Federal Reserve press conference, 2015-06-17 — Chair Janet Yellen

Question (Sam Fleming, Financial Times): Thanks very much. Sam Fleming from the Financial Times. First question is also referencing something that Bill Dudley said recently, which is to do with the use of the balance sheet in tightening monetary policy. He suggested that the short rates should be hiked some way from the zero lower bound before the Fed continues—considers ending reinvestments. I wondered if you could give a little bit more clarity on how the Fed intends to approach the issue of ending reinvestments on its balance sheet. Would you, for instance, see any argument for tapering the end to reinvestments to smooth the profile of maturities in the portfolio? The second question is really on this point of “gradual”—you’ve used this term today in the opening statement. Is the term “gradual” on its way to becoming official guidance from the Fed? Is this something we should start to expect to see popping up in official FOMC statements in future? Thanks.
Answer: So let me start with the balance sheet and our reinvestment policy. We issued a normalization statement giving principles of normalizing policy, and what we said at that time is that we expected to reduce or cease reinvestment at some time after we had begun the process of normalizing policy by raising our target for the federal funds rate. We said the timing of that would depend on economic and financial conditions, and the Committee has really not made any further decisions about how it’s going to go about doing that, so President Dudley was expressing his own personal point of view. But this is a matter that the Committee has not yet decided, and I can’t provide any further detail. It’s obviously something we will be thinking about. Let’s see, you asked about “gradual.” So, in a sense, we already have a statement. The last paragraph of the Federal Open Market Committee statement says: “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” That’s kind of a mouthful. It’s a long sentence, but I think the spirit of that sentence is consistent with my use of the word “gradual,” and it is consistent with what you see in the Summary of Economic Projections. Participants are projecting—obviously there is a lot of uncertainty, but they’re projecting increases that average around 100 basis points per year. Now, that’s not a promise, it’s conditional on their economic forecasts, and those forecasts may prove to be wrong and may change. But at this time, the assessment that participants have of the economy suggest to them that the appropriate pace of normalization to keep the economy on track to meet our objectives will be gradual, in that sense.