Fed's Yellen sees possibility of more stimulus

By James O'Toole @CNNMoney June 6, 2012

NEW YORK (CNNMoney) -- Federal Reserve Vice Chair Janet Yellen has reiterated her view that further action by the central bank might be necessary to stimulate the sputtering U.S. economy.

"An extended period of highly accommodative policy is necessary to combat the persistent headwinds to recovery," Yellen said Wednesday in remarks prepared for delivery to the Boston Economic Club Dinner.

"The pace of the current recovery has turned out to be persistently slower than most observers expected," she added.

Yellen was the latest Fed official to weigh in this week on the state of the economy. Her remarks came amid gathering anxiety among investors following last week's dismal May jobs report and concerns about Europe's debt crisis.

Observers have been parsing comments from Fed officials for clues about whether or not the central bank will take some further stimulative action. Investors have speculated that the Fed could extend Operation Twist -- its program of swapping short-term bonds for ones with longer duration to help keep 10-year and 30-year bond yields low -- or launch a third round of asset purchases known as quantitative easing.

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Yellen noted that there is "considerable uncertainty" about the impact of these policies going forward, but said circumstances may warrant them nonetheless.

"There are a number of significant downside risks to the economic outlook, and hence it may well be appropriate to insure against adverse shocks," she said.

Yellen's remarks followed a speech earlier Wednesday by Atlanta Fed president Dennis Lockhart, who said that extending Operation Twist is "an option on the table."

Also on Wednesday, San Francisco Fed president John Williams said he supported further stimulus should the economy worsen. He suggested that such action could include purchases of mortgage-backed securities.

Williams, like Lockhart, is seen as fairly moderate when it comes to monetary policy. Yellen is viewed as dovish, or more inclined toward stimulus.

The comments by the Fed officials were a prelude to Thursday's appearance by chairman Ben Bernanke before the Joint Economic Committee of Congress. While investors always consider the comments of any Fed official, Bernanke's testimony will get particular scrutiny.

The Fed's next policy meeting is a two-day session concluding June 20, just 10 days before Operation Twist is set to expire.

U.S. stocks rallied Wednesday on hopes that additional stimulus of some kind might be coming. While this seemed improbable as recently as a few weeks ago, the disappointing jobs report and mounting problems in Europe have stoked fears that the U.S. recovery is in jeopardy