Several Years of Low Interest Rates Possible

San Francisco, CA, July 1, 2009--It's possible that interest rates will remain low for several years, according to Federal Reserve Bank of San Francisco President Janet Yellen.

“We have a very serious recession, we have a 9.4 percent unemployment rate,” and inflation possibly falling over time below the Fed’s preferred level, she told reporters yesterday after a speech to the Commonwealth Club of California in San Francisco. Given the recession’s severity, “we should want to do more. If we were not at zero, we would be lowering the funds rate.”

Yellen’s comments go beyond those made by other policy makers after a June 23-24 meeting, when they said the federal funds rate will likely stay at “exceptionally low levels” for “an extended period.”

Yellen said the U.S. economy may be about to “turn the corner” and said that the recession will end later this year.

“Right now, we’re like a patient in intensive care whose condition has stabilized and whose fever is just starting to come down,” Yellen said in the speech. “We’re just completing the sixth quarter of recession, but the pace of decline has slowed markedly” and “confidence in the financial system is slowly returning.”

Yellen compared the financial crisis to “a hundred-year flood: a disaster of the highest order which has put us on continuous emergency footing.”

She said unemployment will “remain painfully high for several more years.”

Rising mortgage rates may “place a drag on a still very sick housing market,” while increasing oil prices may hurt the recovery, Yellen said in her speech. Still, the fiscal stimulus and a rebound in consumer demand and housing construction will probably prompt a revival in economic growth, she said.

“We’ve seen encouraging signs lately that the economy is poised to turn the corner. “Our major banks have made excellent progress in establishing the capital buffers needed to continue lending even through a downturn that is more serious than we anticipate. But they are still nursing their wounds and credit will remain tight for some time to come.”