Federal Reserve Chair Janet Yellen on Friday defended the central bank’s extraordinary efforts to fight the Great Recession and said they might be needed again.
During the recession, the Fed pushed short-term interest rates to zero. When the economy needed more help, it took the extraordinary step of buying hundreds of billions of dollars’ worth of bonds to push long-term interest rates lower.
Now the economy is improving: It grew at a sprightly 3.1 percent annual pace from April through September, and the unemployment rate has tumbled to a 16-year low 4.2 percent.
“The U.S. economy has made great strides,” Yellen said in a speech Friday at a gathering of the National Economists Club at the British embassy in Washington.
So the Fed has reversed policy and is raising short-term rates and reducing its massive bond portfolio.
But Yellen said the Fed likely will have to turn to bond purchases again — even in a downturn that isn’t as bad as the 2007-2009 Great Recession, which was the worst since the 1930s.
She said that’s because economic forces have driven short-term interest rates to unusually low levels. That means the Fed will have less room to cut rates to spur economic growth in a recession, leaving few alternatives but to buy bonds again.