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Fed's Yellen: central bank's policy "no panacea"

By Kristina Cooke and Jonathan Spicer

NEW YORK (Reuters) - The U.S. central bank's policy is "hardly a panacea" for weak U.S. growth and would be more effective if coupled with more near-term fiscal stimulus, Federal Reserve Vice Chair Janet Yellen said on Wednesday.

Yellen said she "strongly supported" the Fed's controversial decision this month to purchase $600 billion more in long-term U.S. government debt.

"I believe it will be helpful in strengthening the recovery. But it is hardly a panacea," she said.

"Thus a fiscal program that combines a focus on pro-growth policies in the near term with concrete steps to reduce longer-term budget deficits could be a valuable complement to our efforts."

Yellen's support for more short-term fiscal stimulus echoes a similar plea by Fed Chairman Ben Bernanke on November 23.

A presidential commission this month unveiled a plan to slash the U.S. budget deficit, recommending spending and benefit cuts and a tax code overhaul. A vote on the plan was postponed this week.

Yellen said that over the long-run the budget situation presents "very difficult challenges," as the U.S. population ages and a greater share of Americans tap Social Security, Medicare and Medicaid benefits.

"If current policy settings are maintained, the budget will be on an unsustainable path, with the ratio of federal debt held by the public to national income rising rapidly," she said. While it is important to address the long-term budget problem, the U.S. must not tighten fiscal policy prematurely. That "could retard an already tepid recovery", she said.

Yellen said the U.S. unemployment rate, currently at 9.6 percent, is likely to remain high for some time, given the slow pace of economic growth and low inflation. She said it was hard to see a turnaround in the housing market, another barrier to the economic recovery.

The U.S. payrolls report for November, due on Friday, is expected to show the jobless rate unchanged.

Yellen also defended the Fed against critics abroad, who have accused the U.S. central bank of deliberately pushing down the value of the dollar to the detriment of other economies.

By spurring economic growth in the United States and lessening risks to the recovery, she said, U.S. policy should provide support for a "sustained expansion" for the global economy.

"Stronger U.S. growth would boost our demand for foreign goods and reduce incentives for capital flows to emerging markets," she said.

She said the Fed's bond buying aimed to lower longer-term interest rates to promote faster economic growth. While in some ways unconventional, she said, the policy "is actually quite similar to the Fed's traditional approach to monetary policy."

(Editing by Padraic Cassidy)

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