Fed’s Yellen Sees First ‘Solid’ Signs of End to Slump

By Vivien Lou Chen and Steve Matthews

July 28 (Bloomberg) — Federal Reserve Bank of San Francisco President Janet Yellen said the U.S. economy is showing the “first solid signs” of emerging from the recession and should resume growth later this year.

“That recovery is likely to be painfully slow” as consumers spend less and save more, Yellen also said in a speech today in Coeur d’Alene, Idaho. “A gradual recovery means that things won’t feel very good for some time to come.”

Yellen’s remarks echo the view of Fed Chairman Ben S. Bernanke, who told Congress last week the economy is showing “tentative signs of stabilization.” Those indications include a rising stock market, slowing declines in housing prices and a waning pace of job losses, the regional bank president said.

“The interaction between the economy and the credit crunch, often described as an adverse feedback loop, led to what could become the most severe recession since the Great Depression,” the 62-year-old bank chief, who votes on monetary policy this year, said in the speech to a convention of the Oregon Bankers Association and Idaho Bankers Association.

“We glimpse the first solid signs since the recession started more than a year and a half ago that economic growth may be poised to resume,” Yellen said. “Indeed, I expect that to happen sometime this year,” she said, while adding that risks to the outlook remain, with the commercial property slump the biggest threat.

Fed Forecasts

Fed officials anticipate the U.S. economy will contract less this year than they had projected in April, even as unemployment climbs to as high as 10 percent, according to their latest forecasts released on July 15.

Consumer prices are now forecast to rise by 1 percent to 1.4 percent this year, compared with April projections of 0.6 percent to 0.9 percent. Excluding food and energy, prices are expected to increase 1.3 percent to 1.6 percent, up from a range of 1 percent to 1.5 percent three months earlier. The figures reflect the central tendency of projections, which exclude the three highest and three lowest forecasts.

Core inflation will probably remain below 2 percent “for several years,” Yellen said.

“The Fed is keenly aware” of the need to tighten policy in time to avert higher inflation, Yellen said. “When the economy does come back, I can assure you that we will act decisively and appropriately to tighten the stance of policy and maintain price stability.”

‘Not the Time’

In response to audience questions, Yellen said the Fed would need to stay “ahead of the curve” and tighten policy before the unemployment rate returns to a more normal level of about 5 percent. “That said, this is not the time” to raise rates, she said.

Most Fed officials last month considered the economy “still quite weak and vulnerable to further adverse shocks,” even as they rejected an expansion in asset purchases, according to minutes of their June 23-24 meeting in Washington.

Yellen today said, “there remains some chance that economic conditions could turn out worse than what I’ve sketched.”

“High on my worry list is the possibility of another shock to the still-fragile financial system,” particularly in commercial real estate, she said. “Our biggest concern now is with maturing loans on depreciated commercial properties.”

Job Losses

Employers reduced payrolls by 467,000 last month and the unemployment rate rose to the highest in almost 26 years. The world’s largest economy has lost about 6.5 million jobs since December 2007.

Payrolls have shrunk at a “dreadful pace” and unemployment is poised to go higher, Yellen said.

The regional Fed president said she expects demand for U.S. debt to stay “strong” even as the government sells a record $115 billion of Treasuries this week.

“I believe the market for our debt will remain strong because savings throughout the global economy is very strong and competition from private issuance is very weak,” Yellen told reporters after the speech.

The government sold a record $42 billion of two-year notes today, the biggest offering of the notes since the Treasury began monthly auctions of them in the mid-1970s. Indirect bidders, a class of investors that includes foreign central banks, bought 33 percent of the notes.

The only thing that would impair demand is an erosion in confidence in U.S. policy, Yellen said, adding she sees “no reason” that will happen.

Yellen praised Bernanke’s performance as Fed chairman, adding that he has tried to strengthen the role of the policymaking committee. Bernanke has made it clear that sound policy relies on the actions of the entire central bank rather than on just a powerful chairman, she said.

“My own view is he has done an excellent job of managing through the most difficult time in U.S. economic history since the Great Depression,” Yellen said of Bernanke. Still, “we would not be lost” if he were not reappointed at the conclusion of his term in January, she said. (Vivien Lou Chen & Steve Matthews, Bloomberg) http://www.bloomberg.com/apps/news?pid=20601068&sid=aGSFM7Y_FJNc

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