Federal Reserve press conference, 2017-09-20 — Chair Janet Yellen

Question (Binyamin Appelbaum, New York Times): Binya Appelbaum, the New York Times. You have now committed to a policy of reducing your balance sheet very gradually. You have described plans to raise interest rates even more gradually than previously. You are locked in for a long period of time to a forecast that monetary policy will essentially keep interest rates at a low level and keep a balance sheet at a high level. If something goes wrong, does the Fed have room to respond under these conditions in the next several years, and could you describe for us what your plans are for a response, should it be warranted?
Answer: So the only thing I would object to there, is you said that we are “locked in,” and I would say that we are not locked in. We believe that economic conditions will evolve in a way that will warrant gradual, further increases in our federal funds rate target, but if conditions evolve differently than that, whichever direction that might be—it might be that growth is more rapid, the labor market tightens more quickly than we assume, and inflation appears to be picking up more rapidly than we had expected—we have not promised, no matter what, that the path of interest rate increases will be gradual. We believe that that will be appropriate, but we always watching the economy and will adjust policy as appropriate. Now, as I said, the hurdle to changing our plans with respect to the balance sheet, in some sense, is high. If conditions were to weaken, we would really only consider resuming reinvestment if it were what we refer to as a material deterioration, and I tried to explain why that is. But, you know, we will adjust monetary policy. What you see in the dot plot is each participant’s best guess, based on the information they have today, about what will be appropriate in light of their expectations about how the economy would evolve. And we think it’s helpful to show the public some sense that it helps in understanding our evaluation of the economy. But we’re assessing incoming data, and these plans are subject to change. What’s not subject to change is our commitment to doing everything in our power to achieve the goals that Congress has assigned to us, which are price stability or 2 percent inflation and maximum employment.

Question (Michael McKee, Bloomberg): Michael McKee from Bloomberg Television and Radio. We’ve talked a lot today about what you’re going to do and what you may do, but not necessarily about why. With four rate increases behind you, financial conditions are looser than before you began. And I’m wondering if that bothers you, if you’re concerned about overstimulating the economy, or if you feel inflation could break out much more quickly than we have seen, or if you feel there’s a financial stability question because stocks, bonds, and real estate are all so expensive now. How would you explain what the Fed is doing, why the Fed is doing it, to the American people?
Answer: So, first of all, let me say that the decisions that we’ve made this year about rates and today about our balance sheet are ones we’ve taken because we feel the U.S. economy is performing well. We are working down our balance sheet because we feel that’s stimulus that in some sense is no longer needed. So the basic message here is, U.S. economic performance has been good. The labor market has strengthened substantially. Every measure of the labor market, whether it’s the narrow unemployment rate, the broader unemployment rate, the number of people working in part-time jobs who want full-time work, the level of job openings, the quit rate, the difficulty that firms are facing in hiring workers, the level of confidence we see in surveys about the labor market—all of that is pointing to vast and continuing improvement in the labor market. And we see sufficient strength in the economy, in terms of spending—that growth, with its ups and downs, but nevertheless is strong enough—looks to be strong enough in the medium term to support ongoing improvement in the labor market. And all of that is good, and I think that the American people should feel the steps we’re taking to normalize monetary policy are ones that we feel are well justified, given the very substantial progress we’ve seen in the economy. Now, inflation is running below where we want it to be, and we’ve talked about that a lot during this—the last hour. This past year, where it’s not clear what the reasons are—I think it’s not been mysterious in the past, but, one way or another, we have had four or five years in which inflation is running below our 2 percent objective, and we are also committed to achieving that. So the monetary policy path that we follow and the paths that my colleagues are writing down in our projections as ones they think will be appropriate given economic conditions are ones that we think are necessary to move inflation back up to 2 percent and to maintain a strong labor market on a sustainable basis. And in making these judgments about the path of policy, we have to balance various risks. One risk is that if we tighten policy too quickly, we may find out that, although we don’t think this now, that the inflation shortfall is something that’s going to be persistent. And if we tighten too quickly, we could undermine inflation performance—leave it at too low a level— inflation expectations could fall, and that could become ingrained, and that would be dangerous. And so that’s a reason to be cautious about raising interest rates when inflation is as low as it is. But, on the other hand, we have a strong labor market and a low unemployment rate. And although the pace of job gains is not quite as strong this year as, for example, as it was in 2016, we’re still averaging 175,000 jobs a month this year, which is quite a bit above the pace of maybe 100 to 120,000 that would be consistent with a stable unemployment rate if labor force participation begins to move down in the manner we expect. So if we don’t do anything to remove policy accommodation, and the labor market tightens and just continues to tighten, as you mentioned, arguably—we could, you know— arguably, financial conditions overall haven’t tightened that much. We think the economy could overheat, inflation could rise more quickly and above our objective. That’s something that would occur with a lag, and that would force us later on to tighten policy more rapidly than would be ideal, and we could risk a recession if we did that. So there are risks on both sides to our objectives, and most of my colleagues and I have concluded that a gradual path of rate increases—while constantly watching incoming data, being open to revising our views on the outlook, and revising our expectations about policy—is the best way to manage that set of risks.