Janet Yellen: Semiannual Monetary Policy Report to the Congress
Testimony by Ms Janet L Yellen, Chair of the Board of Governors of the Federal Reserve
System, before the Committee on Banking, Housing, and Urban Affairs, US Senate, Washington
DC, 14 February 2017.
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Chairman Crapo, Ranking Member Brown, and other members of the Committee, I am pleased
to present the Federal Reserve's semiannual Monetary Policy Report to the Congress. In my
remarks today I will briefly discuss the current economic situation and outlook before turning to
monetary policy.
Current economic situation and outlook
Since my appearance before this Committee last June, the economy has continued to make
progress toward our dual-mandate objectives of maximum employment and price stability. In the
labor market, job gains averaged 190,000 per month over the second half of 2016, and the
number of jobs rose an additional 227,000 in January. Those gains bring the total increase in
employment since its trough in early 2010 to nearly 16 million. In addition, the unemployment
rate, which stood at 4.8 percent in January, is more than 5 percentage points lower than where it
stood at its peak in 2010 and is now in line with the median of the Federal Open Market
Committee (FOMC) participants' estimates of its longer-run normal level. A broader measure of
labor underutilization, which includes those marginally attached to the labor force and people who
are working part time but would like a full-time job, has also continued to improve over the past
year. In addition, the pace of wage growth has picked up relative to its pace of a few years ago, a
further indication that the job market is tightening. Importantly, improvements in the labor market
in recent years have been widespread, with large declines in the unemployment rates for all
major demographic groups, including African Americans and Hispanics. Even so, it is
discouraging that jobless rates for those minorities remain significantly higher than the rate for
the nation overall.
Ongoing gains in the labor market have been accompanied by a further moderate expansion in
economic activity. U.S. real gross domestic product is estimated to have risen 1.9 percent last
year, the same as in 2015. Consumer spending has continued to rise at a healthy pace,
supported by steady income gains, increases in the value of households' financial assets and
homes, favorable levels of consumer sentiment, and low interest rates. Last year's sales of
automobiles and light trucks were the highest annual total on record. In contrast, business
investment was relatively soft for much of last year, though it posted some larger gains toward
the end of the year in part reflecting an apparent end to the sharp declines in spending on drilling
and mining structures; moreover, business sentiment has noticeably improved in the past few
months. In addition, weak foreign growth and the appreciation of the dollar over the past two
years have restrained manufacturing output. Meanwhile, housing construction has continued to
trend up at only a modest pace in recent quarters. And, while the lean stock of homes for sale
and ongoing labor market gains should provide some support to housing construction going
forward, the recent increases in mortgage rates may impart some restraint.
Inflation moved up over the past year, mainly because of the diminishing effects of the earlier
declines in energy prices and import prices. Total consumer prices as measured by the personal
consumption expenditures (PCE) index rose 1.6 percent in the 12 months ending in December,
still below the FOMC's 2 percent objective but up 1 percentage point from its pace in 2015. Core
PCE inflation, which excludes the volatile energy and food prices, moved up to about 1-3/4
percent.
My colleagues on the FOMC and I expect the economy to continue to expand at a moderate
pace, with the job market strengthening somewhat further and inflation gradually rising to 2
percent. This judgment reflects our view that U.S. monetary policy remains accommodative, and
that the pace of global economic activity should pick up over time, supported by accommodative
monetary policies abroad. Of course, our inflation outlook also depends importantly on our
assessment that longer-run inflation expectations will remain reasonably well anchored. It is
reassuring that while market-based measures of inflation compensation remain low, they have
risen from the very low levels they reached during the latter part of 2015 and first half of 2016.
Meanwhile, most survey measures of longer-term inflation expectations have changed little, on
balance, in recent months.
As always, considerable uncertainty attends the economic outlook. Among the sources of
uncertainty are possible changes in U.S. fiscal and other policies, the future path of productivity
growth, and developments abroad.
Monetary policy
Turning to monetary policy, the FOMC is committed to promoting maximum employment and
price stability, as mandated by the Congress. Against the backdrop of headwinds weighing on
the economy over the past year, including financial market stresses that emanated from
developments abroad, the Committee maintained an unchanged target range for the federal
funds rate for most of the year in order to support improvement in the labor market and an
increase in inflation toward 2 percent. At its December meeting, the Committee raised the target
range for the federal funds rate by 1/4 percentage point, to 1/2 to 3/4 percent. In doing so, the
Committee recognized the considerable progress the economy had made toward the FOMC's
dual objectives. The Committee judged that even after this increase in the federal funds rate
target, monetary policy remains accommodative, thereby supporting some further strengthening
in labor market conditions and a return to 2 percent inflation.
At its meeting that concluded early this month, the Committee left the target range for the federal
funds rate unchanged but reiterated that it expects the evolution of the economy to warrant
further gradual increases in the federal funds rate to achieve and maintain its employment and
inflation objectives. As I noted on previous occasions, waiting too long to remove accommodation
would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk
disrupting financial markets and pushing the economy into recession. Incoming data suggest that
labor market conditions continue to strengthen and inflation is moving up to 2 percent, consistent
with the Committee's expectations. At our upcoming meetings, the Committee will evaluate
whether employment and inflation are continuing to evolve in line with these expectations, in
which case a further adjustment of the federal funds rate would likely be appropriate.
The Committee's view that gradual increases in the federal funds rate will likely be appropriate
reflects the expectation that the neutral federal funds rate-that is, the interest rate that is neither
expansionary nor contractionary and that keeps the economy operating on an even keel-will rise
somewhat over time. Current estimates of the neutral rate are well below pre-crisis levels-a
phenomenon that may reflect slow productivity growth, subdued economic growth abroad, strong
demand for safe longer-term assets, and other factors. The Committee anticipates that the
depressing effect of these factors will diminish somewhat over time, raising the neutral funds
rate, albeit to levels that are still low by historical standards.
That said, the economic outlook is uncertain, and monetary policy is not on a preset course.
FOMC 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 informed by incoming
data. Also, changes in fiscal policy or other economic policies could potentially affect the
economic outlook. Of course, it is too early to know what policy changes will be put in place or
how their economic effects will unfold. While it is not my intention to opine on specific tax or
spending proposals, I would point to the importance of improving the pace of longer-run
economic growth and raising American living standards with policies aimed at improving
productivity. I would also hope that fiscal policy changes will be consistent with putting U.S. fiscal
accounts on a sustainable trajectory. In any event, it is important to remember that fiscal policy is
only one of the many factors that can influence the economic outlook and the appropriate course
of monetary policy. Overall, the FOMC's monetary policy decisions will be directed to the
attainment of its congressionally mandated objectives of maximum employment and price
stability.
Finally, the Committee has continued its policy of reinvesting proceeds from maturing Treasury
securities and principal payments from agency debt and mortgage-backed securities. This
policy, by keeping the Committee's holdings of longer-term securities at sizable levels, has
helped maintain accommodative financial conditions.
Thank you. I would be pleased to take your questions.