The Vice Chairman of Federal Reserve, Janet Yellen stated that the Central Bank may keep the benchmark lending rate near zero even if the inflation hits the near term policy targets in future. Incidentally, on last December, the Federal Open Market Committee or FOMC stated that they will be keeping the main interest rate within a range between 0 to 0.25% unless the inflation is forecasted to increase more than 2.5% in the next 2 years. On today, Yellen stated that objectives form the thresholds for any possible action. However, those are not meant to be triggers which will prompt an immediate increase. She added that if a threshold is crossed, then there is a possibility of taking an action, however, nothing is assured till this date.
The central bankers of US are currently trying to focus on the monetary policy in an attempt to revive the economic growth of the country. They are already using the near zero interest rates and also going through a program which calls for unprecedented bond buying. According to economists, the recent comments made by Yellen denote that the policy makers believe that if the rates are increased too early, there may be damage in the expansion.
In September, 3rd round of asset purchase was started by the Federal Reserve and in December, the same was expanded to $85 billion each month. According to Yellen, the Federal Reserve’s control on the economy is improper and hence, sometimes, there can be temporary deviations from the specific longer term goals. She added that inflation goal is neither floors nor the ceilings and hence, the committee will certainly be undergoing an approach which will return the measure to the objective over the course of time. She commented further that the asset purchase program and some other unconventional policies have played instrumental role in increasing the aggregate demand.
The asset purchase program, incidentally, has pushed the balance sheet of the country over a record figure of $3 trillion. Even after that, the economy has contracted by 0.1% in the final quarter of last year. This downturn was possibly caused by the biggest plunge in the defense spending of Government in last 40 years. There can be further fiscal cuts implemented for the Government; however, there is still some disagreement over spending and federal taxation.