US economy still needs ultra-low rates: Fed

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The US economy still needs extraordinarily low interest rates, as inflation is "undesirably low" and growth is likely to be sluggish for several years, a top Federal Reserve official said Monday.

San Francisco Federal Reserve Bank President Janet Yellen told the University of San Diego's business school that the US economy will likely grow at a pace of about 3.5% this year and 4.5% next year.

"Even though the recession appears to be over, it does not mean that we are where we want to be. Even with my moderate growth forecast, the economy will be operating well below its potential for several years," Yellen said, according to prepared remarks.

Unemployment, currently at an "unacceptably high" rate of 9.7%, will likely only decline to 9.25% this year and 8% by the end of next year, she said.

The Fed has kept its target interest rate for bank-to-bank overnight lending at near zero since December 2008 to combat the worst financial crisis and economic downturn since the Great Depression. It has also injected more than USD 1 trillion into the economy.

"Accommodative policy is appropriate, in my view, because the economy is operating well below its potential and inflation is undesirably low," Yellen said. "I believe this is not the time to be removing monetary stimulus."

Speculation on the likely timing of monetary tightening heated up last week after the Fed raised the interest rate it charges for emergency bank loans to 0.75% from 0.50%. But Fed officials stressed that the move, the first increase in any of the Fed's lending rates since the financial crisis began in 2007, wasn't monetary tightening.

Yellen said the increase in the discount rate reflected a return to more normal financial conditions, since banks are now better able to tap private markets for borrowing.

When the time does come for monetary tightening, raising the interest rate the Fed pays on reserves will take a "lead role," she said.