Janet L Yellen: The current economic outlook and monetary policy
Testimony 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,
29 November 2017.
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Chairman Tiberi, Ranking Member Heinrich, and members of the Committee, I appreciate the
opportunity to testify before you today. I will discuss the current economic outlook and monetary
policy.
The economic outlook
The U.S. economy has strengthened further this year. Smoothing through the volatility caused by
the recent hurricanes, job gains averaged about 170,000 per month from January through
October, a somewhat slower pace than last year but still above the range that we estimate will
be consistent with absorbing new entrants to the labor force in coming years. With the job gains
this year, 17 million more Americans are employed now than eight years ago. Meanwhile, the
unemployment rate, which stood at 4.1 percent in October, has fallen 0.6 percentage point since
the turn of the year and is nearly 6 percentage points below its peak in 2010. In addition, the labor
force participation rate has changed little, on net, in recent years, which is another indication of
improving conditions in the labor market, given the downward pressure on the participation rate
associated with an aging population. However, despite these labor market gains, wage growth
has remained relatively modest. Unemployment rates for African Americans and Hispanics,
which tend to be more sensitive to overall economic conditions than those for whites, have
moved down, on net, over the past year and are now near levels last seen before the recession.
That said, it remains the case that unemployment rates for these minority groups are noticeably
higher than for the nation overall.
Meanwhile, economic growth appears to have stepped up from its subdued pace early in the
year. After having risen at an annual rate of just 1-1/4 percent in the first quarter, U.S.
inflationadjusted gross domestic product (GDP) is currently estimated to have increased at a 3 percent
pace in both the second and third quarters despite the disruptions to economic activity in the third
quarter caused by the recent hurricanes. Moreover, the economic expansion is increasingly
broad based across sectors as well as across much of the global economy. I expect that, with
gradual adjustments in the stance of monetary policy, the economy will continue to expand and
the job market will strengthen somewhat further, supporting faster growth in wages and incomes.
Although asset valuations are high by historical standards, overall vulnerabilities in the financial
sector appear moderate, as the banking system is well capitalized and broad measures of
leverage and credit growth remain contained.
Even with a step-up in growth of economic activity and a stronger labor market, inflation has
continued to run below the 2 percent rate that the Federal Open Market Committee (FOMC)
judges most consistent with our congressional mandate to foster both maximum employment
and price stability. Increases in gasoline prices in the aftermath of the hurricanes temporarily
pushed up measures of overall consumer price inflation, but inflation for items other than food
and energy has remained surprisingly subdued. The total price index for personal consumption
expenditures increased 1.6 percent over the 12 months ending in September, while the core
price index, which excludes energy and food prices, rose just 1.3 percent over the same period,
about 1/2 percentage point slower than a year earlier. In my view, the recent lower readings on
inflation likely reflect transitory factors. As these transitory factors fade, I anticipate that inflation
will stabilize around 2 percent over the medium term. However, it is also possible that this year's
low inflation could reflect something more persistent. Indeed, inflation has been below the
Committee's 2 percent objective for most of the past five years. Against this backdrop, the
FOMC has indicated that it intends to carefully monitor actual and expected progress toward our
inflation goal.
Although the economy and the jobs market are generally quite strong, real GDP growth has been
disappointingly slow during this expansion relative to earlier decades. One key reason for this
slowdown has been the retirement of the older members of the baby-boom generation and
hence the slower growth of the labor force. Another key reason has been the unusually sluggish
pace of productivity growth in recent years. To generate a sustained boost in economic growth
without causing inflation that is too high, we will need to address these underlying causes. In this
regard, the Congress might consider policies that encourage business investment and capital
formation, improve the nation's infrastructure, raise the quality of our educational system, and
support innovation and the adoption of new technologies.
Monetary policy
I will turn now to the implications of recent economic developments and the outlook for monetary
policy. With ongoing strengthening in labor market conditions and an outlook for inflation to return
to 2 percent over the next couple of years, the FOMC has continued to gradually reduce policy
accommodation. The Committee raised the target range for the federal funds rate by 1/4
percentage point at both our March and June meetings, with the range now standing at 1 to 1-1/4
percent. And, in October, the Committee began its balance sheet normalization program, which
will gradually and predictably reduce our securities holdings. The Committee set limits on the
pace of balance sheet reduction; those limits should guard against outsized moves in interest
rates and other potential market strains. Indeed, there has been little, if any, market effect
associated with the balance sheet runoff to date. We do not foresee a need to alter the balance
sheet program, but, as we said in June, we would be prepared to resume reinvestments if a
material deterioration in the economic outlook were to warrant a sizable reduction in the federal
funds rate.
Changes to the target range for the federal funds rate will continue to be the Committee's primary
means of adjusting the stance of monetary policy. At our meeting earlier this month, we decided
to maintain the existing target range for the federal funds rate. We continue to expect that gradual
increases in the federal funds rate will be appropriate to sustain a healthy labor market and
stabilize inflation around the FOMC's 2 percent objective. That expectation is based on the view
that the current level of the federal funds rate remains somewhat below its neutral level-that is,
the rate that is neither expansionary nor contractionary and keeps the economy operating on an
even keel. The neutral rate currently appears to be quite low by historical standards, implying that
the federal funds rate would not have to rise much further to get to a neutral policy stance. If the
neutral level rises somewhat over time, as most FOMC participants expect, additional gradual
rate hikes would likely be appropriate over the next few years to sustain the economic expansion.
Of course, policy is not on a preset course; the appropriate path for the federal funds rate will
depend on the economic outlook as informed by incoming data. The Committee has noted that it
will carefully monitor actual and expected inflation developments relative to its symmetric inflation
goal. More generally, in determining the timing and size of future interest rate adjustments, the
Committee will take into account a wide range of information, including measures of labor market
conditions, indicators of inflation pressures and inflation expectations, and readings on financial
and international developments.
Thank you. I would be pleased to answer your questions.