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Unemployment will remain ‘painfully high,’ Fed president says

The U.S. economy may be in for a jobless recovery, a top Federal Reserve official said Monday.

The recession has forced businesses to produce the same level of output despite cuts to their workforces, said San Francisco Federal Reserve Bank President Janet Yellen.

“What I’m hearing [from business contacts] is [they’ve] found ways to work leaner, and even if the demand comes back and sales begin to grow, it’s going to be long time before they start hiring again,” she said. “That’s what I’m worried about.”

Yellen said she isn’t concerned that average unemployment rate will be higher once the economy makes a full recovery; rather, she said, she worries it will be a long time before jobs are created.

“Strapped by tight credit and plummeting sales, businesses have overhauled the way they manage supply chains, inventory, production practices, and staffing,” said Yellen, who made her remarks at the University of San Diego. “… The process of implementing new efficiency gains may have only begun and we may be in store for further efficiency improvements and high productivity growth for some time. If this is the case, the rate of job creation will be frustratingly slow.”

Yellen said the unemployment rate and a 6 percent drop in payrolls “represent a tragedy for our country, our communities, and each of the families and individuals who are coping with a loss of livelihood.”

Yellen said, despite the pace of job loss slowing, she expects unemployment to remain “painfully high” for years. She predicted unemployment would drop to 9.25 percent by the end of 2010, and 8 percent by 2011.

The U.S. economy

The economy will continue to operate well below its potential Yellen said, despite predicting a moderate 3.5 percent rate of economic growth this year and a 4.5 percent rate of growth in 2011.

“The fact that the economy is growing again doesn’t mean we’re where we ought to be,” Yellen said.

Yellen said the good news is the country’s gross domestic product –- the measure of the country’s total output –- has turned around, after “huge declines” during the recession.

Yellen doubts it will sustain growth though, and is not convinced a sharp upswing is in the cards.

Retail sales in the fourth quarter grew a “lackluster 2.2 percent” she said, and consumer confidence has grown slightly. The housing market appears to have stabilized, she said, and new home sales and construction seem to be stable.

But, she said, “As support from the Federal Reserve and other government programs phases out, there is some risk that the housing market could weaken again.”

“Caution” remains the watchword in business investment, and financing is an impediment for businesses ready to expand.

Commercial real estate “remains a bleak spot” she said, “and investment in nonresidential structures is likely to stay depressed for some time.”

The local economy

Unemployment in San Diego in December was well above the national average, Yellen said, but the region has showed signs of a job market turnaround.

“Obviously the area economy was hit hard during the recession, but it does seem to have weathered the storm better than many areas in California,” she said.

Yellen said San Diego’s biotech cluster has been a “bright spot” and biotech employment has largely held up.

“Biotech accounts for about two and a half times as great a share of employment and income in San Diego as it does nationwide,” Yellen said.

“Makers of pharmaceuticals, medical equipment manufacturers and providers of research and development services even registered significant employment gains,” she said.

Yellen predicted future growth in biotech, as a result of rising spending in venture capital.

The local housing market seems to be improving too, Yellen said. After a surge in home foreclosures, the trend now shows a slight decline in foreclosures in San Diego.

“Overall, the San Diego economy will likely recover along with the national economy,” Yellen said. “At the same time, I would not be too surprised to see the recovery take hold here with a bit more vigor than in the nation as a whole.”

Fed policy

The federal funds rate –- what banks charge each other for overnight loans -– is “as low as it can go,” Yellen said, and “this is not the time to be removing monetary stimulus.”

On that note, Yellen said, the Federal Open Market Committee (FOMC) expects low interest rates to continue for an extended period, she said.

The Fed will phase out its emergency lending programs, Yellen said, and is in the “final stages of the purchase of $1.25 trillion of mortgage-backed securities, guaranteed by agencies such as Fannie Mae and Freddie Mac, and $175 billion of the direct debt of those agencies.”

“As financial and economic conditions improve, the need for such extraordinary support diminishes,” she said. “Accordingly, the Fed has begun to phase out its emergency lending programs.”

Yellen said those programs include:

– Special lending programs for primary dealers in the Treasury securities market, for money market mutual funds, and for corporate short-term debt

– Special arrangements to make dollars available to foreign central banks

– The Fed’s Term Auction Facility (TAF) which supported financial institutions, and the Term Asset-Backed Securities Loan Facility (TALF), which supported credit markets

The Fed has also readjusted the terms of its loans to banks and thrifts, she said.

“Eventually the economy will regain enough momentum and won’t need today’s extraordinarily low interest rates,” she said. “When that time comes, we will begin to tighten policy and remove monetary stimulus.”

Read more: http://www.sdnn.com/sandiego/2010-02-22/local-county-news/san-fran-fed-p...