Fed Is Weighing a Reaction to Stirrings of Recovery

The economy added an average of 187,000 jobs a month from September to February, slightly faster than the average monthly pace from 2004 to 2006, the best years of the last economic upswing. The government plans to release a preliminary estimate Friday morning of March job creation.

Some Fed officials have suggested in recent weeks that if economic growth continues on its present trajectory, the central bank should begin to roll back its economic stimulus campaign by the middle of the year, ahead of expectations.

But the Fed’s chairman, Ben S. Bernanke, and his allies remain wary that another surprising spring will be followed by another disappointing summer. Janet L. Yellen, the Fed’s vice chairwoman, who is viewed as a potential successor to Mr. Bernanke, reflected that caution in a speech on Thursday.

“I am encouraged by recent signs that the economy is improving and healing from the trauma of the crisis, and I expect that, at some point, the F.O.M.C. will return to a more normal approach to monetary policy,” she said, referring to the Federal Open Market Committee, which sets policy for the central bank.

For now, she said, the Fed needs to remain focused on reducing unemployment.

Ms. Yellen also commented obliquely on her own future. Asked whether the economics profession, and central banks, needed more women in positions of power, she responded that such a need was “something we’re going to see increase over time, and it’s time for that to happen.”

The Fed announced last year that it intended to hold short-term interest rates near zero so long as the unemployment rate remained above 6.5 percent. It also said that it would buy $85 billion a month in Treasury and mortgage-backed securities to accelerate the decline. By expanding its asset holdings, the Fed continuously increases the scale of its effort to stimulate the economy.

Stronger data has raised hopes that the economy is once again growing fast enough to reduce the unemployment rate, which stood at 7.7 percent in February, little changed from 7.8 percent in September. But more than 20 million Americans are unable to find full-time jobs and it is not yet clear that the recent uptick in the economy is sustainable. The yield on the 10-year Treasury note fell to 1.77 percent on Thursday, indicating that some investors are pessimistic about the economy’s prospects.

In recent months, weekly claims for unemployment benefits have declined. But the Labor Department reported on Thursday that claims spiked in the latest week to the highest level in four months, although it cautioned that the estimate was unusually imprecise because the week included Easter.

“House prices are going up more than I would have expected six months ago,” Ms. Yellen said. “I think it’s making people feel a whole lot better.” She added: “I don’t have any doubt that our policies are contributing to the lowest interest rates, whether it’s borrowing for a car or borrowing for a mortgage. I believe that that is not only caused by our policy, but our policy is contributing.”

John C. Williams, the president of the Federal Reserve Bank of San Francisco, said on Wednesday in Los Angeles that he might support a reduction in the volume of the Fed’s asset purchases by summer and a suspension of the program before the end of the year.

“I’m hopeful that the economy has finally shifted into higher gear,” said Mr. Williams, who supported the purchases last year.

Esther L. George, president of the Federal Reserve Bank of Kansas City, reiterated on Thursday her view that the Fed should scale back immediately. Ms. George cast the sole dissenting vote at the last two meetings of the Fed’s policy-making committee. She told an audience in El Reno, Okla., on Thursday that she was more concerned than her colleagues that the Fed’s efforts to suppress borrowing costs could result in financial instability and faster inflation.

Ms. Yellen and other officials, however, seem inclined to postpone any decisions. The pace of economic growth has remained weak relative to the pace of job growth. The most recent round of federal spending cuts has only just begun to show results. And Fed officials have overestimated the strength of the recovery repeatedly in recent years, only to find the economy needed still more help. Caution may now dictate doing more rather than less.

Article source: http://www.nytimes.com/2013/04/05/business/economy/fed-weighs-a-reaction-to-stirrings-of-recovery.html?partner=rss&emc=rss