Yellen predicts stronger 2nd-half growth

[October 22, 2011]  WASHINGTON (AP) -- The No. 2 official on the Federal Reserve says economic growth will end "noticeably stronger" in the second half of this year, but she says the central bank still needs to keep its policy options open to provide more support to the economy if necessary.

Federal Reserve Vice Chairman Janet Yellen said in a speech in Denver on Friday that oil and other commodity prices are falling and supply disruptions caused by Japan's natural disasters are easing. But she said the economy is still facing numerous problems.

Yellen said the central bank may need to consider more bond purchases to lower interest rates, but she said such an effort should be considered only if the economy required "significantly greater" help than the Fed is now providing.

"It looks likely that economic growth in the second half of this year will be noticeably stronger, and inflation more moderate, than in the first half," Yellen said in remarks to the annual meeting of the Financial Management Association International.

But she said that the Fed would keep under review a range of options that it could employ if needed to support growth, including further bond purchases.

"Securities purchases across a wide spectrum of maturities might become appropriate if evolving economic conditions called for significantly greater monetary accommodation," Yellen said.

Yellen noted that at the Fed's last meeting on Sept. 20-21 the central bank agreed to shift $400 billion of its holdings into more long-term holdings of Treasury securities as a way of lowering long-term interest rates.

Yellen did not provide any specifics about what further types of securities the Fed might consider buying, but she said that expanding the size of the Fed's holdings of long-term Treasury debt by too great an amount could adversely affect how this market operates.

On Thursday, Daniel Tarullo, another Fed board member, called for the central bank to consider buying more mortgage bonds as a way to spur growth by lowering mortgage interest rates and thus giving a boost to the depressed housing industry.

Tarullo and Yellen are among the 10 Fed officials who have a vote on the Federal Open Market Committee, the panel of Fed board members and regional bank presidents who meet eight times a year to set interest-rate policies.

Tarullo's remarks came after Eric Rosengren, president of the Federal Reserve Bank of Boston, in an interview this week also endorsed the idea of considering further purchases of mortgage-backed securities.

The next meeting of the FOMC is Nov. 1-2. There has been speculation in financial markets that the Fed might go further in its campaign to jump-start an economy that many have feared is in danger of slipping back into a recession, although such a move would likely meet opposition from Fed officials who believe the central bank has done as much as it can do.

In addition to the September move to rebalance its holdings, the Fed in August expanded its policy guidance to say it was prepared to keep interest rates at record lows until at least mid-2013 as long as inflation remained under control.

Both the August and September Fed actions were approved on 7-3 votes. The three dissenting votes from regional banks presidents represented the largest number in nearly two decades and underscored the deep policy split on the board.

In her comments Friday, Yellen said she felt the central bank should explore providing more guidance for future moves including an idea being pushed by Charles Evans, head of the Chicago Federal Reserve Bank. Evans has suggested that the Fed should consider pledging to keep rates at record lows until unemployment, currently at 9.1 percent, falls below 7.5 percent.

Yellen said such an idea should be explored although she said it had drawbacks in that it could lead to confusion in the minds of the public over the Fed's long-term goals for the economy.

Yellen, who heads a Fed committee that is investigating ways to improve the Fed's communication efforts, said that another area that should be explored is providing more information on the Fed's long-term goals for economic growth, unemployment and inflation.

[Associated Press; By MARTIN CRUTSINGER]

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.