Janet L 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 Financial Services, US House of Representatives,
Washington DC, 12 July 2017.
* * *
Chairman Hensarling, Ranking Member Waters, 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 in February, the labor market has continued to
strengthen. Job gains have averaged 180,000 per month so far this year, down only slightly from
the average in 2016 and still well above the pace we estimate would be sufficient, on average, to
provide jobs for new entrants to the labor force. Indeed, the unemployment rate has fallen about
1/4 percentage point since the start of the year, and, at 4.4 percent in June, is 5 1/2 percentage
points below its peak in 2010 and modestly below the median of Federal Open Market
Committee (FOMC) participants' assessments of its longer-run normal level. The labor force
participation rate has changed little, on net, this year-another indication of improving conditions
in the jobs market, given the demographically driven downward trend in this series. A broader
measure of labor market slack that includes workers marginally attached to the labor force and
those working part time who would prefer full-time work has also fallen this year and is now
nearly as low as it was just before the recession. It is also encouraging that jobless rates have
continued to decline for most major demographic groups, including for African Americans and
Hispanics. However, as before the recession, unemployment rates for these minority groups
remain higher than for the nation overall.
Meanwhile, the economy appears to have grown at a moderate pace, on average, so far this
year. Although inflation-adjusted gross domestic product is currently estimated to have increased
at an annual rate of only 1-1/2 percent in the first quarter, more-recent indicators suggest that
growth rebounded in the second quarter. In particular, growth in household spending, which was
weak earlier in the year, has picked up in recent months and continues to be supported by job
gains, rising household wealth, and favorable consumer sentiment. In addition, business fixed
investment has turned up this year after having been soft last year. And a strengthening in
economic growth abroad has provided important support for U.S. manufacturing production and
exports. The housing market has continued to recover gradually, aided by the ongoing
improvement in the labor market and mortgage rates that, although up somewhat from a year
ago, remain at relatively low levels.
With regard to inflation, overall consumer prices, as measured by the price index for personal
consumption expenditures, increased 1.4 percent over the 12 months ending in May, up from
about 1 percent a year ago but a little lower than earlier this year. Core inflation, which excludes
energy and food prices, has also edged down in recent months and was 1.4 percent in May, a
couple of tenths below the year-earlier reading. It appears that the recent lower readings on
inflation are partly the result of a few unusual reductions in certain categories of prices; these
reductions will hold 12-month inflation down until they drop out of the calculation. Nevertheless,
with inflation continuing to run below the Committee's 2 percent longer-run objective, the FOMC
indicated in its June statement that it intends to carefully monitor actual and expected progress
toward our symmetric inflation goal.
Looking ahead, my colleagues on the FOMC and I expect that, with further gradual adjustments
in the stance of monetary policy, the economy will continue to expand at a moderate pace over
the next couple of years, with the job market strengthening somewhat further and inflation rising
to 2 percent. This judgment reflects our view that monetary policy remains accommodative.
Ongoing job gains should continue to support the growth of incomes and, therefore, consumer
spending; global economic growth should support further gains in U.S. exports; and favorable
financial conditions, coupled with the prospect of continued gains in domestic and foreign
spending and the ongoing recovery in drilling activity, should continue to support business
investment. These developments should increase resource utilization somewhat further, thereby
fostering a stronger pace of wage and price increases.
Of course, considerable uncertainty always attends the economic outlook. There is, for example,
uncertainty about when-and how much-inflation will respond to tightening resource utilization.
Possible changes in fiscal and other government policies here in the United States represent
another source of uncertainty. In addition, although the prospects for the global economy appear
to have improved somewhat this year, a number of our trading partners continue to confront
economic challenges. At present, I see roughly equal odds that the U.S. economy's performance
will be somewhat stronger or somewhat less strong than we currently project.
Monetary policy
I will now turn to monetary policy. The FOMC seeks to foster maximum employment and price
stability, as required by law. Over the first half of 2017, the Committee continued to gradually
reduce the amount of monetary policy accommodation. Specifically, the FOMC raised the target
range for the federal funds rate by 1/4 percentage point at both its March and June meetings,
bringing the target to a range of 1 to 1-1/4 percent. In doing so, the Committee recognized the
considerable progress the economy had made-and is expected to continue to make-toward
our mandated objectives.
The Committee continues to expect that the evolution of the economy will warrant gradual
increases in the federal funds rate over time to achieve and maintain maximum employment and
stable prices. That expectation is based on our view that the federal funds rate remains
somewhat below its neutral level-that is, the level of the federal funds rate that is neither
expansionary nor contractionary and keeps the economy operating on an even keel. Because the
neutral rate is currently quite low by historical standards, the federal funds rate would not have to
rise all that much further to get to a neutral policy stance. But because we also anticipate that the
factors that are currently holding down the neutral rate will diminish somewhat over time,
additional gradual rate hikes are likely to be appropriate over the next few years to sustain the
economic expansion and return inflation to our 2 percent goal. Even so, the Committee continues
to anticipate that the longer-run neutral level of the federal funds rate is likely to remain below
levels that prevailed in previous decades.
As I noted earlier, the economic outlook is always subject to considerable uncertainty, 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 their economic outlooks
and to their judgments of the associated risks as informed by incoming data. In this regard, as
we noted in the FOMC statement last month, inflation continues to run below our 2 percent
objective and has declined recently; the Committee will be monitoring inflation developments
closely in the months ahead.
In evaluating the stance of monetary policy, the FOMC routinely consults monetary policy rules
that connect prescriptions for the policy rate with variables associated with our mandated
objectives. However, such prescriptions cannot be applied in a mechanical way; their use
requires careful judgments about the choice and measurement of the inputs into these rules, as
well as the implications of the many considerations these rules do not take into account. I would
like to note the discussion of simple monetary policy rules and their role in the Federal Reserve's
policy process that appears in our current Monetary Policy Report.
Balance sheet normalization
Let me now turn to our balance sheet. Last month the FOMC augmented its Policy Normalization
Principles and Plans by providing additional details on the process that we will follow in
normalizing the size of our balance sheet. The Committee intends to gradually reduce the
Federal Reserve's securities holdings by decreasing its reinvestment of the principal payments it
receives from the securities held in the System Open Market Account. Specifically, such
payments will be reinvested only to the extent that they exceed gradually rising caps. Initially,
these caps will be set at relatively low levels to limit the volume of securities that private investors
will have to absorb. The Committee currently expects that, provided the economy evolves
broadly as anticipated, it will likely begin to implement the program this year.
Once we start to reduce our reinvestments, our securities holdings will gradually decline, as will
the supply of reserve balances in the banking system. The longer-run normal level of reserve
balances will depend on a number of as-yet-unknown factors, including the banking system's
future demand for reserves and the Committee's future decisions about how to implement
monetary policy most efficiently and effectively. The Committee currently anticipates reducing the
quantity of reserve balances to a level that is appreciably below recent levels but larger than
before the financial crisis.
Finally, the Committee affirmed in June that changing the target range for the federal funds rate is
our primary means of adjusting the stance of monetary policy. In other words, we do not intend to
use the balance sheet as an active tool for monetary policy in normal times. However, the
Committee 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. More generally,
the Committee would be prepared to use its full range of tools, including altering the size and
composition of its balance sheet, if future economic conditions were to warrant a more
accommodative monetary policy than can be achieved solely by reducing the federal funds rate.
Thank you. I would be pleased to take your questions.