Fed says asset purchases prevented deflation and will create 3m jobs

Denver: Federal Reserve Vice Chairman Janet Yellen defended the central bank's asset purchases, saying they will add 3 million jobs to private payrolls and have prevented the country from slipping into deflation.

"Inflation is currently a percentage point higher than would have been the case," she said in a speech on Friday in Denver. "In the absence of such purchases, the economy would now be close to deflation."

Yellen gave the most detailed accounting yet of the benefits the central bank sees from its November decision to start a second round of asset buying, adding her voice to a defence of the policy by Chairman Ben S. Bernanke and other officials. Republican lawmakers and officials in China, Germany and Brazil have criticised the policy, saying it threatens to weaken the dollar and stoke asset-price bubbles.

Yellen, 64, appearing at the Allied Social Science Associations annual meeting, dismissed concerns that inflation will flare up, saying weak labour demand will be helpful in "mitigating the risk" and the Fed can "tighten policy when needed" by increasing the interest rate it pays on excess bank reserves.

She added that the Fed's moves won't hinder growth overseas, are having "only moderate effects on the foreign exchange value of the dollar," and do not appear to be triggering "significant excesses or imbalances in the United States."

Mortgage debt

The central bank bought $1.7 trillion (Dh6.2 trillion) of mortgage debt and Treasuries through March 2010 as it sought to pull the US out of the worst recession since the 1930s. On November 3, the Federal Open Market Committee decided to buy $600 billion of Treasuries through June in a policy known as QE2 for a second round of quantitative easing.

"For sure, we saved a lot of jobs with QE1 and we're saving jobs with QE2," said Allen Sinai, president and chief executive officer of Decision Economics Inc in New York, referring to the two large-scale rounds of asset purchases. "She and I probably disagree on the number."

In her assessment of the economic impact of the purchases, Yellen cited a paper by four Fed economists that relied on the central bank's main economic forecast model, known as FRB/US.

The simulation assumed the latest round of purchases is completed in a year, and that an elevated level of holdings is maintained for two years before being "unwound linearly over the following five years."

Jobs lost

It concludes that private employment is currently 1.8 million higher than it would have been without the policy and will get an additional boost of 1.2 million by 2012.

The economy has lost 8.4 million jobs during the recession that began in December 2007, the biggest employment slump in the post-Second World War era.

A Labour Department report last week showed that employers added 103,000 jobs in December, fewer than the median projection for a gain of 150,000 in a Bloomberg News survey of economists. The unemployment rate fell to 9.4 per cent from 9.8 per cent, in part because discouraged workers stopped looking for jobs.

At the same time, inflation is below the Fed's preferred rate which Yellen said was "2 per cent or a bit less than that." An inflation gauge tied to consumer spending excluding food and energy rose 0.8 per cent from a year earlier in November.

Minutes of the Fed's most recent meeting in December showed that some officials have a high threshold for scaling back their plans for debt purchases, even with an improving economic outlook.

Recent reports point to a strengthening recovery that has prompted companies such as Memphis, Tennessee-based FedEx to raise profit forecasts. The Institute for Supply Management's non-factory index, which covers about 90 per cent of the economy, rose in December to the highest level since May 2006.

Unemployment holding above 9 per cent is one reason why President Barack Obama last month signed an $858 billion bill extending all Bush-era tax cuts for two years. The bill also continues expanded unemployment insurance benefits through 2011 and cuts payroll taxes by 2 percentage points.

Republican leaders have criticised the second round of stimulus. In a November 17 letter, House Speaker John Boehner of Ohio, then the minority leader, and three other Republicans voiced "deep concerns" to Bernanke about a policy that they said may undermine the dollar and create asset-price bubbles.