Federal Reserve defends QE2, says plan will create 3 million jobs

Reuters, Sunday 9 Jan 2011

Fed Vice Chair defended the second round of quantitative easing, arguing plan will lead to job creation and price stability

Fed 1
Janet Yellen took charge of The Fed`s vice chair in October. (Photo: Reuters)

Federal Reserve Vice Chair Janet Yellen on Saturday defended the central bank's controversial program to buy assets in order to stimulate the economy, citing an internal study showing the full program will result in a gain of 3 million jobs.

"It will not be a panacea, but I believe it will be effective in fostering maximum employment and price stability," Yellen said while participating on a panel at an economics conference.

The Fed's latest plan to buy assets announced in early November -- dubbed QE2 because it is the Fed's second round of quantitative easing -- had sparked sharp criticism domestically, internationally, and even within the Fed itself, for weakening the dollar and risking dangerous inflation.

Yellen, whose defense appeared aimed at mollifying all of those critics, said a simulation approximating the most recent asset-buying program was shown to generate about 700,000 new jobs.

That exercise assumed buying $600 billion in longer-term Treasuries, holding them for about two years, and then unwinding the position over the following five years.

The study also suggests that inflation is currently a percentage point higher than would have been the case, implying that if the Fed had not bought longer-term securities after cutting interest rates to near zero in December 2008, the economy would now be close to a damaging deflationary spiral.

Yellen, who became the Fed's vice chair in October, was known to be a strong supporter of aggressive steps to bolster economic growth in her preceding position as president of the San Francisco Fed. She said concerns that QE2 will cause inflation, imbalances, or a damaging competitive currency devaluation are misplaced.

Addressing one flaw cited by detractors, that the program is falling short in its goal of lowering yields on longer-term Treasury securities, Yellen said that while rates are higher than at the outset of the program, they are lower than they otherwise would have been. She also said yields are more elevated because investors now expect a more robust recovery.

An apparent scale-back by investors of expectations that the Fed will not expand the program beyond its scheduled end mid-year supports the argument that the purchases have helped keep rates lower, Yellen said.

She stressed that the Fed's policy-setting Federal Open Market Committee does not want inflation to be higher than about 2 per cent and can, and will, act quickly to respond to any rising inflation.

"The committee remains unwaveringly committed to price stability and does not seek inflation above the level of 2 per cent or a bit less than that, which most FOMC participants see as consistent with the Federal Reserve's mandate," she said.

Short link: