Yellen: Don't Fear a QE3 Slowdown

The Fed vice chair says that the program will stick around to boost the recovery.

Janet Yellen said that the Fed will not sell assets until after it allows the federal funds rate to rise.

Janet Yellen said that the Fed will not sell assets until after it allows the federal funds rate to rise.

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Last month, the stock market slid on the news that policymakers at the Federal Reserve were chattering about a slowdown—or even an end—to quantitative easing. But the woman who is second-in-command at the central bank issued a message of calm to those who are rankled by that news.

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"The level of accommodation is increasing as long as those purchases continue," said Federal Reserve Vice Chair Janet Yellen at the National Association for Business Economics Economic Policy Conference on Monday. "And I think the [Federal Open Market Committee] has made very clear, but let me try to emphasize again my own view that once accommodation has peaked … the committee's intention is to leave that accommodation in place until well into the recovery."

She's talking about QE3, the Fed's attempt to boost the economy by purchasing $85 billion in U.S. Treasuries and mortgage backed securities per month. Translated from Fedspeak, her message was simple: even if the rate of those purchases slows down, the Fed will still be making asset purchases and boosting the economy until the recovery looks strong enough.

She also added that, while there are potential risks involved in QE3, she remains confident in the program: "At this stage, I do not see any [potential costs] that would cause me to advocate a curtailment of our asset purchase program."

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Why does it matter? Yellen, along with Fed Chair Ben Bernanke, believes that the program has been effective in spurring economic growth, boosting demand and reviving a sluggish housing market.

While there are plenty of QE3 supporters, there are also many opposed to the program. Dallas Fed President Richard Fisher last week said that "it would be best to taper the dose of QE," for fear of "overkill."

Last month, the minutes from the latest FOMC meeting also suggested that while many members believe the program has worked, they also are increasingly nervous about the risks of QE3, including inflation and the Fed's ability to unwind a balance sheet that has ballooned to $3 trillion.

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But if Yellen is right, those opponents will likely have years to voice their fears. She said that the Fed will not sell assets until after it allows the federal funds rate to rise. That step seems a long way off. The Federal Reserve has said that it will keep interest rates near zero as long as unemployment is above 6.5 percent and inflation is no higher than 2.5 percent. Inflation is well behaved for now, but unemployment is still near 8 percent, meaning that the Fed could be on an asset buying spree for a while longer.

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