SF Fed President Janet Yellen Ranges Far And Wide On The Economy

Janet Yellen delivered a pretty comprehensive speech on the economy and the Fed actions today. If you aren’t familiar with her, she is the President of the San Francisco Fed and perhaps one of the more influential members of the central bank. She may well become the first female chairwoman of the Fed.

It’s a bit long so I’ll only excerpt a couple of sections. I do recommend that you take the time to read it and put it up against some of the more outrageous comments that seem to be going around the blogosphere as well as the MSM.

On recovery:

Still, I expect the recession will end sometime later this year. That would make it the longest and probably deepest downturn since the Great Depression. Growth will come from a variety of sources. One is federal government spending resulting from the stimulus program passed by Congress earlier this year. This package provides tax cuts that leave more cash in consumers’ pockets, as well as direct government spending increases that add to payrolls and boost economic output. But it will take more than fiscal policy to really get the economy moving forward.

On housing:

The housing sector too will eventually rise from the ashes. Home construction has fallen dramatically over the past few years as the nation works off the massive overbuilding of the boom years. But, once this adjustment is complete, housing construction will need to increase significantly just to keep pace with the growth in the number of households.  Finally, the vicious cycle of tight credit and a weak economy can turn into a virtuous cycle. Once the economy starts growing and jobs and income are increasing, fewer borrowers will default and lenders will be willing to increase the supply of credit.

And on the hurdles we have yet to face:

I don’t like taking the wind out of the sails of our economic expansion, but a few cautionary points should be considered. I expect the pace of the recovery will be frustratingly slow. It’s often the case that growth in the first year after a recession is very rapid. That’s what happened as we came out of a very deep downturn in the early 1980s. Although I sincerely wish we would repeat that performance, I don’t think we will. In past deep recessions, the Fed was able to step on the accelerator by cutting the federal funds rate sharply, causing the economy to shoot ahead. This time, we already have our foot planted firmly on the floor. We can’t take the federal funds rate any lower than zero.  I believe that the Fed’s novel programs are stimulating the flow of credit, but they simply aren’t as powerful levers as large rate cuts, so this time monetary policy alone can’t power a rapid recovery.

History also teaches us that it often takes a long time to recover from downturns caused by financial crises. 3 In particular, financial institutions and markets won’t heal overnight.  Our major banks have made excellent progress in establishing the capital buffers needed to continue lending even through a downturn that is more serious than we anticipate. But they are still nursing their wounds and credit will remain tight for some time to come.

I also think that a massive shift in consumer behavior is under way—one that will produce great benefits in the long run but slow our recovery in the short term. 4American households entered this recession stretched to the limit with mortgage and other debt. The personal saving rate fell from around 8 percent of disposable income two decades ago to almost zero.  Households financed their lifestyles by drawing on increasing stock market and housing wealth, and taking on higher levels of debt. But falling house and stock prices have destroyed trillions of dollars in wealth, cutting off those ready sources of cash. What’s more, the stark realities of this recession have scared many households straight, convincing them that they need to save larger fractions of their incomes. In the long run, higher saving promises to channel resources from consumption to investment, making capital more readily available to retool industry and fix our infrastructure. But, in the here and now, such a rediscovery of thrift means fewer sales at the mall, and fewer jobs on assembly lines and store counters.

There is much more including her view on the likelihood of inflation (remote) and the Fed’s commitment to price stability (unflinching and embedded in the culture). It’s a speech that covers much ground and does so well.

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