Federal Reserve press conference, 2015-12-16 — Chair Janet Yellen

Question (Steve Liesman, CNBC): Just to follow up, how does raising rates help get you to either of those goals?
Answer: We have kept rates at an extremely low level and had a high balance sheet for a very long time. We have considered the risks to the outlook and worried about the fact that with interest rates at zero, we have less scope to respond to negative shocks than to positive shocks that would call for a tightening of policy. That is a factor that has induced us to hold rates at zero for this long. But we recognize that policy is accommodative, and if we do not begin to slightly reduce the amount of accommodation, the odds are good that the economy would end up overshooting both our employment and inflation objectives. What I—we would like to avoid is a situation where we have waited so long that we’re forced to tighten policy abruptly, which risks aborting what I would like to see as a very long-running and sustainable expansion. So to keep the economy moving along the growth path it’s on with improving and solid conditions in labor markets, we would like to avoid a situation where we have left so much accommodation in place for so long that we overshoot these objectives and then have to tighten abruptly and risk damaging—damaging that performance.

Question (Sam Fleming, Financial Times): Sam Fleming. Sam Fleming from the Financial Times. Could I ask about the balance sheet policy you’re adopting today? You’ve said that you want to keep a large balance sheet until normalization is “well under way.” Could you explain first of all why you anticipate that being appropriate? What does “well under way” mean in terms of normalization? And, longer term, what are your views on the idea that the Fed might need to have a larger balance sheet than historically over the longer term?
Answer: Well, in our normalization principles, which are in effect, the Committee stated that we eventually want to operate with a much smaller balance sheet of—than we have at present. The—we would reduce the size of the balance sheet to essentially whatever size we needed to manage monetary policy effective—in an effective and efficient way. Now, a lot has changed since pre–financial crisis in terms of the financial system, and we are studying— we are engaging in a project at this time to consider what our long-run operating framework should look like. So I can’t tell you exactly what size of balance sheet we will determine is the best to operate in an efficient and effective manner. It might be somewhat larger than the very tiny quantity of reserves that we had in pre-crisis. We have not determined that. We have also said that we will—we expect to reduce the size of our balance sheet over time by cease— diminishing or ceasing entirely reinvestments. And, beyond that, we haven’t given additional guidance other than to say that the timing of reductions in reinvestment will depend on economic and financial conditions. And I suppose the additional guidance we’re giving today, when we say “well under way,” we want to see—as I mentioned, there are number of considerations, and the Committee has made no further decisions about this, but as we’ve discussed, the factors that will be relevant to the decision—one factor that we’ve talked about is the desirability of having some scope to respond to an adverse shock to the economy by lowering the federal funds rate. And so it would be nice to have a buffer in terms of having raised the federal funds rate to a certain extent to give us some meaningful scope to respond. Now, I don’t have in mind any particular level of the federal funds rate. It would depend on the entire economic outlook, how robust the economy is. But that is an important consideration for the Committee, and it means that this is not something that we expect to be turning to, to cease reinvestment very quickly.

Question (Greg Robb, MarketWatch): Greg Robb from MarketWatch. There’s been a lot of talk today and a lot of discussion about the downside risks facing the economy from, you know, the global environment, but you say in your statement that the risks are nearly balanced. So should—could you talk more about the upside risks that you see to the economy? And, just briefly, the—some Fed officials have been emphasizing lately the median CPIs from Dallas and Cleveland. How much weight do you put on those measures?
Answer: Well, starting with the median CPIs, we look at a range of statistics that bear on the inflation outlook, and the median CPI has been somewhat more stable and running closer to 2 percent than the PCE, but there is a systematic gap between these two measures, and our objective is 2 percent on the PCE price index, and so there’s no simple translation. We do have a PCE inflation objective. Sorry, let’s see, the other—the upside risks. So I—there are upside risks to the economy, and I think, you know, we tend to focus on the downside risk. It’s right to do so. We want to be careful about downside risks. But consumers are in much healthier financial condition. Their income prospects have improved. We see them buying a lot of cars. Housing has been recovering very slowly, but the demographics would point to considerable upside for residential investment. My mainline forecast is for gradual recovery, but there is upside risk there. We have seen that the decline in drilling has been depressing investment spending, but there’s upside risk too. The global economy—we tend to focus—there are many countries that are undergoing very difficult adjustments or slowing growth, especially with declining commodity prices. But even recently, we’ve seen growth in emerging markets strengthen. And—so it is not only downside risks, but, you know, we do pay attention to downside risks. But the Committee said they regard the risks overall as balanced.