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San Francisco Federal Reserve Bank President Janet Yellen said Monday that although it appears that the economy is on its way to recovery, the financial system still contains hazards that could harm the recovery and economic growth.
Speaking before the San Francisco Society of Certified Financial Analysts, Yellen said that she expects that "things won't feel very good for some time to come."
"In particular, the unemployment rate will remain elevated for a few more years, meaning hardship for millions of workers," she said in prepared remarks.
She added, "Moreover, the slack in the economy, demonstrated by high unemployment and low utilization of industrial capacity, threatens to push inflation lower at a time when it is already below the level that, in the view of most members of the Federal Open Market Committee best promotes the Fed's dual mandate for full employment and price stability."
During the speech, Yellen commended the Fed and other central banks around the world for responding aggressively to last year's financial crisis and preventing a financial meltdown.
She went on to say that the government's stimulus package introduced in February also deserves credit for helping to stabilize the economy, and that the large amount of stimulus money that remains to be spent will help add to economic growth.
The San Francisco Fed chief added that high levels of unemployment (9.7 percent of the workforce) and low levels of capacity utilization leave the economy with an "enormous" amount of slack that will give the economy room to grow rapidly in the coming years.
"Indeed, we need to grow robustly to alleviate the enormous human toll resulting from high unemployment and the waste of so much idle industrial capacity," Yellen said. "At first glance, history suggests that a vigorous expansion could very well take place. Following previous deep recessions, the United States typically saw V-shaped recoveries."
However, she cautioned that recovery for the United States would "look more like the letter U than V," and cited a recent Blue Chip consensus forecast that anticipates the weakest recovery of the post-war era through 2011.
Yellen also addressed inflation, saying that the Fed has the tools in place to tighten monetary policy, even before its massive balance sheet begins to shrink as the economy recovers.
"We at the Fed are and will remain fiercely independent from politics," she said. "We have the means-and we certainly have the will-to tighten policy when the time is right."
Yellen concluded by stressing that the greater threats to price stability in the U.S. economy were disinflationary forces caused by the slack in the economy.
"We face an economy with substantial slack, prospects for only moderate growth, and low and declining inflation," she said. "...I can assure you that we will be ready, willing, and able to tighten policy when it's necessary to maintain price stability."
Yellen's comments Monday echoed similar sentiments expressed by President Barack Obama in a speech earlier in the day at Federal Hall on Wall Street. Obama said that recovery would occur slowly and that the country and its financial instutions could not become complacent and return to their old ways.
"We will not go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses," he said. "Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall."
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