Yellen Chides Washington

• Posted by Robert Sinn
• on November 29th, 2011

Fed Vice Chair Janet Yellen just issued a speech which addresses many key issues facing the US & global economies – The heart of the speech is directed at US fiscal policy wherein she appears to be calling for a short term fiscal stimulus balanced with credible “long-run considerations”:

“At the same time, too much fiscal tightening in the near term could harm the economic recovery. Significant near-term reductions in federal spending or large increases in taxes would impose an additional drag on the economy at a time when aggregate demand is already weak. Indeed, under current law, federal fiscal policy is slated to impose considerable restraint on the growth of aggregate demand next year. We need, and I believe we have scope for, an approach to fiscal policy that puts in place a well-timed and credible plan to bring deficits down to sustainable levels over the medium and long terms while also addressing the economy’s short-term needs. I do not underestimate the difficulty of crafting a strategy that appropriately balances short-run needs with long-run considerations, but doing so would provide important benefits to the U.S. economy.” 

I wonder if anyone in Washington is listening or even cares at this point? Yellen also leaves open the possibility of additional Fed monetary policy easing:

“The Federal Reserve continues to provide highly accommodative monetary conditions to foster a stronger economic recovery in a context of price stability. Moreover, the scope remains to provide additional accommodation through enhanced guidance on the path of the federal funds rate or through additional purchases of longer-term financial assets.”

However, this is nothing new as these additional options for accommodation have been reiterated by Bernanke et al. on numerous occasions over the past several months. She does leave us with a curious sentence regarding housing in her conclusion which is left open to interpretation:

“However, monetary policy is not a panacea, and it is essential for other policymakers to also do their part. In particular, there is a strong case for additional measures to address the dysfunctional housing market. Stronger housing demand has the potential to boost recovery.”

This appears to be a call to policymakers to do something to stimulate housing demand, does this mean that the Fed will not embark on a QE3 focused on MBS purchases? Or is this a hint that the Fed will be open to a large scale round of MBS purchases should policymakers fail to do their part?

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