Janet L Yellen: Economic outlook
Central bank: fed | Type: speech | Date: 2015-12-03

## Janet L Yellen: Economic outlookTestimony by Ms Janet L Yellen, Chair of the Board of Governors of the Federal Reserve System, before the Joint Economic Committee, US Congress, Washington DC, 3 December 2015.*

*

*Chairman Coats, Ranking Member Maloney, and members of the Committee, I appreciate the opportunity to testify before you today.

In my remarks I will discuss the current economic outlook before turning to monetary policy.

## The economic outlookThe U.S. economy has recovered substantially since the Great Recession.

The unemployment rate, which peaked at 10 percent in October 2009, declined to 5 percent in October of this year.

At that level, the unemployment rate is near the median of Federal Open Market Committee (FOMC) participants' most recent estimates of its longer-run normal level.

The economy has created

about

13

million

jobs

since

the

low

point

for

employment

in

early

2010,

and

total nonfarm payrolls are now almost 4-1/2 million higher than just prior to the recession.

Most recently, after a couple of months of relatively modest payroll growth, employers added an estimated 271,000 jobs in October.

This increase brought the average monthly gain since June to about 195,000 - close to the monthly pace of around 210,000 in the first half of the year and still sufficient to be consistent with continued improvement in the labor market.At the same time that the labor market has improved, U.S. economic output - as measured by inflation-adjusted gross domestic product (GDP), or real GDP - has increased at a moderate pace, on balance, during the expansion.

Over the first three quarters of this year, real GDP is currently estimated to have advanced at an annual rate of 2-1/4 percent, close to its average pace over the previous five years.

Many economic forecasters expect growth roughly along those same lines in the fourth quarter.Growth this year has been held down by weak net exports, which have subtracted more than 1/2 percentage point, on average, from the annual rate of real GDP growth over the past three quarters.

Foreign economic growth has slowed, damping increases in U.S. exports, and the U.S. dollar has appreciated substantially since the middle of last year, making our exports more expensive and imported goods cheaper.By contrast, total real private domestic final purchases (PDFP) - which includes household spending,

business

fixed

investment,

and

residential

investment,

and

currently

represents about 85 percent of aggregate spending - has increased at an annual rate of 3 percent this year, significantly faster than real GDP.

Household spending growth has been particularly solid in 2015, with purchases of new motor vehicles especially strong.

Job growth has bolstered household income, and lower energy prices have left consumers with more to spend on other goods and services.

Increases in home values and stock market prices in recent years, along with reductions in debt, have pushed up the net worth of households, which also supports consumer spending.

Finally, interest rates for borrowers remain low, due in part to the FOMC's accommodative monetary policy, and these low rates appear to have been especially relevant for consumers considering the purchase of durable goods.Other

components

of

PDFP,

including

residential

and

business

investment,

have

also advanced this year.

Indeed, gains in real residential investment spending have been faster so far this year than last year, although the level of new residential construction still remains fairly low.

And outside of the drilling and mining sector, where lower oil prices have led to substantial cuts in outlays for new structures, business investment spending has posted moderate gains.Turning to inflation, it continues to run below the FOMC's longer-run objective of 2 percent.

Overall consumer price inflation - as measured by the change in the price index for personal consumption expenditures - was only 1/4 percent over the 12 months ending in October.However, this number largely reflects the sharp fall in crude oil prices since the summer of 2014.

Because

food

and

energy

prices

are

volatile,

it

is

often

helpful

to

look

at

inflation excluding those two categories - known as core inflation - which is typically a better indicator of future overall inflation than recent readings of headline inflation.

But core inflation - which ran at 1-1/4 percent over the 12 months ending in October - is also well below our 2 percent objective,

partly

reflecting

the

appreciation

of

the

U.S.

dollar,

which

has

pushed

down

the prices of imported goods, placing temporary downward pressure on inflation.

Even after taking account of this effect, however, inflation has been running somewhat below our objective.Let me now turn to where I see the economy is likely headed over the next several years.

To summarize, I anticipate continued economic growth at a moderate pace that will be sufficient to generate additional increases in employment and a rise in inflation to our 2 percent objective.

Although the economic outlook, as always, is uncertain, I currently see the risks to the outlook for economic activity and the labor market as very close to balanced.Regarding U.S. inflation, I anticipate that the drag due to the large declines in prices for crude oil

and

imports

over

the

past

year

and

a

half

will

diminish

next

year.

With

less

downward pressure on inflation from these factors and some upward pressure from a further tightening in

U.S.

labor

and

product

markets,

I

expect

inflation

to move

up

to

the

FOMC's

2

percent objective over the next few years.

Of course, inflation expectations play an important role in the inflation process, and my forecast of a return to our 2 percent objective over the medium term

relies

on

a

judgment

that

longer-term

inflation

expectations

remain

reasonably

well anchored.

## Monetary policyLet me now turn to the implications of the economic outlook for monetary policy.

In the policy statement issued after its October meeting, the FOMC reaffirmed its judgment that it would be appropriate to increase the target range for the federal funds rate when we had seen some further improvement in the labor market and were reasonably confident that inflation would move back to the Committee's 2 percent objective over the medium term.

That initial rate increase would reflect the Committee's judgment, based on a range of indicators, that the economy

would

continue

to

grow

at

a

pace

sufficient

to

generate

further

labor

market improvement

and

a

return

of

inflation

to

2

percent,

even

following

the

reduction

in

policy accommodation.

As I have already noted, I currently judge that U.S. economic growth is likely to be sufficient over the next year or two to result in further improvement in the labor market.

Ongoing

gains

in

the

labor

market,

coupled

with

my

judgment

that

longer-term

inflation expectations remain reasonably well anchored, serve to bolster my confidence in a return of inflation to 2 percent as the disinflationary effects of declines in energy and import prices wane.Committee participants recognize that the future course of the economy is uncertain, and we take account of both the upside and downside risks around our projections when judging the appropriate stance of monetary policy.

In particular, recent monetary policy decisions have reflected our recognition that, with the federal funds rate near zero, we can respond more readily to upside surprises to inflation, economic growth, and employment than to downside shocks.

This asymmetry suggests that it is appropriate to be more cautious in raising our target for

the

federal

funds rate than

would

be the

case

if short-term

nominal

interest rates

were appreciably above zero.

Reflecting these concerns, we have maintained our current policy stance even as the labor market has improved appreciably.However, we must also take into account the well-documented lags in the effects of monetary policy.

Were the FOMC to delay the start of policy normalization for too long, we would likely end

up

having

to

tighten

policy

relatively

abruptly

to

keep

the

economy

from

significantly overshooting

both

of

our

goals.

Such

an

abrupt

tightening

would

risk

disrupting

financial markets and perhaps even inadvertently push the economy into recession.

Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risktaking and thus undermine financial stability.On balance, economic and financial information received since our October meeting has been consistent with our expectation of continued improvement in the labor market.

And, as I have noted,

continuing

improvement

in

the

labor

market

helps

strengthen

our

confidence

that inflation will move back to our 2 percent objective over the medium term.

That said, between today and the next FOMC meeting, we will receive additional data that bear on the economic outlook.

These data include a range of indicators regarding the labor market, inflation, and economic activity.

When my colleagues and I meet, we will assess all of the available data and their implications for the economic outlook in making our policy decision.As you know, there has been considerable focus on the first increase in the federal funds rate after nearly seven years in which that rate was at its effective lower bound.

We have tried to be as clear as possible about the considerations that will affect that decision.

Of course, even after the initial increase in the federal funds rate, monetary policy will remain accommodative.

And

it

bears

emphasizing

that

what

matters

for

the

economic

outlook

are

expectations concerning the path of the federal funds rate over time: It is those expectations that affect financial conditions and thereby influence spending and investment decisions.

In this regard, the

Committee

anticipates

that

even

after

employment

and

inflation

are

near

mandateconsistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

## SummaryIn

closing, the economy has come a long way toward the FOMC's objectives of maximum employment and price stability.

When the Committee begins to normalize the stance of policy, doing so will be a testament, also, to how far our economy has come in recovering from the effects of the financial crisis and the Great Recession.

In that sense, it is a day that I expect we all are looking forward to.Thank you.

I would be pleased to take your questions.