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San Francisco Federal Reserve President Janet Yellen said Tuesday that while economic recovery has begun and seems to be "more than a flash in the pan," there are many factors that call into question the durability of the recovery.
Speaking to the Phoenix chapter of Lambda Alpha International, Yellen said that temporary government programs that aided in the recovery will not provide an ongoing source of growth, and added that financial institutions still carry bad loans and a hobbled housing market has contributed to weaknesses in consumer spending.
She also commented on continuing problems in the job market, calling the current unemployment rate of 10.2 percent - the highest since 1983 - "sobering."
The San Francisco chief did express some optimism, however, saying that the country avoided the worst during last year's financial crisis.
"A year ago, after the near collapse of the global financial system, there was a real possibility of an outright depression," she said in prepared remarks. "Fortunately, we avoided that."
Yellen went on to say that the 3.5 percent increase in gross domestic product in this year's third quarter was a "great relief."
"The recession hasn't officially been declared over, but a wide array of data suggests that the corner has been turned," she said. "In the third quarter, residential investment-which was at the center of the downturn-rose at nearly a 25 percent annual rate, albeit from a very low level. Home sales, prices, and housing starts are once again climbing. Meanwhile, manufacturing is also beginning to show signs of strength."
Yellen credited the response of government and the central bank with rescuing the financial system through lower interest rates, fiscal stimulus packages and programs to increase the flow of credit to businesses and households.
"These initiatives appear to have eased financial conditions," she said. "Clearly, the financial system is not yet back to normal, but it has bounced back notably."
Yellen added that demand for households and durable goods is beginning to revive, and that inventories of unsold goods are shrinking rapidly and appear to be in better alignment with sales.
Touching on inflation, Yellen said that economic slack and downward wage pressure pose the greatest threat to price stability and is actually pushing inflation lower, requiring the FOMC to keep the interest rates at zero for an extended period.
"We are-and always will be-steadfast in our determination to achieve both of our statutory goals of full employment and price stability," she said. "Until that time comes though, 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."
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