Federal Reserve press conference, 2017-12-13 — Chair Janet Yellen

Question (Steve Liesman, CNBC): Steve Liesman, CNBC. Every day, it seems, we look at the stock market, it goes up triple digits in the Dow Jones. To what extent are there concerns at the Federal Reserve about current market valuations, and do they now or should they, do you think, if we keep going on this trajectory—should that animate monetary policy? Finally, maybe as a sign of what’s been going on with valuations, this cryptocurrency called bitcoin keeps going up every day. What is the policy of the central bank of the United States of the introduction, use, and incredible rise in popularity of bitcoin?
Answer: Okay. So let me start, Steve, with the stock market generally. I mean, of course the stock market has gone up a great deal this year, and we have in recent months characterized the general level of asset valuations as “elevated.” What that reflects is simply the assessment that, looking at price/earnings ratios and comparable metrics for other assets other than equities, we see ratios that are at the high end of historical ranges—and so that’s worth pointing out. But economists are not great at knowing what appropriate valuations are. We don’t have a terrific record, and the fact that those valuations are high doesn’t mean that they are necessarily overvalued. We are in a—I’ve mentioned this in my opening statement, and we’ve talked about this repeatedly—likely a low interest rate environment, lower than we’ve had in past decades. And if that turns out to be the case, that’s a factor that supports higher valuations. We’re enjoying solid economic growth with low inflation, and the risks in the global economy look more balanced than they have in many years. So I think what we need to and are trying to think through is, if there were an adjustment in asset valuations or the stock market, what impact would that have on the economy, and would it provoke financial stability concerns? And I think when we look at other indicators of financial stability risks, there’s nothing flashing red there or possibly even orange. We have a much more resilient, stronger banking system, and we’re not seeing some worrisome buildup in leverage or credit growth at successive levels.1 So, you know, this is something that the FOMC pays attention to, but if you ask me, is this a significant factor shaping monetary policy now, well, it’s on the list of risks, it’s not a major—it’s not a major factor. And then you asked about bitcoin, and there I would simply say that bitcoin at this time plays a very small role in the payment system. It is not a stable source of—store of value, and it 1 Chair Yellen intended to say that credit growth is not at excessive levels. doesn’t constitute legal tender. It is a highly speculative asset, and the Fed doesn’t really play any role—any regulatory role with respect to bitcoin other than assuring that banking organizations that we do supervise are attentive, that they’re appropriately managing any interactions they have with participants in that market and appropriately monitoring anti-money- laundering Bank Secrecy Act, you know, responsibilities that they have.

Question (Binyamin Appelbaum, New York Times): Binya Appelbaum, the New York Times. I’m struggling to reconcile the pieces of the economic outlook that you’ve described today. You’ve said that we are basically at full employment. You’ve said that you’re expecting a tax package to deliver a significant stimulus, and that it will be on the demand side. You expect growth to be faster. You expect unemployment to be lower, and yet somehow inflation is going to remain at 2 percent for the foreseeable future. Could you describe what has changed about your economic assessment so that everything has changed except inflation?
Answer: Well, you know, the projections that we’re showing you today, many factors went into that, fiscal policy being one of a number of different factors. And, you know, you’re looking at 16 participants who have made adjustments to their economic outlook for a whole variety of reasons, including, in some cases, rethinking some of the fundamentals that went into their original forecast. So there have been modifications in different directions by different participants. So I would caution you about the dangers of looking at the median and acting like that is one individual who has made a change to their forecast. That’s a leap that isn’t quite justified. But, look, generally, you see modestly faster growth over the next couple of years, which is consistent and, I said, I think for most participants, reflects partly an impact from taxes stimulating consumer and investment spending. But it’s not a gigantic increase in growth that since—relative to September. You do see a lower path for unemployment, but remember that inflation has also been running low on a persistent basis, and the Committee does have a concern about inflation and wants to see it moving up. And, on balance, you see only modest changes, slight revisions to the path for the fed funds rate. You might think, well, shouldn’t I see more? Well, okay, growth is a little stronger, the unemployment rate runs a little bit lower—that would perhaps push in the direction of slightly tighter monetary policy. But, again, counterbalancing that is that inflation has run lower than we expect, and, you know, it could take a longer period of a very strong labor market in order to achieve the inflation objective.

Question (John Heltman, American Banker): Are there any important differences between your colleagues and your vision on regulatory reform?
Answer: So I have not seen anything emerge at this point that I would describe as a significant difference.

Question (Greg Robb, MarketWatch): Thank you. Chair Yellen, what do you think will be the drivers of inflation over the next couple of years, and how long will the Committee go with low unemployment, low inflation before you rethink monetary policy—this gradual rate hikes? Thank you.
Answer: So, you know, I think for a number of years—so we’ve had an undershoot of inflation for a number of years. We absolutely recognize that. I think until this year, undershoot was understandable. First we had a good deal of slack in the labor market. Then we had plummeting oil prices. And, beginning in mid-2014, there was a marked depreciation in the dollar.2 And those three factors held down inflation for a number of years. Now, in 2016, core inflation came very close to 2 percent. We seemed to be on a path of inflation moving up, and this year, beginning in March, there seemed to be a sequence of negative surprises. Some reflect one-time factors that were easily identifiable, like a marked decline in quality-adjusted cell phone plans. There may be other factors that are not so easy to name, but we would judge—you know, inflation doesn’t always follow exactly. There are errors and many factors that affect it beyond the key influences of labor market slack: exchange rates and import prices and oil prices. Those are three big ones. But there are other factors that affect inflation too, and our judgment at this point is that transitory factors that are unrelated to the broader macroeconomic outlook are holding inflation down. But I have tried to be straightforward in saying that this could end up being something that is more ingrained and turns out to be permanent. It’s very important to watch it and, if necessary, rethink what’s determining inflation. A possibility is that the longer-run sustainable 2 Chair Yellen intended to say that, beginning in mid-2014, there was a marked appreciation of the dollar. rate of unemployment is—it’s been coming down. Estimates in the Committee have come down. It’s conceivable that they need to come down even more. It’s not my judgment that inflation expectations have slipped, but that also remains a possibility that needs to be monitored. So there are—you know, there could be a rethink of inflation. I think it’s important to watch inflation outcomes carefully and, if we don’t see inflation moving in the manner that the Committee anticipates, to alter policy so that we do achieve our 2 percent objective. But, at the moment, most of my colleagues and I believe we are on track to achieve it.

Question (Michael McKee, Bloomberg): Michael McKee from Bloomberg Television and Radio. I suppose I should be asking you a valedictory question since it’s the last question, but I don’t think you can top what you’ve already said, so let me just do a couple of cleanup questions here. President Trump, while you were speaking, just said that he thinks his tax plan will produce 4 percent growth. Do you think that is possible? Second, do you think that there is any Fed blame or complicity in the flattening of the yield curve, and are you worried that there might be some sort of policy mistake built into that that could slow the economy? And the last question, which is a bit of a valedictory, is one that everybody on Wall Street has wanted to ask you for four years. Since this is your last press conference, can you tell us which dot is yours? [Laughter]
Answer: Well, I can answer the last question first. The answer is “no.” I’ve never been willing to reveal which dot is mine, and I’m not going to change that now. So, you know, my assessment, and I think most participants’ assessments, as I said, of the impact of the tax policy on growth has been informed by work by the Joint Committee on Taxation and other analysts. And everyone recognizes that there’s uncertainty about what the economic effects would be, and I wouldn’t want to rule anything out. It is challenging, however, to achieve growth of the levels that you mentioned. Look, if the package were to stimulate growth of that magnitude, let me just say again, the Federal Reserve would welcome that. If it’s a supply-side—favorable supply-side developments that would be compatible with the attainment of our employment and inflation objectives, that’s something that would be very, very welcome. But it would be challenging to achieve numbers like that. Let’s see, I think you also then asked me about the yield curve, and—I mean, there is much discussion about yield curve inversions and whether or not a flattening yield curve could signal a recession. Is that the brunt of your question? So this is something that we discussed and have looked at. The yield curve has flattened some as we have raised short rates. It mainly—the flattening yield curve mainly reflects higher short-term rates. The yield curve is not currently inverted, and I would say that the current slope is well within its historical range. Now, there is a strong correlation historically between yield curve inversions and recessions, but let me emphasize that correlation is not causation, and I think that there are good reasons to think that the relationship between the slope of the yield curve and the business cycle may have changed. And one reason for that is that long-term interest rates generally embody two factors. One is the expected average value of short rates over, say, 10 years, and the second piece of it is a so-called term premium that often reflects things like inflation—inflation risk. Typically, the term premium historically has been positive. So when the yield curve has inverted historically, it meant that short-term rates were well above average expected short rates over the longer run. So with the positive term premium, that’s what it means. And typically that means that monetary policy is restrictive, sometimes quite restrictive, and some of those recessions were situations in which the Fed was consciously tightening monetary policy because inflation was high and trying to slow the economy. Well, right now the term premium is estimated to be quite low, close to zero, and that means that, structurally—and this can be true going forward—that the yield curve is likely to be flatter than it’s been in the past. And so it could more easily invert. If the Fed were to even move to a slightly restrictive policy stance, you could see an inversion with a zero term premium. So I think the fact the term premium is so low and the yield curve is generally flatter is an important factor to consider. Now, I think it’s also important to realize that market participants are not expressing heightened concern about the decline of the term premium, and, when asked directly about the odds of recession, they see it as low, and I would concur with that judgment. Thanks very much.