Fed Official Says Low Rates Needed to Fuel Economic Recovery
February 22, 2010 - 4:03 PMRecord-low interest rates are still needed to foster the economic recovery and to relieve high unemployment, a Federal Reserve official said Monday.
Janet Yellen, president of the Federal Reserve Bank of San Francisco, is the latest Fed official in recent days to stress that the central bank isn't in any rush to boost borrowing costs for millions of Americans. The remarks come after the Fed took a surprise step Thursday and bumped up the rate banks pay for emergency loans.
Despite a big growth spurt at the end of last year, the economic rebound is likely to slow later this year as benefits from the government stimulus plan fade, Yellen pointed out in a speech in San Diego.
There's a risk that the housing market could weaken again once a homebuyer tax credit expires this spring and after the Fed stops buying mortgage securities from Fannie Mae and Freddie Mac, she said. The Fed is on track to wrap up $1.25 trillion worth of those purchases by the end of March. The program has lowered mortgage rates and bolstered the housing market.
Recession-scarred consumers and businesses are also likely to remain cautious, restraining the recovery. And, that means unemployment - now at 9.7 percent - will probably remain "painfully high for years," Yellen said.
Against this backdrop, "This is not the time" to be tightening credit, Yellen said.
Just hours after the Fed acted last Thursday, Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said the bump-up in the emergency lending rate to banks should not be viewed as a "a sign that a tightening is imminent."
The Fed portrayed Thursday's action as a part of a broader move to pull back the extraordinary aid it provided to fight the financial crisis and move its policies closer to normal now that financial conditions are improving.
William Dudley, president of the Federal Reserve Bank of New York, warned Friday that even though the economy is growing again "it's far too early to pop the champagne corks." Unemployment, he said, is "unacceptably high."
More insights into the Fed's take on economic and financial conditions and its strategy to reel in stimulative aid provided during the crisis will likely come when Fed Chairman Ben Bernanke testifies on Capitol Hill this week.
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