Business World

The United States recession could end in the second half of this year but will likely not give way to a robust rebound in growth, Janet Yellen, President of the Federal Reserve Bank of San Francisco, said.

“The good news is that, for the first time in a while, there is some good news to savor,” Yellen said in a speech to the Haas Business School of the University of California, Berkeley, on Tuesday.

“I am hopeful that the recession will end in the second half of this year due to aggressive monetary and fiscal policies, and the operation of typical business cycle mechanisms.”

Still, Yellen said that a raft of uncertainties still faced the United States, and that a robust, “V-shaped” recovery looked unlikely from what she said will probably end up being remembered as the worst downturn, domestically and globally, since the Great Depression of the 1930s.

Yellen quipped to an audience packed with business students that the recovery would hopefully be shaped “like a U, rather than an L.”

“I expect the U.S. recovery to be frustratingly tepid once it does get started,” she said, adding that unemployment will probably take “several more years” to return to long-run equilibrium levels.

“My forecast that output growth will turn positive in 2009 and proceed near trend in 2010 implies that the unemployment rate will rise from 8.5 percent now to around 9.5 percent by the end of this year.”

U.S. households are unlikely to repeat the “spending spree of major proportions” seen in the years prior to the recession, which started in December 2007, she said cheapest cash advance. “The deleveraging of household balance sheets could restrain spending for years.”

Yellen said recently released figures on first-quarter U.S. gross domestic product, while very weak, contained some positive signals such as the large decline in business inventories that many see as a prerequisite to a turn in the economy.

“The first-quarter data suggest that the necessary inventory correction may be quite far along,” she said, adding that recent data also hinted at a stabilization in the housing sector.

Yellen, a voting member of the Federal Open Market Committee in 2009, taught economics at Berkeley for many years and got a rousing ovation from the students packing the audience.

SKEPTICAL ON INFLATION RISK

Yellen said she was “quite skeptical” about the risk of inflation being kicked up by the Fed’s extraordinary efforts to restore credit markets by pumping up its balance sheet.

The suggestion that the Fed will find it politically difficult to pull the plug on private sector borrowers it has supported during the crisis — in other words, to draw down its balance sheet — was not persuasive, Yellen said.

“I want to assure you that the Fed is well aware of this danger and is readying the tools even now,” she said, referring to the risk of not removing monetary accommodation quickly enough. 

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