The United States is not facing a downturn as deep as the Great Depression, but many of the current dynamics are similar, driving the need for "urgent, aggressive action" to stop a deepening recession, a top Federal Reserve policy-maker said.
The dynamics of the financial markets as well as the global nature of the current downturn both have similarities to the depression of the 1930s, Janet Yellen, president of the San Francisco Federal Reserve Bank, told reporters after a speech to the 128th Assembly for Bank Directors meeting on the Kohala Coast of Hawaii.
"The economy is in the midst of a downward spiral, and that calls for strong policy responses," Yellen said.
"Government policies to restore confidence, create jobs by boosting the demand for goods and services, and improve the functioning of our financial system represent our main hope of avoiding a very severe economic contraction."
Yellen is a voting member of the policy-setting Federal Open Market Committee in 2009. Yellen, speaking on the same day the government announced the biggest job losses in 34 years, said now is not the time to dither or debate endlessly on the shape of fiscal stimulus.
"It is critical that decisions on these matters be made on a timely basis," she said.
The US jobless rate hit 7.6 per cent in January, the Labour Department said.
Yellen said most economists see the rate peaking in eight-per cent or nine-per cent range, still short of the peak of the 1981-1982 recession and far below the 20 per-cent plus rate of the Great Depression.
Yellen said consumer spending had been stopped in its tracks as American households have hunkered down and acted to boost their savings in response to spiralling unemployment and a "staggering" $10 trillion (Dh36.7trn) loss of household wealth.
Yellen said that "unfortunately, there is no end in sight" to the housing woes that triggered the current recession, with inventories of unsold homes remaining high and private mortgage credit still scarce.
Meanwhile, a yawning output gap in the US economy suggests "inflation will remain, for some time, below levels that are consistent with price stability".
Still, Yellen said outright deflation, while possible, was less of a worry to her than rising "real" interest rates now that nominal rates are already as low as they can go, inflation is falling, and the economy is still contracting. The US inflation rate, both headline and the core rate excluding volatile food and energy costs, is likely to fall below one per cent in 2009, she said.
"The committee does not regard it as desirable to allow inflation to fall to very low levels," she said, referring to the policy-setting FOMC.
Yellen said the FOMC's recent comments that it intends to keep short-term interest rates low for a considerable period are one way it can bolster the economy now that it has reached the "zero bound" on the fed funds rate.
Yellen said past banking crises have shown the importance of removing bad assets from banks' balance sheets, and looked for a proposal on that score from the Obama administration soon, as a prerequisite to restoring stability to the system and, ultimately, the economy.
Meanwhile, Yellen told reporters the Fed needed to fight back against the notion that its liquidity efforts would inevitably lead to higher inflation and higher interest rates, terming the notion "ludicrous".