloomberg last month that QE3 will provide at least a small benefit to the economy. (credit:AP)
Myth: Tying the U.S. dollar to commodities would solve everything.(08 of11)
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Rep. Paul Ryan (R-Wis.) has proposed tying the value of the U.S. dollar to a basket of commodities, in an aim to promote price stability. But this actually would cause prices to be much less stable and hurt the U.S. economy overall, as The Atlantic's Matthew O'Brien has noted. (credit:AP)
Myth: Ending the Fed would make the financial system more stable.(09 of11)
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Rep. Ron Paul (R-Tex.) claims that ending the Federal Reserve and returning to the gold standard would make the U.S. financial system more stable. But the U.S. economy actually experienced longer and more frequent financial crises and recessions during the 19th century, when the U.S. was using the gold standard and did not have the Fed. (credit:AP)
Myth: The Fed can't do anything else to help job growth.(10 of11)
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Manycommentators have claimed that there simply aren't any tools left in the Fed's toolkit to be able to help job growth. But some economistshave noted that the Fed could target a higher inflation rate to stimulate job growth. The Fed, however, has ruled this option out -- for now. (credit:AP)
Myth: The Fed can't easily unwind all of this stimulus.(11 of11)
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Some commentatorshave claimed that the Fed can't safely unwind its quantitative easing measures. But the Fed's program involves buying some of the most heavily traded and owned securities in the world, Treasury and government-backed mortgage bonds. The Fed will likely have little problem finding buyers for these securities, all of which will eventually expire even if the Fed does nothing. But economists have noted that once the Fed decides it's time to unwind the stimulus, the economy will have improved to such an extent that this won't be an issue. (credit:AP)
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