Janet Yellen, the Federal Reserve's influential vice chair, said on Monday the central bank's aggressive monetary stimulus is warranted given how far below its full potential the economy is operating.
Continue Reading Below
Downplaying the potential costs of the Fed's unconventional easing efforts, which currently include $85 billion in monthly asset purchases, Yellen highlighted the dangers of a prolonged period of economic malaise.
"Insufficiently forceful action to achieve our dual mandate also entails costs and risks," Yellen told a conference sponsored by the National Association of Business Economists. "At present, I view the balance of risks still calling for highly accommodative monetary policy to support a stronger recovery and more rapid growth in employment."
Yellen, seen as a potential successor to Fed Chairman Ben Bernanke, who is expected to step down early next year, reiterated Fed officials' intention to keep their foot on the accelerator even as the economy recovers.
"The large shortfall of employment relative to its maximum level has imposed huge burdens on all too many Americans and represents a substantial social cost," she said. "Prolonged economic weakness could harm the economy's productive potential for years to come."
The U.S. economy stalled in the fourth quarter but is forecast to expand around 2 percent this year. At the same time, unemployment remains at an elevated 7.9 percent, and Yellen said Fed officials expect the rate to come down all too slowly to around 7 percent at the end of next year.
In response to the financial crisis and deep recession of 2007-2009, the U.S. central bank slashed interest rates to effectively zero, and bought over $2.5 trillion in Treasury and mortgage-backed securities in an effort to keep long-term rates low and spur spending and investment.
It began a third round of quantitative easing or QE3 in September, extending the program starting in December. Since then, there has been renewed discussion about divisions within the Fed's policy-setting committee, with some officials apparently growing worried about the potential costs of easy monetary policy. Yellen was clearly not in that camp.