WESTPORT, Conn. (Dow Jones)--A top Federal Reserve official acknowledged Thursday that ultra easy monetary policy creates problems for savers, but countered that such policy is necessary to get the economy back on track.
"Critics of the Federal Reserve's accommodative monetary policy are correct that the low level of interest rates represents a strain on households who rely on income from interest-bearing assets," Federal Reserve governor Sarah Bloom Raskin said. But she also said this burden needs to be seen in its proper perspective, as "less than 7% of total household assets are directly held in transaction accounts, certificates of deposit, savings bonds, and bonds."
Instead, the vast majority of household wealth resides with stocks, real estate, company ownership and other forms that can benefit from Fed policies that seek to spur growth with very low interest rates, the official said.
"For these other types of assets, rates of return depend primarily on the strength of the economy and how fast the economy is growing," Raskin said. "These returns should be supported, over time, by the accommodative monetary policy that we have in place," she said.
The official also observed that as "the Federal Reserve aims to keep inflation low and stable over time," savers can be confident their holdings won't be eroded by a rising price environment.
Raskin's comments came from the text of a speech that was prepared for delivery before a local group in Connecticut, where she was to speak from the pulpit of the Unitarian Church in Westport. She gave her address as central bank chairman Ben Bernanke was to face a second day of congressional testimony, this time before the Senate.
In his appearance before the House of Representatives on Wednesday, Bernanke acknowledged improvements in the economy, while noting the pace of the recovery is likely to remain modest. The Fed leader kept alive the chance the Fed could provide additional monetary policy stimulus for the economy, while doing nothing to suggest such action was imminent.
Financial market participants have marked down the odds that the Fed will in fact expand its efforts to spur better rates of growth this year in light of a host of economic data that has collectively shown improvement. Of particular note, labor markets look like they are finally showing sustained rates of growth, although given the number of jobs lost over the course of the financial crisis, it will take a considerable amount of time to get unemployment down to pre-crisis levels.
Raskin echoed the chairman in her assessment of the economy. "The pace of expansion is likely to remain modest over coming quarters," the official said, amid a "depressed housing market" joined with "small real income gains, and the probability of continued fiscal restraint."
"Of late, we have had some relatively encouraging economic news," Raskin said, although she added "the headwinds that have been restraining the expansion for some time have been easing, at best, only gradually."
Raskin described credit conditions as "tight" and said "the run-up in gasoline prices we are currently experiencing will presumably reduce household purchasing power in coming months."
Whether rising gas prices translate into inflation "depends critically on the evolution of inflation expectations," Raskin said. She explained "if, as I expect, inflation expectations remain stable in response to the recent run-up in gasoline prices, their influence on overall inflation should be limited as well."
In her speech, Raskin also noted that it will be a long time before the Fed starts shrinking its balance sheet. "Assuming that the [Federal Open Market Committee] follows the plans that we outlined in June 2011 for winding down the Federal Reserve's balance sheet, any initial sales of our securities holdings presumably would not begin until 2015, sometime after the first increase in the target federal funds rate," Raskin said.
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