Janet Yellen defends QE2 saying that China should welcome a weaker dollar

The Fed's #2, right under Bernanke, has explained the Fed's QE2 logic by saying that the decision will bring inflation to a level that is consistent with price stability. 

I tend to think zero inflation is the best policy and over time.  Two percent inflation over a generation (25 years) would make a dollar worth only 60 cents.  Not too appealing to me. 

She also thought that China should welcome Yuan appreciation.  The flip side of that coin is those trillions of dollars held in reserve will also be worth less.  Via WSJ:

The official was speaking at an economic conference in New York. Yellen also tackled the Fed's recent decision to stimulate the economy by way of buying $600 billion in Treasury debt through the middle of next year.

A top Federal Reserve official acknowledged concerns that leaders in countries like China have about the current path of U.S. monetary policy, but added central bank efforts will ultimately be a positive for the world economy.

The Fed's bond buying program begun last month was started to "support U.S. economic growth and bring inflation back to a level we consider consistent with price stability," Federal Reserve vice chair Janet Yellen said Wednesday. The policy "is by no means to cause problems for emerging markets, to push down the dollar," she said, adding that current Fed policy "will in the end be beneficial to the overall economy" of the world.

That said, Yellen understands why some nations, most notably China, might be concerned. While there is a strong global commitment toward achieving a better balance between global economies, Yellen said she's not surprised by the current friction created by Fed policies. "The tensions in the short term are real, and I think they are to be expected given that we are in this two track global economy, that we have so many advance nations like the United States that are trying to fight off recession, to strengthen a recovery from recession and avoid disinflation, where we need to have stimulative policies to get our economies moving."

China and other emerging economies have "inflationary pressures" and are seeing strong capital inflows that make sense given the relative strength of their economies, the policymaker said. "Perhaps at the margin our decision contributes" to emerging market issues, but "I don't believe that actions the [Federal Open Market Committee] took are the sole cause, or are even a major contributor to the worries that China has," Yellen said.

Yellen also noted "a case could be made that emerging market policymakers should welcome currency appreciation because it reduces inflation pressures and, over time, aids global rebalancing."


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