Fed dove warns of L-shaped US recovery

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The US faces a slow and protracted recovery shaped like an L with a gradual upward tilt, Janet Yellen, the president of the Federal Reserve Bank of San Francisco, said on Tuesday.

The comments by Ms Yellen, the most prominent dove on the Fed’s policymaking committee, came amid a slew of other Fed speeches that contained no hints of early interest rate increases.

Ms Yellen said unemployment “could well stay high for several years to come”. Moreover, she suggested that deflation was still a bigger risk than excess inflation, given the amount of slack in the economy.

The San Francisco Fed chief said: “It may be that we are witnessing the start of a new era for consumers following the harsh financial blows they have endured.”

Stressing the Fed’s commitment to “both of our statutory goals of full employment and price stability”, Ms Yellen said: “We need to provide the monetary accommodation necessary to spur job creation and prevent inflation from falling any further below rates that are consistent with price stability.”

Richard Fisher, the president of the Dallas Fed, who had been one of the most hawkish members of the committee but has now moved towards the centre, agreed with Ms Yellen that “right now I see more immediately deflationary concerns than inflationary ones”.

However, Mr Fisher said he was “particularly mindful of the risks we run by stating ... that we expect to maintain the Fed funds rate at exceptionally low levels for an extended period”.

He said this “could fuel the carry trade” and if this were “to become a disorderly influence” the Fed would have to “craft an appropriate remedy”.

Dennis Lockhart, the centrist president of the Atlanta Fed, highlighted concerns about commercial real estate. He said an economic recovery was under way but “the banking system has not fully recovered – far from it”.

Mr Lockhart said he was “concerned about the interaction among bank lending, small business employment” and commercial real estate values.

He added that small businesses, which normally provided the lion’s share of job growth, were particularly dependent on banks for credit, and banks were still grappling with bad debts. “My current outlook for employment is one of very slow net job gains, once the trend [of job losses] reverses in all likelihood some time next year,” he said.

Eric Rosengren, the dovish president of the Boston Fed, said the US central bank was not at the point where it need consider raising rates. “Both elements of our mandate are moving in the opposite direction,” with falling inflation and rising unemployment, he said.

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