FOMC Press Conference - 2016-12-14
Central bank: fed | Type: press_conference | Date: 2016-12-14

December 14, 2016 Chair Yellen’s Press Conference FINAL
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Transcript of Chair Yellen’s Press Conference
December 14, 2016
CHAIR YELLEN. Good afternoon. Today the Federal Open Market Committee decided
to raise the target range for the federal funds rate by ¼ percentage point, bringing it to ½ to
¾ percent. In doing so, my colleagues and I are recognizing the considerable progress the
economy has made toward our dual objectives of maximum employment and price stability.
Over the past year, 2¼ million net new jobs have been created, unemployment has fallen further,
and inflation has moved closer to our longer-run goal of 2 percent. We expect the economy will
continue to perform well, with the job market strengthening further and inflation rising to
2 percent over the next couple of years. I’ll have more to say about monetary policy shortly, but
first I’ll review recent economic developments and the outlook.
Economic growth has picked up since the middle of the year. Household spending
continues to rise at a moderate pace, supported by income gains and by relatively high levels of
consumer sentiment and wealth. Business investment, however, remains soft despite some
stabilization in the energy sector. Overall, we expect the economy will expand at a moderate
pace over the next few years.
Job gains averaged nearly 180,000 per month over the past three months, maintaining the
solid pace that we’ve seen since the beginning of the year. Over the past seven years, since the
depths of the Great Recession, more than 15 million jobs have been added to the U.S. economy.
The unemployment rate fell to 4.6 percent in November, the lowest level since 2007, prior to the
recession. Broader measures of labor market slack have also moved lower, and participation in
the labor force has been little changed, on net, for about two years now, a further sign of
improved conditions in the labor market given the underlying downward trend in participation
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stemming largely from the aging of the U.S. population. Looking ahead, we expect that job
conditions will strengthen somewhat further.
Turning to inflation, the 12-month change in the price index for personal consumption
expenditures was nearly 1½ percent in October, still short of our 2 percent objective but up more
than a percentage point from a year earlier. Core inflation—which excludes energy and food
prices that tend to be more volatile than other prices—has risen to 1¾ percent. As the transitory
influences of earlier declines in energy prices and prices of imports continue to fade and as the
job market strengthens further, we expect overall inflation to rise to 2 percent over the next
couple of years.
Our inflation outlook rests importantly on our judgment that longer-run inflation
expectations remain reasonably well anchored. Market-based measures of inflation
compensation have moved up considerably but are still low. Survey-based measures of longer-
run inflation expectations are, on balance, little changed. Of course, we remain committed to our
2 percent inflation objective and will continue to carefully monitor actual and expected progress
toward this goal.
Let me now turn to the economic projections that were submitted for this meeting by
Committee participants. As always, they conditioned their projections on their own individual
views of appropriate monetary policy, which, in turn, depend on each participant’s assessment of
the multitude of factors that shape the outlook. The median projection for growth of inflation-
adjusted gross domestic product rises from 1.9 percent this year to 2.1 percent in 2017 and stays
close to 2 percent in 2018 and 2019, slightly above its estimated longer-run rate. The median
projection for the unemployment rate stands at 4.7 percent in the fourth quarter of this year.
Over the next three years, the median unemployment rate runs at 4.5 percent, modestly below the
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median estimate of its longer-run normal rate. Finally, the median inflation projection is
1.5 percent this year and rises to 1.9 percent next year and 2 percent in 2018 and 2019. Overall,
these economic projections are very similar to those made in September: GDP growth is a touch
stronger; the unemployment rate is a shade lower; and inflation, beyond this year, is unchanged.
Returning to monetary policy, the Committee judged that a modest increase in the federal
funds rate is appropriate in light of the solid progress we have seen toward our goals of
maximum employment and 2 percent inflation. We continue to expect that the evolution of the
economy will warrant only gradual increases in the federal funds rate over time to achieve and
maintain our objectives. That’s based on our view that the neutral nominal federal funds rate—
that is, the interest rate that is neither expansionary nor contractionary and keeps the economy
operating on an even keel—is currently quite low by hist orical standards. With the federal funds
rate only modestly below the neutral rate, we continue to expect that gradual increases in the
federal funds rate will likely be sufficient to get to a neutral policy stance over the next few
This view is consistent with participants’ projections of appropriate monetary policy.
The median projection for the federal funds rate rises to 1.4 percent at the end of next year,
2.1 percent at the end of 2018, and 2.9 percent by the end of 2019. Compared with the
projections made in September, the median path for the federal funds rate has been revised up
just ¼ percentage point. Only a few participants altered their estimate of the longer-run normal
federal funds rate, although the median edged up to 3 percent.
Of course, the economic outlook is highly uncertain, and participants will adjust their
assessments of the appropriate path for the federal funds rate in response to changes to the
economic outlook and associated risks. As many observers have noted, changes in fiscal policy
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or other economic policies could potentially affect the economic outlook. Of course, it is far too
early to know how these policies will unfold. Moreover, changes in fiscal policy are only one of
the many factors that can influence the outlook and the appropriate course of monetary policy.
In making our policy decisions, we will continue—as always —to assess economic conditions
relative to our objectives of maximum employment and 2 percent inflation. As I have noted on
previous occasions, policy is not on a preset course.
Finally, we will continue to reinvest proceeds from maturing Treasury securities and
principal payments from agency debt and mortgage-backed securities. As our statement says, we
anticipate continuing this policy “until normalization of the level of the federal funds rate is well
under way.”
Thank you. I’d be happy to take your questions.
HARRIET TORRY. Thank you, Madam Chair. Harriet Torry with the Wall Street
Journal. Why does the Fed now see three rate increases next year instead of two? Is it because
the economy is at risk of overheating, or is the Fed behind the curve, or is this a reaction to
Donald Trump’s election?
CHAIR YELLEN. Well, I would like to emphasize that this is a very modest adjustment
in the path of the federal funds rate and involves changes by only, you know, some of, you know,
some of the participants. So in thinking about the paths and the revisions, there are a number of
factors that were taken into account by participants. The unemployment rate is perhaps a touch,
as I said, a touch lower than previously; you’ve seen some modest downward revisions in that—
in that projection. For this year, there was a slight upward revision to inflation, and some of the
participants, but not all of the participants, did incorporate some assumption of a change in fiscal
policy into their projections. And that may have been a factor that was one of several that
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occasioned these shifts, but I want to emphasize that these—the shifts that you see here are really
very tiny.
STEVE LIESMAN. Steve Liesman, CNBC. In recent testimony, you said your advice
was for fiscal authorities to increase the productive capacity of the economy. Do individual and
business tax cuts increase the productive capacity of the economy? And how would the Fed’s
reaction be different to fiscal policies that increase the productive capacity of the economy and
those that don’t?
CHAIR YELLEN. So the statement that I made, that it would be useful to increase the
productive capacity of the economy, reflects my concern that productivity growth has been very
low. It’s the ultimate determination of the evolution of living standards. Policies that would
improve productivity growth would include policy changes that enhance education, training,
workforce development; policies that spur either private or public investment to enhance the
quality of capital in the United States that workers have to work with; and policies that spur
innovation or competition or the formation of new firms. So tax policies can have that effect. It
really depends on the specifics. I don’t think there’s anything that I could say in general about
what tax policy would do, but that—a nd I really can’t tell you what the Fed’s response would be
to any policy changes that are put into effect. I wouldn’t want to speculate until I were more
certain of the details and how they would affect the likely course of the economy.
STEVE LIESMAN. Okay. A quick follow-up— I’m sorry, but if there was a rush of
fiscal policy that did not increase the productive capacity of the economy, would that mean the
Federal Reserve would have to move more quickly with raising rates?
CHAIR YELLEN. I— you know, it’s something I really just can’t generalize about
because, while it would be desirable to have tax policies that do increase the productive capacity
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of the economy, an increase in the pace of productivity change is one of the factors that does
affect the economy’s neutral rate. A boost to productivity could spur investment. As we have
been saying, we estimate that the value of the neutral federal funds rate is quite low—has —a nd
one of the reasons for that is slow productivity growth. And so it’s very hard to generalize about
it because it could affect that neutral rate.
JIM PUZZANGHERA. Hi. Jim Puzzanghera with the L.A. Times. For the average
American, can you explain what the impact of this hike and three additional hikes will be next
year? And should they feel more confident in the economy now that you are raising rates at a
slightly faster pace?
CHAIR YELLEN. So let me say that our decision to raise rates is—should certainly be
understood as a reflection of the confidence we have in the progress the economy has made and
our judgment that that progress will continue. And the economy has proven to be remarkably
resilient. So it is a vote of confidence in the economy. As you know, this was a decision that
was well anticipated in markets, and I think it will have relatively small effect on market rates. It
could boost very slightly some short-term interest rates that could have an effect on borrowing
costs that are linked to them, but, overall, I think that households and firms will see very modest
changes from this decision. But, certainly, it’s important for households and businesses to
understand that my colleagues and I have judged the course of the U.S. economy to be strong,
that we’re making progress toward our inflation and unemployment goals. We have a strong
labor market, and we have a resilient economy.
SAM FLEMING. Sam Fleming from the Financial Times. Clearly, there’s been a lot of
discussion already about fiscal—fiscal policy. But even if you discount or don’t know what the
fiscal outlook is going to be next year, unemployment is already below the longer-run projection
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under the policy rule you cited in your August speech. That would suggest that policy ought to
be tighter. Is there a risk that the Federal Reserve is already behind the curve, even before any
fiscal impact steps in next year? Thanks.
CHAIR YELLEN. So I would agree that—a nd as we said in our statement—policy
remains accommodative. The degree of accommodation I would characterize as moderate. As
I’ve emphasized and said in the statement, we currently judge the neutral level of the federal
funds rate to be pretty low. So there is some accommodation. Remember that inflation is still
below our objective. The Committee projects—at least the median projection shows a very
modest undershoot of estimates of the longer-run normal rate of unemployment. The median
unemployment rate here gets down to 4½ percent, which is just a few tenths below the estimated
longer-run normal level of the unemployment rate. And we think that that’s appropriate because
we want inflation to rise to our 2 percent objective in a timely fashion.
So there is not a substantial undershoot of the natural rate of unemployment. We’re not
seeing evidence in labor markets of very substantial upward pressures on labor that could signify
extreme shortages of labor that could propel inflation higher in a very rapid way, and inflation is
still operating below our objective. So I do not judge that we are behind the curve. I’ve—m y
judgment is that we’re on a good path to reaching our objectives. But, of course, the outlook is
uncertain. We recognize that there are many sources of uncertainty affecting the outlook. And
we will have to adjust our thinking as things evolve, as conditions—conditions evolve, and we
learn more about economic policy changes that could affect the outlook.
JIM TANKERSLEY. Jim Tankersley, Washington Post. I’m curious, you and your
predecessor had both at times called for more fiscal stimulus to help with the outlook, the growth
outlook. And I’m wondering, how much do you judge the economy has capacity for fiscal
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stimulus right now? It’s a version of Steve’s question, but I think we’re trying to get at, how
much can happen before we run that risk of overheating?
CHAIR YELLEN. Well, I believe my predecessor and I called for fiscal stimulus when
the unemployment rate was substantially higher than it is now. So, with a 4.6 percent
unemployment and a solid labor market, there may be some additional slack in labor markets,
but I would judge that the degree of slack has diminished. So I would say at this point that fiscal
policy is not obviously needed to provide stimulus to help us get back to full employment. But,
nevertheless, let me be careful that I am not trying to provide advice to the new Administration
or to Congress as to what is the appropriate stance of policy. There are many considerations that
Congress needs to take account of and many bases for justifying changing fiscal policy. I’ve
continued to highlight the importance of spurring productivity growth, that I think that would be
something that’s beneficial for the economy. Of course, it’s also important for Congress to take
account of the fact that, as our population ages, that the debt-to-GDP ratio is projected to rise,
and that needs to continue to be taken into account. And so there are many factors that I think
should enter into such decisions.
CHRISTOPHER CONDON. Thank you. Chris Condon, Bloomberg News. Chair
Yellen, you’ve just spoken about some of the risks—the inflationary risks of running in this
expansionary fiscal policy. But in October you were wondering whether it might be possible to
repair some of the damage done to the labor force during the recession by running what you
termed a “high-pressure economy.” So I’m wondering, why couldn’t fiscal policy serve the
same end in seeking to run a high-pressure economy, hoping to draw more Americans off the
sidelines and into the workforce? Is there something necessarily riskier about approaching it
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from the fiscal side, or perhaps have you become less enthusiastic about the idea of running a
high-pressure economy? Thank you.
CHAIR YELLEN. So I want to be clear that what I said in that speech in Boston is that
an important research question is whether or not, in an economy with a very strong labor market,
there might be changes that took place that permanently raised the labor force participation,
training, and other things of the labor—of the labor force that would be positives for the
productive potential of our economy on a long-lasting basis. I never said that I favor running a
high-pressure economy. And, you know, as you can see in the SEP projections of the
participants—and this has long been true not just in this forecast , but in earlier ones as well— you
see a modest undershooting. The under—unemployment rate is projected to modestly
undershoot, for several years, levels that are deemed to be normal in the longer run. That’s an
appropriate policy purely on the grounds that inflation is running below our objective. And
while we don’t want to overshoot our 2 percent objective, we also don’t want a persistent
undershoot of our 2 percent objective, and that does involve a labor market that may succeed in
attracting more people off the sidelines into the labor market. It’s something we will see as we
examine experience over the next couple of years. We may adjust our views on this. But I do
want to make clear that I have not recommended running a “hot” economy as some sort of
experiment.
LINDSAY DUNSMUIR. Hi, Lindsay Dunsmuir with Reuters. How comfortable are
you with possible interference on Fed policy by the incoming President? And I’m talking there
about the negative impacts his tweets on aerospace companies in the last week have had on their
share prices. And do you feel having a President tweeting about individual companies—do you
feel that that could begin to distort corporate decisionmaking?
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CHAIR YELLEN. Well, I’m not going to offer the incoming President advice about how
to conduct himself in policy. I’m a strong believer in the independence of the Fed. We have
been given the independence by Congress to make decisions about monetary policy in pursuit of
our dual-mandate objectives of maximum employment and inflation, and that is what I intend to
stay focused on. That’s what the Committee is focused on.
BINYAMIN APPELBAUM. Binya Appelbaum with the New York Times. The
President-elect has said that overhauling financial regulation is a high priority for him. I’m
curious whether the Fed has been asked to provide any advice on how that might be done, and
what advice you would provide to the President-elect about how our financial regulatory system
should be improved?
CHAIR YELLEN. So we have been—our staff have been in touch with the Trump
transition team. And we, of course, share the objective that the whole government has to work
constructively to ensure a smooth transition. I’ve not been in touch beyond that, and it’s not
something that I would expect. But— I’m sorry, so what would I—
BINYAMIN APPLEBAUM. I was saying, what advice would you give about how the
system should be improved?
CHAIR YELLEN. About how—
BINYAMIN APPLEBAUM. —on financial re gulation.
CHAIR YELLEN. —the f inancial rate. Yes. So, okay, on financial regulation, I feel
that we lived through a devastating financial crisis that took a huge toll on our economy. And
most members of Congress and the public came away from that experience feeling that it was
important to take a set of steps that would result in a safer and stronger financial system. And I
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feel that we have done that. That has been our mission since the financial crisis for the last six or
seven years. That’s what Dodd-Frank was designed to do.
I think it’s very important that we have reduced the odds that a systemically important
firm could fail by requiring higher capital, higher liquidity, by performing stress tests that
provide us another way of ensuring that the firms we count on to supply credit to households and
businesses would be able to go on doing that even in the face of a severely adverse shock. The
firms—the largest firms have a great deal more capital than they did before the crisis. Those are
important changes. We have placed the toughest regulations on those firms that are systemically
important. I would advise that—and we have been trying to do this —that it’ s important to look
for ways to relieve regulatory burden on community banks and smaller institutions, to tailor
regulation so that it’s appropriate for the systemic risk profile of the particular institutions.
I think there was broad agreement also that we should end “too big to fail,” and that
means not only reducing the odds of the failure of a systemically important institution, but also
making sure that, should such a firm fail, that it could be resolved in an orderly way. And the
living wills process has been about that, and I think we’ve made considerable progress in making
sure that the largest and most systemic firms conduct their businesses in a day-to-day way with
some thought about—with important thinking in place about whether or not the way they are
conducting their business would aid resolution in the event that they encountered a severe
negative shock. So this is progress, I would say, it’s very important not to roll back. There may
be some changes that could be made, and we’ve suggested a few, like eliminating the burden of
compliance with the Volcker rule, or incentive compensation, regulations for smaller banks, or
modestly raising the threshold for banks that are subject to enhanced prudential supervision. But
I would urge that it’s important to keep this in place.
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MARTIN CRUTSINGER. Marty Crutsinger with the Associated Press. The election of
Donald Trump seemed to have sparked a major reaction in financial markets: stock prices at
record highs, the dollar has strengthened, long-term interest rates are higher. The—did any of
that get discussed in the meeting and did it—do you feel that it will have any effect, either
negative or positive, on things? And also, did you have any broader discussion about Trump’s
economic plan and what it might do and how the Fed might have to react?
CHAIR YELLEN. So we did discuss these topics in our meeting today. I would simply
summarize by saying that all the FOMC participants recognize that there is considerable
uncertainty about how economic policies may change and what effect they will have on the
economy. And in so far as that will affect monetary policy, of course we will have to factor
those policies along with many other things, including the global environment and oil prices and
other matters. We will have to factor that into our outlook and figure out what is an appropriate
response. But we’re operating under a cloud of uncertainty at the moment, and we have time to
wait to see what changes occur and to factor those into our decisionmaking as we gain greater
You mentioned the market moves. So I see the market moves as implicit forecasts about
what impact these policies are likely to have on the economy. The changes—the financial
market changes that you described, particularly the increase in stock prices, the increase in
longer-term rates, and the strengthening of the dollar, suggest that many market participants
anticipate expansionary fiscal policies that would raise interest rates somewhat in the United
States relative to abroad and would cause a strengthening in the dollar. But market participants
were uncertain too, and I would expect changes in our understanding of what is going to happen
to also affect market prices in financial markets as we move forward.
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NANCY MARSHALL-GENZER. Hi, Nancy Marshall-Genzer with Marketplace.
Wondering about slack, when do you think the slack in the labor market will have worked its
way through so we’re no longer talking about it at press conferences and it’s not such a big
CHAIR YELLEN. So this is not something that it’s possible to judge precisely. My
colleagues write down their best estimates of a normal longer-run unemployment rate. The
median stands at 4.8 percent, so we’re close, possibly—t he unemployment rate right now is ever
so slightly below, but in the neighborhood. If we look at larger, broader measures of slack, like
the U-6 measure that includes involuntary part-time employment and those who are marginally
attached to the labor force, they’re slightly higher than pre-recession levels, but they’ve come
down considerably. We look at a broad array of indicators of the labor market, and if you look at
job openings or the hires rate or the quits rate or difficulty of hiring workers as reported in
business surveys, you know, I would say the labor market looks a lot like the way it did before
the recession, that it’s—w e’re roughly comparable to 2007 levels when we thought the, you
know, there was a normal amount of slack in the labor market. The labor market was in the
vicinity of maximum employment.
MICHAEL MCKEE. Michael McKee from Bloomberg Television and Radio. Given
President-elect Trump’s criticism of your low-rate policy during the campaign, like it or not,
market participants are going to focus a lot in 2017 on you. You’ve suggested you will serve out
your term, but I’m curious if that statement still holds, if you would like another term as Fed
Chair, if you would accept another term as Fed Chair, and would you stay on the Committee if
you were not Fed Chair?
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CHAIR YELLEN. So I guess the way I think about it is that I was confirmed by the
Senate to a four-year term. The term of the Fed Chair was not meant to coincide with that of the
President, and there were good reasons for that, too. It’s part of ensuring the independence of the
Fed. And so I do intend to serve out my four-year term. I haven’t made any decision about the
future. I, you know, I recognize I might or might not be reappointed. It’s a decision that I don’t
have to make and don’t, you know, don’t have thoughts on at this time. And, as you said, I
recognize too that I could stay on as a Board member, and that’s a decision for another day.
PETER BARNES. Peter Barnes, Fox Business. Just to follow up on Marty’s question
about the financial markets, the Dow is about to hit 20,000. It’s up substantially since the
election on, apparently, investor optimism about potential—the impact of President -elect
Trump’s policies on the economy and an improving economy. I wonder if you share that
optimism, number one, and, if not, are we seeing a bout of, perhaps, irrational exuberance right
now? Or are you concerned at all about a bubble in equity prices that could create some
financial instability in the economy?
CHAIR YELLEN. So, you know, I really don’t want to comment on the level of stock
prices. They may have been boosted by expectations about tax policy; possible cuts in corporate
tax rates that have been much discussed; or by expectations about growth, possible reductions,
and downside risk to the economy. But, you know, these are things that market participants are
trying to view, along with the likely path of—paths of interest rates, and I think all of that factors
into movements and stock valuations. But I don’t— I don’t want to offer a view as to whether
they’re appropriate.
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PETER BARNES. You have said—mentioned— can I just follow up? On equity prices,
you have talked about whether or not the valuations are still—are within historical ranges and
norms. Did—i s Dow 20,000 kind of within historical norms? Are you comfortable with that?
CHAIR YELLEN. Well, I think rates of return in the stock market relative to—
remember that the level of interest rates is low, and, taking that into account, I believe it’s fair to
say that they remain within normal ranges.
JOHN HELTMAN. John Heltman of American Banker. You said that much progress
has been made since the crisis in making the banks more secure, more safe, higher liquidity,
capital levels, et cetera. Does that feeling extend to the culture of the banks, the way that they
run, the way that they operate in their approach towards—towards business? Do you think that
more needs to be done there? Do you expect that if there has been improvement, that it will
continue to be—that culture will continue to improve in the next A dministration and the next
CHAIR YELLEN. Well, there have been many ways in which there have been
compliance failures at large organizations, and you’ve seen a series of enforcement actions by
the banking regulators over a range of practices that suggests some breakdown of compliance or
culture, whether it involves violations of sanctions or foreign exchange or LIBOR or other
matters. So this is something that we’ve discussed and emphasized, the importance of a culture
of compliance. And the Board will be undertaking review. We’ve already begun this year,
broadly, of compliance and management of compliance risk in the largest corporations. So I
think this is something that’s important. And the failings that we have seen in a number of
institutions suggest there is certainly room for improvement.
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GREG ROBB. Greg Robb from MarketWatch. I’d like to—two questions , if I might—
follow up on the question about running the economy hot that you mentioned in your speech up
in Boston a couple months ago. You brought it up. Are you now sort of distancing yourself
from the idea?
CHAIR YELLEN. Well, I want to make clear what I said and what I didn’t say. One of
the things we’ve learned from our financial crisis and from a series of financial crises in history
and around the globe is that, very commonly, when the economy takes a hit and falls into a
recession, that productivity doesn’t pick up to pre-recession levels and that there looks like there
is a permanent hit to the path of potential output for the economy, which is called “hysteresis.”
And I raised the question as to whether or not this might operate in the opposite direction as well.
We have seen quite a few people who lost their jobs during the Great Recession drop out of the
labor force and, you know, lose their ties and become discouraged and not reenter. And I raised
the question as to whether or not hysteresis could operate in the opposite direction. And that was
a research question for economists to see if there is any evidence, because it could be important
in determining policy. But I didn’t— I didn’t draw any policy conclusions from that. And, as I
indicated, I think the path that you see—that the Committee has laid out in a tentative way that
involves a modest degree of undershooting of normal longer-run levels of unemployment going
down to around 4½ percent would remain for a couple of years—might provide some insight. So
I was not recommending a substantially easier policy in order to test that hypothesis.
GREG ROBB. Thank you, Madam Chair. I guess my question to—that I had before that
follow-up was, both times you’ve raised rates in this cycle, the market expectations of a rate hike
have been over 50 percent. The market has, you know, kind of priced it in. Is that a prerequisite
going forward? Will that have to happen as you go forward?
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CHAIR YELLEN. It’s not a prerequisite, but we do try to explain our evolving views as
clearly as we can. It’s important for market participants to have a sense of how we think about
the economy and the appropriate path of policy, to look at incoming data, and to form their own
judgments as to whether or not changes in policy would be appropriate. And while it’s not a
prerequisite, if we’re in good sync in terms of explaining what goes into our policy judgments,
it’s not surprising that it would often be true that moves are well anticipated by the market. As I
said, in thinking about today’s move, we’ve indicated that we thought we were making progress
on our objectives. We wanted to see some more. I think anyone looking at incoming data can
clearly see that we have enjoyed further progress both in the labor market and on inflation. And,
therefore, there are good reasons why the market should have anticipated a moved today.
PATRICK GILLESPIE. Chair Yellen, Patrick Gillespie with CNN. There’s been a lot of
discussion about manufacturing jobs and trade. I’m wondering, what do you think are two or
three concrete steps that could be taken to increase manufacturing employment in the United
States? And, separately, I’ve asked you about the importance of job training programs,
something that you’ve emphasized. Specifically, what do you think about the worker assistance
provided to workers who lose their jobs to trade, both the financial assistance and the worker
retraining programs? Are they sufficient?
CHAIR YELLEN. So, I don’t want to weigh in. I don’t intend to weigh in. I haven’t
weighed in on either fiscal policy, specifics of evaluating policies. I’m not going to weigh in
either on the details of particular trade policies. But, more generally, I’d say, you asked me
about manufacturing. There were a lot of manufacturing jobs lost over a long period of time and
particularly after—during the G reat Recession. We’ve had some recovery in manufacturing
employment as the economy’s recovered. So, to some extent, manufacturing employment
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depends on the progress of the economy, and we have seen some recovery. Over a long period
of time, technological change is something that has been important in reducing manufacturing
employment absolutely and as a share of jobs in the economy. For decades, the pace of
technological change in manufacturing has outstripped that in the economy as a whole. And, so,
firms—man ufacturing firms have found it easier to continue producing by—with reducing their
workforces. And that’s a change that I would expect to continue.
You mentioned worker assistance. So some of the forces that are acting on
manufacturing and other sectors, including technological change and globalization—e ven though
most economists would judge the overall consequences of these developments for the economy
to be positive, certainly there are groups of workers who were harmed by developments
pertaining to globalization and technology. And I think most economists and policymakers
recognize that it’s important to provide ways for workers who were harmed by these kinds of
developments to be retrained for jobs so that they can succeed in the economy. And so, I mean, I
would agree—without getting into any particular program and whether it’ s sufficient, I do think
that it’s important to recognize there are those who were harmed by these developments, and
their concerns, I think, need to be addressed by policymakers, certainly.
JUSTINE UNDERHILL. Justine Underhill, Yahoo Finance. So the Fed’s balance sheet
has grown to over $4 trillion. And as the Fed begins removing policy accommodation, under
what circumstances would you see the Fed removing or possibly winding down its balance sheet
in either letting mature— securities mature or possibly outright selling bonds from the SOMA
portfolio?
CHAIR YELLEN. So we’ve indicated in our normalization principles that we expect to
diminish the size of our portfolio over time largely by ceasing reinvestments of principal rather
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than by selling securities. We’ve indicated that once the process of normalization of the federal
funds rate is well under way, we would probably begin to allow our portfolio to run off. We’ve
not yet made any precise decisions about when that will occur. We want to feel that if the
economy were to suffer an adverse shock, that we have some scope through traditional means of
interest rate cuts to be able to respond to that. Now, there’s no mechanical rule about what level
of the federal funds rate we might deem appropriate to begin that process. It’s not something
that only depends on the level of the federal funds rate. It also depends on our judgment of the
amount of momentum in the economy and possible concerns about downside risks to the
economy. So we’ve not yet made this decision, but it is something that we have long planned, to
begin to allow our balance sheet to run off. And then it would take several years. And we would
end up, if all goes well, with a substantially smaller balance sheet than we have at present.
MICHAEL DERBY. Mike Derby from Dow Jones Newswires. I wondered if the
unexpected outcome of the election and the sense that a lot of people are really upset with how
the economy is performing despite having, you know, aggregate economic statistics that look
pretty good—i s that causing you in any way to think differently about how you evaluate the
economy, like what sort of things you look for to get a sense of what’s going on in the economy?
Is— you know, basically, did how things turned out in the election—is it making you think
differently about how you evaluate the economy’s performance and how it’s doing?
CHAIR YELLEN. Well, I mean, we’ve long been aware, and I’ve spoken about
previously disturbing trends in the economy, particularly rising wage inequality, income
inequality, and the fact that a significant share of our population hasn’t been enjoying significant
real wage gains, if any. And so these are long-standing concerns. These are not new
phenomenon, but the recession was very severe and probably exacerbated developments that had
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long been affecting many American workers and households. And I think they are quite
disturbing.
Now, they’re ones that the Fed is not well positioned— I think our policies can affect the
general level of economic activity and slack in the labor market, the level—the rate of inflation ,
which we focus on. But I think it’s important for policymakers more broadly to be attentive to
these trends and to think about policies that could address them. We’ve been quite attentive with
respect to particular demographic groups in the labor market. Particularly, minorities tend to be
very badly affected by downturns. We’ve discussed that. We’ve been focused on it—i t’s not
just since the election—and are pleased to see that they are enjoying gains. For example, the
African American unemployment rate at this point is now rough— about back to 2007 levels as
well. But these are important trends, and I think it’s important for policy to address them.