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US Federal Reserve officials in no hurry to raise rates

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With unemployment high and inflation low, the Federal Reserve is in no hurry to raise interest rates, two Federal Reserve officials suggested on Tuesday.

The Fed cut its key target rate to near zero in December 2008 and pumped more than $1 trillion into the world’s biggest economy to blunt the worst downturn since the Great Depression.

While a mild recovery has taken hold and the jobs market has begun to stabilize, the officials said scant signs of inflation mean the Fed’s vow to keep near-zero rates for an extended period continued to be warranted.

“Such an accommodative policy is currently appropriate, in my view, because the economy is operating well below its potential and inflation is subdued,” San Francisco Federal Reserve President Janet Yellen said at a Town Hall Los Angeles luncheon. “I don’t believe this is yet the time to be tightening monetary policy.”

Earlier on Monday in Shanghai, Chicago Federal Reserve Bank President Charles Evans said he believed the Fed’s “extended period” language means no change to rates for at least three to four meetings of the policy-setting Federal Open Market Committee — or about six months.

“I’m hopeful that businesses will be surprised by the strength of demand over the next year and that they will actually begin to add workers, but it is quite a cautionary prospect for the U.S. and that leads me to think that monetary policy is likely to continue to be accommodative for an extended period of time,” said Evans, who is not a voting member of the Fed’s policy-setting committee this year.

Yellen is President Barack Obama’s top pick for vice chairman of the Fed board to replace Donald Kohn, a 40-year Fed veteran who plans to retire on June 23.

She is not a voting member of the policy-setting Federal Open Market Committee (FOMC) this year, but she will gain a vote if confirmed to the role of vice chairman.

In her first public comments on the prospect, she said on Tuesday that she is open to the possibility of the job, and is providing information requested by the White House.

COMMITTED TO PRICE STABILITY

Yellen’s remarks on Tuesday were in keeping with her reputation as a monetary policy dove — that is, more concerned with stimulating jobs and economic growth than with averting inflation.

But she made clear that her view that inflation is not currently a threat did not mean she would not be willing to take her foot off the gas pedal when the situation was warranted.

“I think I am as committed to price stability and the attainment of price stability as any member of the FOMC,” she said.

“When the time has come, am I going to support raising interest rates? You bet. I don’t want to see inflation pick up.”

As recovery takes hold, she said, the time will come for the Fed to boost short-term interest rates.

To do so, it will likely increase the rate the Fed pays on the reserves banks hold at the Fed, a hike that should bring up other short-term interest rates as well.

The Fed’s balance sheet — which swelled during the crisis as it provided emergency liquidity — should eventually shrink to more normal levels, with holdings largely in Treasury securities.

While selling assets could play some role in the shift, the Fed would only do so once tightening was warranted, she told reporters after her speech.

Speaking earlier in the day, Philadelphia Federal Reserve Bank President Charles Plosser said that better regulation is needed to dissuade market players from taking excessive risks.

“We have to have ways of disciplining the actors in the marketplace so that they don’t take excessive risks, and in many cases the market can do that and do that quite effectively. But when we protect creditors, when we protect people from failure, we encourage them to take risks,” Plosser told an economic conference in Prague.

“The ‘too big to fail’ problem has essentially removed much of that market discipline.”

Source: Reuters

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