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

Question (Christopher Condon, Bloomberg): Chris Condon, Bloomberg News. Chair Yellen, there’s been extraordinary progress during your term as Chair in lowering several measures of unemployment and underemployment, and all while inflation has remained subdued. But some people are even asking, why stop there? Bill Spriggs, the chief economist at the AFL-CIO, who I think you know well, criticized the Fed last week for seeking to maintain unemployment above 4 percent, which he notes necessarily means keeping the unemployment rate among black Americans above 8 percent. He described this as a deliberate policy to sacrifice many hundreds of thousands of potential workers and their families out of fear of future inflation, when in fact the Fed’s preferred measure of inflation has not exceeded 3 percent in more than 25 years. So I’m wondering how you would respond to his frustration over the Fed’s desire to continue raising rates when core inflation really shows no sign of heading above the Fed’s symmetric goal for inflation. Thank you.
Answer: So let me first say that employment is a very important part of our mandate. We’re charged by Congress with trying to pursue maximum employment, and we have taken that very seriously. I’m very pleased and heartened by the improvement we have seen in the labor market, and at 4.4 percent, the unemployment rate has really fallen to quite a low level. As that’s happened, the unemployment rates for less advantaged groups in the labor market, particularly African Americans and Hispanics, has fallen more dramatically than that for the nation as a whole, reversing the outsized increases that those groups experienced when the financial crisis and Great Recession hit. And these are really very positive developments. So we certainly seek a strong labor market, but we have a dual mandate, which is inflation and unemployment, and we also have to be mindful of our obligation to achieve a 2 percent inflation objective over the medium term. Now, I recognize and it’s important that inflation has been running under our 2 percent objective for a number of years, and that is a concern, particularly if it were to translate into lower inflation expectations. For a number of years there were very understandable reasons for that shortfall, and they included quite a lot of slack in the labor market—which, my judgment would be, has largely disappeared—very large reductions in energy prices, and a large appreciation of the dollar that lowered import prices starting in mid-2014. This year, the shortfall of inflation from 2 percent, when none of those factors is operative, is more of a mystery, and I will not say that the Committee clearly understands what the causes are of that. Now, we do, in our regular projection, show fan charts indicating the typical size of forecast errors. All of the variables—GDP, the unemployment rate, and inflation—are forecast by ourselves and private forecasters with errors, and so there is variation in these economic variables from year to year. I would say our judgment, as I said in the statement, is that the shortfall is not largely related to cyclical considerations. You can see from the projections that the Committee participants submitted that we anticipate that core and headline inflation will move up close to our 2 percent objective next year—namely, that the shortfall this year is due to transitory factors that are likely to disappear over the course of the coming year. But I want to emphasize that we do have a commitment to raising inflation to 2 percent. And as we watch incoming data, the assessments that you see participants write down about the path of the federal funds rate, they are not set in stone. They are not definite plans. We will look at incoming data on inflation and on other economic variables, including the labor market, in deciding what we should actually do going forward. And if it proves contrary to our expectations that the shortfall is persistent, it will be necessary to adjust monetary policy to address that. But I want to point out that while there are risks that inflation could continue below 2 percent, which we need to take account of in monetary policy, monetary policy also operates with a lag. And experience suggests that tightness in the labor market, gradually and with a lag, tends to push up wage and price inflation, and that’s also a risk, that we want to be careful not to allow the economy to overheat in a way that would force us later on, somewhere down the road, to have to tighten monetary policy rapidly, which could cause a recession and threaten the very desirable labor market conditions that we have now.

Question (Steve Liesman, CNBC): Steve Liesman, CNBC. Madam Chair, you just said in your opening remarks that reducing the balance sheet should not be “an active tool for monetary policy in normal times,” you don’t plan to make adjustments to the balance sheet. I’m wondering if we could explore if there’s any sensitivity to the plan you just announced if there’s a spike in interest rates, a plunge in the stock market, weakness in growth. In the June statement, you indicated that the only reason why you would change the—it suggested the only reason you’d change the balance sheet is if it required, first, a change in the funds rate. Is that true? If there’s some unexpected development in markets, or, for example, given that we don’t know what the plans are on the fiscal side for the deficit in terms of tax cuts—there could be a sudden spike in the deficit—will the balance sheet reduction plan be immune to all of that? And, given that question, and the idea that this has never been done before, why so much certainty about the plan you’ve just announced and apparent unwillingness to adjust it?
Answer: So we have two policy tools that are available to us to use: the balance sheet and adjustments in short-term interest rates—our federal funds rate target. And, historically, the Committee has operated to adjust monetary conditions to meet our economic goals when there are shocks to the economy by adjusting the federal funds rate—our short-term interest rate target. And that’s something—a technique of monetary control that we have used for a very long time that we are familiar with, we believe we understand pretty well what the effects are on the economy, market participants understand how that tool has been used and would likely be adjusted in response to shocks to the economy. And our preference is, when we have two different tools that we could use to actively adjust the stance of policy, to prefer and to make a commitment that, to the maximum extent possible, the federal funds rate will be the active tool of policy. That’s our go-to tool. That is what we intend to use unless we think that the threat to the economy is sufficiently great that we might have to cut the federal funds rate— after all, we’ve moved it up to 1 to 1¼ percent and expect it to go up further—but a very significant negative shock to the economy could conceivably force us back to the so-called zero lower bound. We have said if there were that type of material deterioration in the outlook where we could face a situation where the federal funds rate isn’t a sufficient tool for us to adjust monetary policy, we might stop—we might stop roll-offs from our balance sheet and resume reinvestment. But as long as we believe that we can use the federal funds rate as a tool, that is what we intend to do. So, if there are small changes in the outlook that require a recalibration of monetary policy, we will change our anticipated path and setting of the federal funds rate, but not, for example, change the caps on reinvestment or stop—continue reinvestment for a few months and then change it. We think that provides greater clarity to market participants about how policy will be conducted and will be, will be less confusing and more effective in terms of conducting policy.

Question (Nick Timiraos, Wall Street Journal): Nick Timiraos of the Wall Street Journal. Chair Yellen, Fed Governor Lael Brainard recently gave a speech in which she said trend inflation appeared to have moved lower by around ½ percentage point. I wanted to ask, do you agree? And what would the Fed need to do, if anything, to boost trend inflation if it has fallen? And, related to that, you’ve said you expect the inflation softness this year to prove “transitory.” Compared to three months ago, how firm is your current expectation that the slowdown will remain transitory, and what implications would that have for monetary policy if it is not?
Answer: So the term “trend inflation”—usually there are a variety of statistical techniques that can be used to extract a trend from a series. Exactly what that means is, in some sense, a statistical thing, and there are methodologies that would show some modest decline in recent years in the trend. After all, we’ve had a number of years in which inflation has been low. As I said in answer to an earlier question, I think if you go back to, say, 2013 and consider the— until this year, the reasons why inflation was low are not hard to understand. It’s a combination of slack in the labor market, declines in energy prices, and a strong dollar that pulled down import price inflation. So what’s important in determining inflation going forward is inflation expectations. By some—by many—by some survey measures of professional forecasters, those have been rock solid. We do also look at household expectations, which have come down some. Market-based measures of inflation compensation, as we mentioned in the statement—they have declined, and they’ve been stable in recent months, but they’ve declined to levels that are low by historical standards. That might suggest that inflation expectations have come down, but one can’t get a clear read—there are risk premia built into inflation compensation that make it impossible to extract directly what inflation expectations are. So, you know, there is a miss this year. I can’t say I can easily point to a sufficient set of factors that explain this year why inflation has been this low. I’ve mentioned a few idiosyncratic things, but, frankly, the low inflation is more broad based than just idiosyncratic things. The fact that inflation is unusually low this year does not mean that that’s going to continue. Remember that in January and February, core inflation was running over a 12-month basis at around 1.9 percent, and we look to be very close to 2 now. We’ve had several months of data that have meaningfully pulled that down, and what we need to do is figure out whether or not the factors that have lowered inflation are likely to prove persistent or they’re likely to prove transitory, and that’s what we’re going to try to be determining on the basis of incoming data. And you asked me about the policy implications. Of course, if we determined our view changed, and instead of thinking that the factors holding inflation down were transitory, we came to the view that they would be persistent, it would require an alteration in monetary policy to move inflation back up to 2 percent, and we would be committed to making that adjustment.