Federal Reserve press conference, 2016-12-14 — Chair Janet Yellen

Question (Jim Tankersley, Washington Post): Jim Tankersley, Washington Post. I’m curious, you and your predecessor had both at times called for more fiscal stimulus to help with the outlook, the growth outlook. And I’m wondering, how much do you judge the economy has capacity for fiscal stimulus right now? It’s a version of Steve’s question, but I think we’re trying to get at, how much can happen before we run that risk of overheating?
Answer: Well, I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now. So, with a 4.6 percent unemployment and a solid labor market, there may be some additional slack in labor markets, but I would judge that the degree of slack has diminished. So I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment. But, nevertheless, let me be careful that I am not trying to provide advice to the new Administration or to Congress as to what is the appropriate stance of policy. There are many considerations that Congress needs to take account of and many bases for justifying changing fiscal policy. I’ve continued to highlight the importance of spurring productivity growth, that I think that would be something that’s beneficial for the economy. Of course, it’s also important for Congress to take account of the fact that, as our population ages, that the debt-to-GDP ratio is projected to rise, and that needs to continue to be taken into account. And so there are many factors that I think should enter into such decisions.

Question (Christopher Condon, Bloomberg): Thank you. Chris Condon, Bloomberg News. Chair Yellen, you’ve just spoken about some of the risks—the inflationary risks of running in this expansionary fiscal policy. But in October you were wondering whether it might be possible to repair some of the damage done to the labor force during the recession by running what you termed a “high-pressure economy.” So I’m wondering, why couldn’t fiscal policy serve the same end in seeking to run a high-pressure economy, hoping to draw more Americans off the sidelines and into the workforce? Is there something necessarily riskier about approaching it from the fiscal side, or perhaps have you become less enthusiastic about the idea of running a high-pressure economy? Thank you.
Answer: So I want to be clear that what I said in that speech in Boston is that an important research question is whether or not, in an economy with a very strong labor market, there might be changes that took place that permanently raised the labor force participation, training, and other things of the labor—of the labor force that would be positives for the productive potential of our economy on a long-lasting basis. I never said that I favor running a high-pressure economy. And, you know, as you can see in the SEP projections of the participants—and this has long been true not just in this forecast, but in earlier ones as well—you see a modest undershooting. The under—unemployment rate is projected to modestly undershoot, for several years, levels that are deemed to be normal in the longer run. That’s an appropriate policy purely on the grounds that inflation is running below our objective. And while we don’t want to overshoot our 2 percent objective, we also don’t want a persistent undershoot of our 2 percent objective, and that does involve a labor market that may succeed in attracting more people off the sidelines into the labor market. It’s something we will see as we examine experience over the next couple of years. We may adjust our views on this. But I do want to make clear that I have not recommended running a “hot” economy as some sort of experiment.

Question (Binyamin Appelbaum, New York Times): Binya Appelbaum with the New York Times. The President-elect has said that overhauling financial regulation is a high priority for him. I’m curious whether the Fed has been asked to provide any advice on how that might be done, and what advice you would provide to the President-elect about how our financial regulatory system should be improved?
Answer: So we have been—our staff have been in touch with the Trump transition team. And we, of course, share the objective that the whole government has to work constructively to ensure a smooth transition. I’ve not been in touch beyond that, and it’s not something that I would expect. But—I’m sorry, so what would I— —the financial rate. Yes. So, okay, on financial regulation, I feel that we lived through a devastating financial crisis that took a huge toll on our economy. And most members of Congress and the public came away from that experience feeling that it was important to take a set of steps that would result in a safer and stronger financial system. And I feel that we have done that. That has been our mission since the financial crisis for the last six or seven years. That’s what Dodd-Frank was designed to do. I think it’s very important that we have reduced the odds that a systemically important firm could fail by requiring higher capital, higher liquidity, by performing stress tests that provide us another way of ensuring that the firms we count on to supply credit to households and businesses would be able to go on doing that even in the face of a severely adverse shock. The firms—the largest firms have a great deal more capital than they did before the crisis. Those are important changes. We have placed the toughest regulations on those firms that are systemically important. I would advise that—and we have been trying to do this—that it’s important to look for ways to relieve regulatory burden on community banks and smaller institutions, to tailor regulation so that it’s appropriate for the systemic risk profile of the particular institutions. I think there was broad agreement also that we should end “too big to fail,” and that means not only reducing the odds of the failure of a systemically important institution, but also making sure that, should such a firm fail, that it could be resolved in an orderly way. And the living wills process has been about that, and I think we’ve made considerable progress in making sure that the largest and most systemic firms conduct their businesses in a day-to-day way with some thought about—with important thinking in place about whether or not the way they are conducting their business would aid resolution in the event that they encountered a severe negative shock. So this is progress, I would say, it’s very important not to roll back. There may be some changes that could be made, and we’ve suggested a few, like eliminating the burden of compliance with the Volcker rule, or incentive compensation, regulations for smaller banks, or modestly raising the threshold for banks that are subject to enhanced prudential supervision. But I would urge that it’s important to keep this in place.

Question (Martin Crutsinger, Associated Press): Marty Crutsinger with the Associated Press. The election of Donald Trump seemed to have sparked a major reaction in financial markets: stock prices at record highs, the dollar has strengthened, long-term interest rates are higher. The—did any of that get discussed in the meeting and did it—do you feel that it will have any effect, either negative or positive, on things? And also, did you have any broader discussion about Trump’s economic plan and what it might do and how the Fed might have to react?
Answer: So we did discuss these topics in our meeting today. I would simply summarize by saying that all the FOMC participants recognize that there is considerable uncertainty about how economic policies may change and what effect they will have on the economy. And in so far as that will affect monetary policy, of course we will have to factor those policies along with many other things, including the global environment and oil prices and other matters. We will have to factor that into our outlook and figure out what is an appropriate response. But we’re operating under a cloud of uncertainty at the moment, and we have time to wait to see what changes occur and to factor those into our decisionmaking as we gain greater clarity. You mentioned the market moves. So I see the market moves as implicit forecasts about what impact these policies are likely to have on the economy. The changes—the financial market changes that you described, particularly the increase in stock prices, the increase in longer-term rates, and the strengthening of the dollar, suggest that many market participants anticipate expansionary fiscal policies that would raise interest rates somewhat in the United States relative to abroad and would cause a strengthening in the dollar. But market participants were uncertain too, and I would expect changes in our understanding of what is going to happen to also affect market prices in financial markets as we move forward.

Question (Peter Barnes, Fox Business): You have said—mentioned—can I just follow up? On equity prices, you have talked about whether or not the valuations are still—are within historical ranges and norms. Did—is Dow 20,000 kind of within historical norms? Are you comfortable with that?
Answer: Well, I think rates of return in the stock market relative to— remember that the level of interest rates is low, and, taking that into account, I believe it’s fair to say that they remain within normal ranges.

Question (Patrick Gillespie, CNN): Chair Yellen, Patrick Gillespie with CNN. There’s been a lot of discussion about manufacturing jobs and trade. I’m wondering, what do you think are two or three concrete steps that could be taken to increase manufacturing employment in the United States? And, separately, I’ve asked you about the importance of job training programs, something that you’ve emphasized. Specifically, what do you think about the worker assistance provided to workers who lose their jobs to trade, both the financial assistance and the worker retraining programs? Are they sufficient?
Answer: So, I don’t want to weigh in. I don’t intend to weigh in. I haven’t weighed in on either fiscal policy, specifics of evaluating policies. I’m not going to weigh in either on the details of particular trade policies. But, more generally, I’d say, you asked me about manufacturing. There were a lot of manufacturing jobs lost over a long period of time and particularly after—during the Great Recession. We’ve had some recovery in manufacturing employment as the economy’s recovered. So, to some extent, manufacturing employment depends on the progress of the economy, and we have seen some recovery. Over a long period of time, technological change is something that has been important in reducing manufacturing employment absolutely and as a share of jobs in the economy. For decades, the pace of technological change in manufacturing has outstripped that in the economy as a whole. And, so, firms—manufacturing firms have found it easier to continue producing by—with reducing their workforces. And that’s a change that I would expect to continue. You mentioned worker assistance. So some of the forces that are acting on manufacturing and other sectors, including technological change and globalization—even though most economists would judge the overall consequences of these developments for the economy to be positive, certainly there are groups of workers who were harmed by developments pertaining to globalization and technology. And I think most economists and policymakers recognize that it’s important to provide ways for workers who were harmed by these kinds of developments to be retrained for jobs so that they can succeed in the economy. And so, I mean, I would agree—without getting into any particular program and whether it’s sufficient, I do think that it’s important to recognize there are those who were harmed by these developments, and their concerns, I think, need to be addressed by policymakers, certainly.