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Janet Yellen stands by Fed’s low interest rate policies


 

WASHINGTON – Janet Yellen said Thursday that the U.S. economy has regained ground lost to Great Recession but still needs the Federal Reserve’s support because unemployment remains too high at 7.3 per cent.

Yellen made those comments in testimony to the Senate Banking Committee, which is considering her nomination to be the next chairman of the Federal Reserve.

Her remarks suggest that she plans to stand by the Fed’s extraordinary low interest rate policies begun under current Chairman Ben Bernanke until the economy shows further improvement.

The Fed’s support of the recovery is the “surest path to returning to a more normal approach to monetary policy,” said Yellen.

Yellen noted that the economy is still performing far below its potential. And she points out that inflation is running below the Fed’s 2 per cent target.

The Fed’s policies, which include three rounds of bond purchases, are credited with helping boost economic growth and lower unemployment. But they have also driven up stock prices and stoked worries about a greater risk of inflation and asset bubbles.

Even with some Republican resistance, Yellen’s backing by the committee and confirmation by the full Senate is viewed as all but assured. But approval won’t come before critics air their grievances about the Fed’s response to the financial crisis and the Great Recession.

Some economists saw Yellen’s comments, which were released a day ahead of the hearing, as a sign that the Fed won’t move at its next meeting in December to reduce its bond purchases — a process often called “tapering.” Rather, the Fed could delay any tapering beyond March, when many have predicted it would begin.

“This is a strong signal that the Fed is not going to reduce its support for the economy any time soon,” said Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University.


 
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Janet Yellen stands by Fed’s low interest rate policies

  1. Instead of producing positive economic
    developments, the Fed’s relentless buying of massive amounts of
    securities has had significant negative, unintended consequences. For
    example, banks have a limited amount of capital with which to take risks
    with their portfolio. With this capital, they have two broad options:
    First, they can confine their portfolio to their historical lower-risk
    role of commercial banking operations—the making of loans and standard
    investments. With interest rates at extremely low levels, however, the
    profit potential from such endeavors is minimal. Second, they can
    allocate resources to their proprietary trading desks to engage in
    leveraged financial or commodity market speculation. By their very
    nature, these activities are potentially far more profitable but also
    much riskier. Therefore, when money is allocated to the riskier
    alternative in the face of limited bank capital, less money is available
    for traditional lending. This deprives the economy of the funds needed
    for economic growth, even though the banks may be able to temporarily
    improve their earnings by aggressive risk taking.Ziad K Abdelnour

  2. Instead of producing positive economic
    developments, the Fed’s relentless buying of massive amounts of
    securities has had significant negative, unintended consequences. For
    example, banks have a limited amount of capital with which to take risks
    with their portfolio. With this capital, they have two broad options:
    First, they can confine their portfolio to their historical lower-risk
    role of commercial banking operations—the making of loans and standard
    investments. With interest rates at extremely low levels, however, the
    profit potential from such endeavors is minimal. Second, they can
    allocate resources to their proprietary trading desks to engage in
    leveraged financial or commodity market speculation. By their very
    nature, these activities are potentially far more profitable but also
    much riskier. Therefore, when money is allocated to the riskier
    alternative in the face of limited bank capital, less money is available
    for traditional lending. This deprives the economy of the funds needed
    for economic growth, even though the banks may be able to temporarily
    improve their earnings by aggressive risk taking.

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