FOMC Press Conference - 2016-06-15
Central bank: fed | Type: press_conference | Date: 2016-06-15

June 15, 2016 Chair Yellen’s Press Conference FINAL
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Transcript of Chair Yellen’s Press Conference
June 15, 2016
CHAIR YELLEN. Good afternoon. Today, the Federal Open Market Committee
maintained the target range for the federal funds rate at ¼ to ½ percent. This accommodative
policy should support further progress toward our statutory objectives of maximum employment
and price stability. Based on the economic outlook, the Committee continues to anticipate that
gradual increases in the federal funds rate over time are likely to be consistent with achieving
and maintaining our objectives. However, recent economic indicators have been mixed,
suggesting that our cautious approach to adjusting monetary policy remains appropriate. As
always, our policy is not on a preset course, and if the economic outlook shifts, the appropriate
path of policy will shift correspondingly. I will come back to our policy decision, but first I will
review recent economic developments and the outlook.
Economic growth was relatively weak late last year and early this year. Some of the
factors weighing on growth were expected. For example, exports have been soft, reflecting
subdued foreign demand and the earlier appreciation of the dollar. Also, activity in the energy
sector has obviously been hard hit by the steep drop in oil prices since mid-2014. But the
slowdown in other parts of the economy was not expected. In particular, business investment
outside of energy was particularly weak during the winter and appears to have remained so into
the spring. In addition, growth in household spending slowed noticeably early in the year despite
solid increases in household income as well as relatively high levels of consumer sentiment and
wealth. Fortunately, the first-quarter slowdown in household spending appears to have been
temporary; indicators for the second quarter have so far pointed to a sizable rebound. This
recovery is a key factor supporting the Committee’s expectation that overall economic activity
will expand at a moderate pace over the next few years.
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Despite lackluster economic growth, the job market continued to improve early in the
year. During the first quarter, job gains averaged nearly 200,000 per month, just a bit slower
than last year’s pace. And the unemployment rate held near 5 percent even though notably more
people were actively looking for work. However, more recently the pace of improvement in the
labor market appears to have slowed markedly. Job gains in April and May are estimated to
have averaged only about 80,000 per month. And while the unemployment rate fell to
4.7 percent in May, that decline occurred because fewer people reported that they were actively
seeking work. A broader measure of unemployment that includes individuals who want and are
available to work but have not searched recently as well as people who are working part time but
would rather work full time has flattened out. On a more positive note, average hourly earnings
increased 2½ percent over the past 12 months—a bit faster than in earlier years and a welcome
indication that wage growth may finally be picking up. Although recent labor market data have,
on balance, been disappointing, it’s important not to overreact to one or two monthly readings.
The Committee continues to expect that the labor market will strengthen further over the next
few years. That said, we will be watching the job market carefully.
Ongoing economic growth and an improving labor market underpin our inflation outlook.
Overall consumer price inflation—as measured by the price index for personal consumpt ion
expenditures—was about 1 percent over the 12 months ending in April, still short of our
2 percent objective. Much of this shortfall continues to reflect the effects of earlier declines in
energy prices and lower prices for imports. Core inflation, which excludes energy and food
prices, has been running close to 1½ percent. As the transitory influences holding down inflation
fade, and as the labor market strengthens further, the Committee expects inflation to rise to
2 percent over the next two to three years.
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Our inflation outlook also rests importantly on our judgment that longer-run inflation
expectations remain reasonably well anchored. However, we can’t take the stability of longer-
run inflation expectations for granted. While most survey measures of longer-run inflation
expectations show little change, on balance, in recent months, financial market measures of
inflation compensation have declined. Movements in these indicators reflect many factors and
therefore may not provide an accurate reading on changes in the inflation expectations that are
most relevant for wages and prices. Nonetheless, in considering future policy decisions, we will
continue to carefully monitor actual and expected progress toward our inflation goal.
Let me now turn to the individual economic projections submitted for this meeting by
FOMC participants. As always, each participant’s projections are conditioned on his or her own
view of appropriate monetary policy, which, in turn, depends on each person’s assessment of the
multitude of factors that shape the outlook. Participants’ projections for growth of inflation-
adjusted gross domestic product are slightly lower in the near term than the projections made for
the March FOMC meeting. The median growth projection now remains at 2 percent through
2018, in line with its estimated longer-run rate. The median projection for the unemployment
rate edges down from 4.7 percent at the end of this year to 4.6 percent in the next two years,
somewhat below the median assessment of the longer-run normal unemployment rate. The
median path of the unemployment rate is little changed from March. Finally, the median
inflation projection stands at 1.4 percent this year, a bit firmer than in March, and then rises to
1.9 percent next year and 2 percent in 2018.
Returning to monetary policy, as I said, the Committee maintained its target range for the
federal funds rate. This decision reflects the Committee’s careful approach in setting monetary
policy, particularly in light of the mixed readings on the labor market and economic growth that I
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have discussed as well as continuing below-target inflation. Proceeding cautiously in raising our
interest rate target will allow us to verify that economic growth will return to a moderate pace,
that the labor market will strengthen further, and that inflation will continue to make progress
toward our 2 percent objective. Caution is all the more appropriate given that short-term interest
rates are still near zero, which means that monetary policy can more effectively respond to
surprisingly strong inflation pressures in the future than to a weakening labor market and
falling inflation.
Although the financial market stresses that emanated from abroad at the start of this year
have eased, vulnerabilities in the global economy remain. In the current environment of sluggish
global growth, low inflation, and already very accommodative monetary policy in many
advanced economies, investor perceptions of, and appetite for, risk can change abruptly. As our
statement notes, we will continue to closely monitor global economic and financial
developments.
We continue to expect that the evolution of the economy will warrant only gradual
increases in the federal funds rate. We expect the rate to remain, for some time, below levels
that are anticipated to prevail in the longer run because headwinds weighing on the economy
mean that the interest rate needed to keep the economy operating near its potential is low by
historical standards. These headwinds—which include developments abroad, subdued
household formation, and meager productivity growth—could persist for some time. But, if they
gradually fade over the next few years as we expect, then the interest rate required to keep the
economy operating at an even keel should move higher as well.
This view is consistent with participants’ projections of appropriate monetary policy.
The median projection for the federal funds rate rises only gradually to 1½ percent at the end of
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next year and 2½ percent by the end of 2018, somewhat below its estimated longer-run normal
level. Although the median federal funds rate at the end of this year is unchanged from March, a
number of participants revised down their projections. For 2017 and 2018, the median projection
is ¼ to ½ percentage point lower than in March, roughly in line with the ¼ percentage point
downward revision made to the estimated longer-run level of the federal funds rate.
As I have noted on previous occasions, participants’ projections for the federal funds rate,
including the median path, are not a fixed plan for future policy. Policy is not on a preset course.
These forecasts represent participants’ individual assessments of appropriate policy given their
projections of economic growth, employment, inflation, and other factors. However, the
economic outlook is inherently uncertain, so each participant’s assessment of appropriate policy
is also necessarily uncertain, especially at longer time horizons, and will change in response to
changes to the economic outlook and associated risks.
Finally, the Committee will continue its policy of reinvesting proceeds from maturing
Treasury securities and principal payments from agency debt and mortgage-backed securities.
As highlighted in our policy statement, we anticipate continuing this policy until normalization
of the level of the federal funds rate is well under way. Maintaining our sizable holdings of
longer-term securities should help maintain accommodative financial conditions and should
reduce the risk that we might have to lower the federal funds rate to zero in the event of a future
large adverse shock.
Thank you, I will be happy to take your questions.
SAM FLEMING. Thanks very much. Sam Fleming from the Financial Times. One of
the big uncertainties hanging over markets right now is clearly the vote in the United Kingdom
next week. How much of a factor was that in today’s decision, relative to the questions you’ve
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elucidated about, the domestic jobs numbers and inflation data? And could you talk a little bit
about the channels that you think about when you talk about the potential impact of a Brexit on
the U.S. economy? Thank you.
CHAIR YELLEN. Well, Brexit, the upcoming U.K. decision on whether or not to leave
the European Union, is something we discussed, and I think it’s fair to say that it was one of the
factors that factored into today’s decisions—clearly this is a very important decision for the
United Kingdom and for Europe. It is a decision that could have consequences for economic and
financial conditions in global financial markets. If it does so, it could have consequences in turn
for the U.S. economic outlook that would be a factor in deciding on the appropriate path of
policy. So it is certainly one of the uncertainties that we discussed and that factored into
today’s decision.
STEVE LIESMAN. Thank you. The Fed’s outlook for rates has come down sharply for
2018 especially, but it’s been coming down gradually over time—almost a full percentage point
in some cases, compared to a year ago—and yet the GDP outlook remains the same. What has
happened in, say, just the past quarter to the Committee’s outlook for rates to bring it down so
much for, say, 2018, where it’s now just 2.4 percent and further from the long run than it was,
say, in the prior estimate that was out there? Has there been a dramatic change in the
Committee’s view on the relationship of GDP to rates? And maybe you could also explain why
the Fed has to keep lowering these rates and getting that forecast wrong.
CHAIR YELLEN. So, as I mentioned in my opening remarks, there is really a great deal
of uncertainty around each individual’s assessment of the appropriate level of rates, particularly
as we go further out in the forecast horizon and when we come to the long term. And I think
what we can see, and what many econometric and other studies show, is that the so-called neutral
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rate—namely , the level of the federal funds rate that is consistent with the economy growing
roughly at trend and operating near full employment—t hat rate is quite depressed by historical
standards. Many estimates would put it, in real or inflation-adjusted terms, near zero.
Now, the path that you see in the dot plot for rates over time is importantly
influenced—there is accommodation , and as we achieve our objectives, I think most participants
feel that the accommodation in the current stance of policy needs to be gradually removed, but a
very important influence in the out years is, what will happen to that neutral rate that will just
keep the economy operating on an even keel? And I’ve often in my statements and remarks
talked about headwinds that reflect lingering effects of the financial crisis; to the extent that there
are headwinds, I think many of us expect that these headwinds would gradually diminish over
time, and that’s a reason why you see the upward path for rates.
But there are also more long-lasting or persistent factors that may be at work that are
holding down the longer-run level of neutral rates—f or example, slow productivity growth,
which is not just a U.S. phenomenon but a global phenomenon. You know, obviously, there is a
lot of uncertainty about what will happen to productivity growth, but productivity growth could
stay long for a prolonged time, and we have an aging—aging societies in many parts of the world
that could depress this neutral rate.1 And I think all of us are involved in a process of constantly
reevaluating where is that neutral rate going, and I think what you see is a downward shift in that
assessment over time, the sense that maybe more of what’s causing this neutral rate to be low are
factors that are not going to be rapidly disappearing but will be part of the new normal. Now,
1 Chair Yellen intended to say, “You know, obviously, there is a lot of uncertainty about what will happen to
productivity growth, but productivity growth could stay low for a prolonged time, and we have an aging—aging
societies in many parts of the world that could depress this neutral rate.”
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you still see an assessment that that neutral rate will move up somewhat, but it has been coming
down, and I think it continues to be marked lower. And it is highly uncertain, for all of the dots.
JASON LANGE. Hi, I’m Jason Lange with Reuters. The median participant forecast for
the fed funds rate for 2017 and 2018 came down quite dramatically, but this stands in contrast
with the 2016 meeting forecast. As you mentioned, there were a number— actually, six—
participants who saw only one rate hike this year. Can you comment on what it would take for
two rate increases to be a—the likely or appropriate policy path? And about this disconnect
between the median view and the view of the, say, the voting members of the Committee? If
there is one, I should add. Thank you.
CHAIR YELLEN. Well, I’m not going to comment on participants versus voters. You
know, monetary policy—the Committee feels that mon etary policy—when we are looking at
several years, we should show the public what the views are of all the participants in the
Committee, especially given that voting—voting rotates every year, and so that’s a decision we
But you asked me what it would take to have two increases. So, you know, the
Committee as a whole never discusses, how many increases should we have this year or next
year—that ’s not a decision we’re making as a Committee. We’re making decisions on a
meeting-by-meeting basis and trying to give a sense to the public of what we’re looking for and
what the basis of a decision will be. And, as I indicated, first of all, international uncertainties
loom large here; we mentioned Brexit, the U.K. decision, obviously how that turns out is
something that will factor into future decisions. And we’re also looking at the prospects for
economic growth and continued progress in the labor market. The forecast that you see in the
SEP and the statement indicate the Committee continues to expect we will have moderate
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growth, 2 percent growth—so , you know, suggests healthy growth for the rest of the year and a
pickup in growth in the second quarter, and we expect to see continuing progress in the
labor market.
Now, we had questions about the growth outlook because we did see slower growth in
the fourth quarter and in the first quarter. I have to say there, with respect to the slowdown we
saw in consumer spending, that seemed to be out of line with fundamentals. We expected it to
pick up, and we’ve seen very good evidence that it has picked up. But now, the labor market
appears to have slowed down, and we need to assure ourselves that the underlying momentum in
the economy has not diminished. So, as I said, we will be carefully assessing data on the labor
market to make sure that job gains are going to continue at a pace sufficient to result in further
improvement in the labor market. And we will be watching the spending data to make sure
growth is picking up in line with our expectations.
Of course, with respect to inflation, we’re constantly evaluating whether or not
incoming information is roughly in line with our expectations. So we will be evaluating that at
every meeting; every meeting is live, and we could make a decision at any meeting to adjust the
funds rate, but that’s the kind of thing that we will want to see to make such decisions.
BINYAMIN APPELBAUM. The Fed created a labor market conditions index a couple
of years ago that was designed to sort of bring together a lot of these factors in the labor market
that you’ve talked about. As I’m sure you know, it’s been falling since January. That suggests
to some people that it was your decision to raise rates in December that has caused this
weakening in the labor market. Could you address what role, if any, you think the Fed’s decision
to raise rates has played in the slowdown we are now seeing?
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CHAIR YELLEN. Well, let me just say the labor market conditions index is a kind of
experimental research product that’s a summary measure of many different indicators, and,
essentially, that measure tries to assess the change in the labor market conditions. As I look at it,
and as that index looks at things, the state of the labor market is still healthy, but there’s been
something of a loss of momentum: The 200,000 jobs a month we saw, for example, in the first
quarter of the year, that’s slowed in recent months.
Exactly what the reasons are for that slowing, it’s difficult to say. It may turn out— you
know, again, we should never pay too much attention to, for example, one job market report.
There’s a large error around that, we often see large revisions, we should not overblow the
significance of one data point, especially when other indicators of the labor market are still
flashing green: Initial claims for unemployment insurance remain low; perceptions of the labor
market remain fine; data from the JOLTS on job openings continue to reach new highs. So
there’s a good deal of incoming data that does signal continued progress and strength in the labor
market, but, as I say, it does bear watching.
So, the Committee doesn’t feel and doesn’t expect, and I don’t expect, that labor
market—progress in the labor market has come to an end. We have tried to make clear to the
public and through our actions and through the revisions you see—have seen over time in the dot
plot—that we do not have a fixed plan for raising rates over time . We look at incoming data and
are prepared to adjust our views to keep the economy on track, and, in light of that data
dependence of our policy, I really don’t think that a single rate increase of 25 basis points in
December has any—has had much significance for the outlook. And we will continue to adjust
our thinking in light of incoming data in whatever direction is appropriate.
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JON HILSENRATH. Chair Yellen, I want to come back to these longer-run rate
projections that you’ve been asked about. So, yields on 10-year Treasury notes have fallen
below 1.6 percent; on 5-year notes, they’re near 1 percent. Elsewhere in the world, in Germany
and Japan, long-term bond yields are negative. Does—how do you explain this low level of
long-term bond yields? And does it give you any pause in looking at your own projections and
coming to a conclusion about whether those projections are possibly still way too high when the
bond market is at a much lower level?
CHAIR YELLEN. So I think the levels of longer-term rates reflect essentially two
things. One is market expectations about the path of short-term rates over, if we’re considering,
say, a 10-year Treasury security, what would be the path of short-term rates over the next
10 years. And the second factor is the so-called term premium, or the extra yield that investors
demand in order to hold a longer-term security instead of to invest short term. And clearly,
market expectations for the path of short-term interest rates over the next 10 years remain low,
and that is a factor. That is an important factor that’s, I think, holding down the level of longer-
term yields. But, perhaps as important, or maybe even more important, the term premium is also
low and has probably come down. Now, when we engaged in longer-term asset purchases, our
very purpose in doing that was to drive down longer-term yields by making these assets scarce—
scarcer and, hence, more valuable to the public that wants to invest in long-term securities, and
we were consciously attempting to drive down that term premium.
Now, we continue to hold a large quantity of those securities, but we’re not adding to
them. But, in many parts of the world—the ECB , for example, and the Bank of Japan are also
engaging in quantitative easing, buying longer-term assets and pushing down those term premia.
So I think term premia are very low as well as the expected path of short rates.
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JON HILSENRATH. Do these yield levels give you any uncertainty, any doubt about
whether—are you going to be able to get rates to where projections say they’re going?
CHAIR YELLEN. Well, so I want to say again, we’re quite uncertain about where rates
are heading in the longer term. We write down our best estimates at this time of what is a
longer-run normal level of the federal funds rate, and those are numbers about which there is
great uncertainty. As I said, we have good reason to believe that the so-called neutral rate or rate
compatible with the economy operating at full employment is low at the present time. And many
of us believe, as a base case, it’s reasonable to assume that those rates will move up over time,
but we’re not certain of that. It is—i t’s one of the uncertainties that—and there could be
revisions in either direction, but thus far, in recent SEPs, I’d say the revisions have mainly
been—have been in the downward direction. The idea that a low neutral rate may be more—
closer to the new normal, but you still do see some reversion. So we’re really quite uncertain
about that.
YLAN MUI. In your speech in Philadelphia, you called the slowdown in job growth last
month “concerning,” and you mentioned today that you want to verify that the underlying
momentum in the economy and in the labor market is still continuing. What do you need to see
to convince you that the labor market is still moving toward full employment, and for how long
would you need to see it?
CHAIR YELLEN. So I can’t give you a formula, I know you would probably like to
have a number that’s a cutoff for what we need to see in a particular report. There are a lot of
different indicators of the labor market—f or example, the labor market conditions index that
Binya referred to has 19 different indicators. Clearly, we will be looking at the next job report,
and if we were to see a healthy pace of job growth, you know, above that needed to kind of
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maintain the status quo in the labor market. So, you know, I should say, over time, we should
expect to see, as the economy comes closer to maximum employment, the likely pace of job
gains is probably going to slow down somewhat. And we have seen some slowing. But the
recent couple of months was very low and, arguably, not even at the pace we need to see to
maintain stable labor market conditions. So we want to see an adequate pace of job creation.
There might be revisions to previous months that would change our views, but there will be other
surveys of employment intentions and other indicators of the labor market that we’ll focus—
we’ll be focusing on. So, there is no formula for what it takes, but we will be looking at the
labor market. Did you want to follow up?
YLAN MUI. Sorry, I had a quick follow-up. Also in your speech in Philadelphia, you
did not say that you felt that it would be probably appropriate for a rate hike to occur in the
coming months. Do you—did you intentionally leave that out?
CHAIR YELLEN. You know, we do need to make sure that there is sufficient
momentum. I don’t know what the timetable is going to be to gain that assurance. Every
meeting is live; there is no meeting that is off the table, that—no meeting is out in terms of a
possible rate increase. But, we really need to look at the data, and I can’t prespecify a timetable.
So I’m, you know, not comfortable to say it’s in the next meeting or two, but it could be, it could
be, it’s not impossible. It’s not impossible that by July, for example, we would see data that led
us to believe that we’re on a perfectly fine course, and that data was an aberration, and other
concerns would have passed.
PETER BARNES. Ma’am, Peter Barnes, Fox Business. Hi. We are in an election
season, and in the past, the Fed has been sensitive to making policy changes in election years.
You have three more meetings before the November presidential election. Could you comment
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on whether or not the election will come into play, and any concern that if you change policy
ahead of the election and, based on your forecast today, you obviously could—a re you concerned
that that could then lead to charges that the Fed is trying to change policy to influence the
outcome of the election, because the Fed has been sensitive to that in the past? Thank you.
CHAIR YELLEN. So we are very focused on assessing the economic outlook and
making changes that are appropriate without taking politics into account. Look, if the data—
incoming data were, in the coming months, to justify the kind of gradual increases that we have
long discussed, that we see as appropriate in light of the outlook, I think markets should not be
surprised by such a decision if we make it. And it’s obviously consistent with the data that
we’ve seen, and the Committee will feel free to move in the coming months if we think it’s
appropriate.
JEANNA SMIALEK. Jeanna Smialek, Bloomberg. You mentioned in your remarks at
the beginning that we are getting a slightly different signal when you look at inflation versus
when you look at inflation expectations. Could you detail a little bit which you look at and sort
of weight more? Are you more concerned with the inflation expectations or focusing more on
the slight pickup in actual inflation?
CHAIR YELLEN. Well, we’re looking at both. You know, I would say, with respect to
the behavior of inflation, inflation is behaving roughly in the manner I would have expected; I
have really not seen significant surprises there. We’ve long said that an important reason that
inflation is as low as it’s been is because of past declines in energy prices and increases in the
value of the dollar, and as those factors began to dissipate, we would see inflation moving up.
Now, that’s exactly what we’re seeing, what we’re—that ’s in line with our thinking and with the
data. So, those things have stabilized, their influence is dissipating.
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And with respect to core inflation, which—now , that’s partly influenced also by the
dollar, but trying to pull out the dollar and import price influence—core inflation seems to be
behaving roughly as one would expect with well-anchored inflation expectations and in
improving labor markets. So I’m not seeing anything—inflation , even core inflation, is running
under 2 percent. I continue to think the evidence supports a projection that it will move up over
the next couple of years back toward our 2 percent objective. But, we’ve seen in the past, and
economic theory suggests, that inflation expectations are relevant to price and wage setting
decisions. So we do monitor indicators of inflation expectations carefully.
Now, it’s very hard to know exactly what inflation expectations are relevant to actual
price and wage decisions. And so, for example, we have seen the Michigan survey, a measure of
household inflation expectations, move down. It’s hard—that ’s a preliminary number, it’s hard
to know what to make of it. We’ve certainly taken note of it. But survey-based measures that—
where forecasters are queried—have really all been quite stable. And measures of inflation
compensation— I always try to be careful to call it “inflation compensation” rather than
“inflation expectations” because they’re not inflation expectations. Inflation expectations
influence those market measures, but there’s also an inflation risk premium. And there are
actually good reasons to think that the inflation risk premium could have declined significantly
and may be depressing those measures. So we watch them, we’ve taken note in the statement
that they’ve moved down, but actual inflation is behaving more or less as would be expected.
MARTIN CRUTSINGER. Marty Crutsinger with the Associated Press. When the April
minutes were released, they caught markets by surprise. In there, they showed—they seem ed to
show that there was an active discussion of a possible June rate increase, something that we
hadn’t gotten from the policy statement that was issued right after the meeting. Was that a
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conscious decision to hold back and tell us in—when the minutes came out about the June
discussion? And if so, could you tell us what surprises we could see in the June minutes?
CHAIR YELLEN. So the minutes are always—have to be an accurate discussion of
what happened at the meeting. So they’re not changed after the fact in order to correct possible
misconceptions. There was a good deal of discussion at that meeting of the possibility of
moving in June, and that appeared in the minutes.
I suppose in the April statement, we gave no obvious hint or kind of calendar-based
signal that June was a possibility. But I think if you look at the statement, we pointed to slower
growth but pointed out that the fundamentals—there was no obvious fundamental reason for
growth to have slowed. And we pointed to fundamentals underlying household spending
decisions that remained on solid ground, suggesting that maybe this was something transitory
that would disappear. We noted that labor market conditions continued to improve in line with
our expectations, and we did downgrade somewhat our expressions of concern about the global
risk environment. So I do think that there were hints in the April statement that the Committee
was changing its views of what it was seeing in a direction. We continue to say that we think, if
economic developments evolve in line with our expectations, the gradual and cautious further
increases we expect to be appropriate. And I suppose I was somewhat surprised with the market
interpretation of it. But the June meeting minutes—the minu tes of the April meeting were an
accurate summary of what had happened.
JEREMY TORDJMAN. Jeremy Tordjman with the AFP news agency. The Fed has
repeatedly voiced its concern over the slow pace of wage growth, and I was wondering, do you
think that increasing the federal minimum wage could be of any help? Could it boost the higher
wages and eventually drive up the inflation?
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CHAIR YELLEN. So I think that the minimum wage increases that have gone into
effect—estimates that I ’ve seen suggest it’s a relatively minor influence on the aggregate level of
wage inflation. I would take somewhat faster wage increases to be a sign that labor market slack
is diminishing and that the labor market is approaching conditions that are consistent with
maximum employment. So, I think, you know, I think we have seen some hints, perhaps
preliminary indications, that wage growth is picking up. And as much as anything, I think it’s a
sign of a generally healthy labor market, which is what our mandated objective is, to achieve
maximum employment. And so it would be a symptom of it.
GREG ROBB. Greg Robb from MarketWatch. There’s been a lot of discussion in last
couple months about the slow pace of demand in the global economy, and some economists
think that central banks should think about using helicopter money, maybe in Japan first or
Europe first. But then, former Fed Chairman Ben Bernanke weighed in saying that he thought it
would be a good thing for the Fed to put helicopter money in its toolkit in case there was a
downturn in the United States. So I’d like to get your comments on that.
CHAIR YELLEN. So, in normal times, I think it’s very important that there be a
separation between monetary and fiscal policy, and it’s a primary reason for independence of a
central bank. We have seen all too many examples of countries that end up with high or even
hyperinflation because those in charge of fiscal policy direct their central bank to help them
finance it by printing money, and maintaining price stability and low and stable inflation is very
much aided by having central bank independence.
Now, that said, in unusual times where the concern is with very weak growth or possibly
deflation—rather rare circumstances —f irst of all, fiscal policy can be a very important tool. And
it’s natural that if it can be employed that, just as monetary policy is doing a lot to try to
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stimulate growth, that fiscal policy should play a role. And normally, you would hope, in an
economy with those severe downside risks, monetary and fiscal policy would not be working at
cross purposes to get—but together.
Now, whether or not in such extreme circumstances, there might be a case for, let’s say,
coordination—close coordination, with the central bank playing a role in financing fiscal policy;
this is something that academics are debating, and it is something that one might legitimately
consider. I would see this as a very abnormal, extreme situation where one needs an all-out
attempt, and even then it’s a matter that academics are debating, but only in an unusual situation.
JUSTINE UNDERHILL. Justine Underhill, Yahoo Finance. So now that the Fed has
started the process of raising rates, various Fed officials have said, including Ben Bernanke, that
the Fed could go cash flow negative in this scenario as capital losses are taken on the portfolio of
bonds. Do you still see this happening, and when might this happen?
CHAIR YELLEN. So you’re talking about our income going negative?
JUSTINE UNDERHILL. Yes.
CHAIR YELLEN. Well, it is conceivable in a scenario when—where growth and
inflation really surprise us to the upside that we would have to raise short-term interest rates so
rapidly that the rates we would be paying on reserves would exceed what we’re earning on our
portfolio. Now even then, we have about $2 trillion of liabilities, namely currency on which we
pay no interest. So this does requires an extreme scenario with very rapid increases in short-term
interest rates. So it is conceivable but quite unlikely that it could happen.
But, you know, if it were to happen, we would have an economy that would be doing
very well. This is probably an economy that everybody would feel very pleased—was
performing well and better than expected, and where monetary policy— you know, our goal is
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price stability and maximum employment, and we would probably feel that we had done very
well in achieving that. So, we usually make money— we’ve been making a lot of money in
recent years, but the goal of monetary policy is not to maximize our income. And, you know, in
a very strong economy like that, the Treasury would be seeing a lot of inflows in the form of tax
revenues, too.
STEVE BECKNER. Madam Chair, Steve Beckner of Market News International. To
what extent do you feel constrained in raising interest rates by the low or even negative rates that
foreign central banks are pursuing, possibly out of concern for what it might mean for the dollar
exchange rate? And, if that is a constraint, to what extent are you—might you also be concerned
about the impact, long range, of low domestic rates on possibly distorting domestic markets?
CHAIR YELLEN. So the state of foreign economies, both their growth outlooks and the
stance of monetary policy, those are factors that influence the U.S. outlook and influence the
appropriate stance of monetary policy. So, of course, we do look at foreign rates, the
prospects—and the prospects for growth in those economies in considering the stance of policy.
Differentials between countries in likely policy paths do tend to spill over into exchange
rates—t hat is a standard part of how monetary policy works—and a stronger dolla r, those have a
both—a depressing effect. It creates channels through which domestic demand is depressed. At
the moment, net exports—well, for quite some time and probably going forward, they will be
somewhat of a drag on U.S. growth, so that’s a factor that we take into account. And increases
in the dollar that we’ve seen since mid-2014 have served to push inflation down as well; it can
also have impacts on commodity prices that are relevant.
So, it’s—it is certainly relevant to the stance of U .S. monetary policy and a factor, but
when one says “a constraint,” I really would not go so far as to say it is a constraint on monetary
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policy. When we have an outlook for continuing above-trend growth—that if we held rates
absolutely flat, we have reason to believe inflation would overshoot our target—w e would see a
case to gradually raise rates over time. At the moment, I think markets do expect, and this is
factored into market prices, a gradual path for rates to increase over time.
But, for example, if we were to see upside surprises to growth and to inflation and had to
raise short-term rates faster, thought we should, one of the channels by which that would work
would be the associated impact on the dollar. That is a standard channel through which the
monetary policy transmission mechanism works, and we would take it into account and would
not feel constrained, but that would be part of how it would work.
NANCY MARSHALL-GENZER. How much do you—oh, Nancy Marshall -Genzer
from Marketplace. How much are you watching oil prices and their impact on inflation, and how
that could affect the timing of future rate increases and how much you might increase rates?
CHAIR YELLEN. Well, oil prices have had many different effects on the economy, and
so we’ve been watching oil prices closely. As you said, falling oil prices pull down inflation.
You know, it takes falling oil prices to lower inflation on a sustained basis. Once they stabilize
at whatever level, their impact on inflation dissipates over time. So we’re beginning to see that
happening. Not only have they stabilized, they have moved up some, and their inflation is—their
impact on inflation is waning over time. But oil prices have also had a very substantial negative
effect on drilling and mining activity that’s led to weakness in investment spending and job loss
in manufacturing and, obviously, in the energy sector.
Now, you know, it has different effects in different countries and different sectors. For
American households, it’s been a boon. We’ve estimated that since mid-2014, the decline in
energy prices and oil prices has probably resulted in gains of about $1,400 per U.S. household,
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and that’s had an offsetting positive impact on spending. But in many countries around the
world that are important commodity exporters, the decline we’ve seen in oil prices has had a
depressing effect on their growth, their trade with us and other trade partners, and caused
problems that have had spillovers to the global economy as well. So it’s a complicated picture.
NANCY MARSHALL-GENZER. Thank you.