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

Question (Craig Torres, Bloomberg): Hi, Madam Chair, Craig Torres from Bloomberg. I’d like to follow Jon’s question. The way the Committee describes inflation—well, there’s this “transitory” language. I’d like to point out that oil prices today are at 36, and on June 15, they were $60. So, this “transitory,” which first appeared in the statement in December, I believe, is lasting a long, long time, maybe longer than many people’s definition of “transitory,” and it could go on. And, second, I really wonder if the Committee knows how quickly wage increases or labor market tightness transfers into higher prices, and that too is also a forecast. So, my question: What will you be willing to do if you don’t see progress toward 2 percent inflation? We missed the target for three years, and, you know, what would you be willing to do? And, second, would you allow inflation to bounce around between 2 and 3 percent the way you’ve allowed it to move under 2 percent over the past several years? Thanks.
Answer: First, let me say with respect to oil prices, I have been surprised by the further downward movement in oil prices, but we do not need to see oil prices rebound to higher levels in order for the impact on inflation to wash out. So all they need to do is stabilize. I believe there is some limit below which oil prices are unlikely to rise. If we look—to fall. If we look at market expectations, market expectations are for stabilization and then some gradual upward movement. So I certainly grant that we’ve had a series of shocks pushing them down, but we’re not looking for them to revert back to the—to higher levels that they were at merely to stabilize. We—I would point out, you asked me, would we tolerate overshoots. For a number of years between 2004 and 2008, we had a series of increases in oil prices that for a series of years raised inflation above—again, we didn’t have a 2 percent objective then, but—raised it above 2 percent, and we judged those increases to be transitory as well and looked through them. We do monitor inflation expectations very carefully. If we saw in a meaningful way that inflation expectations were either moving up in a way that made it—them seem unanchored or down, that would be of concern. And we have called attention to some slight downward movements in survey measures. We are watching that, but I still judge that inflation expectations are reasonably well anchored. So, yes, we have tolerated inflation shortfalls that we thought would disappear over the medium term just as we did overshoots of inflation that we also judged to be transitory. But we do need to monitor inflation very carefully because if energy prices and the dollar were to stabilize, import prices, our expectation is that both headline and core inflation would move up. And if we failed to see that occurring in the manner that we expect, of course we need to take further action to reconsider the outlook and to put in place appropriate policy.

Question (Ylan Mui, Washington Post): Hi, Ylan from the Washington Post. You said earlier that expansions don’t die of old age, but I think the other half of that is that it’s often central banks that kill them off instead. So I’m wondering how worried you are about the possibility that the Fed will have to turn around after hiking rates. Other central banks that have tried to raise rates have had to do just that. And how damaging you think that might be to the Fed’s credibility?
Answer: So, when you say that central banks often kill them, I think the usual reason that that has been true when that has been true is that central banks have begun too late to tighten policy, and they’ve allowed inflation to get out of control. And at that point, they have had to tighten policy very abruptly and very substantially, and it’s caused a downturn, and the downturn has served to lower inflation. So, if you don’t mind my flipping the question on you, I would point out that it is because we don’t want to cause a recession through that type of dynamic at some future date that it is prudent to begin early and gradually. Now, it is true that some central banks have raised rates and later turned around. Not in every case has that reflected a policy mistake. Economies are subject to shocks. Sometimes when they have raised rates, it hasn’t been the wrong thing to do, but conditions have changed in a way that they have had to reverse policy to respond to shocks. I’m not denying that there are situations where central banks have moved too early. We have considered the risk of that. We have weighed that risk carefully in making today’s decision. I don’t believe we’ll have to do it. But, look, you know, as I’ve—as the Committee has said, we’re watching economic developments closely, and we will adjust policy in whatever way is necessary to support the attainment of our objectives.

Question (Lindsay Dunsmuir, Reuters): Hi, Lindsay Dunsmuir with Reuters. You keep saying that the things holding back inflation are transitory, and yet every day there seems to be new impulses from outside that look that they could drive prices lower. I guess my question is, if in a year’s time inflation remains where it is today, would you see that as a defeat for your theory? And is that part of the reason why the language has been upgraded in the statement to say that you want to see actual progress towards your 2 percent target?
Answer: Well, we have said that we will carefully monitor both actual and expected progress. You know, I think that standard Fed policy has been to look through shocks that are transitory. Occasionally, there are sequences of transitory shocks. We have had some further declines in energy prices, and, you know, as I said previously, I do expect there is a bottom to that. I expect we will be seeing it. If we—if we analyze inflation data and conclude that, clearly, transitory influences are holding down inflation, I do not want to say that we would respond to that. But if we concluded that there were structural factors or that there were a problem with our theory or some global deflationary force that were simply persistently holding down inflation in a way that was not transitory—and I don’t want to attach any simplistic meaning to what we would need to see to conclude that in the inflation data, but if we concluded that, we certainly would take action to make sure we adjusted policy so that we attain our 2 percent objective. But we would need to feel that what we were seeing in the data suggested a sustained departure from our 2 percent objective that we really needed to address.

Question (Jeremy Tordjman, Agence France-Presse): Hello, Jeremy Tordjman with Agence France-Presse, AFP. Are you concerned about the negative impact that your decision could have on the emerging markets? Do you fear it could trigger some financial turbulences abroad that could eventually hit the U.S.?
Answer: So we are constantly monitoring foreign economic developments, including those in emerging markets. We understand that in the global economy, with integrated product and capital markets, that our fates are very much linked, and that the performance of the U.S. economy has important spillovers onto emerging markets and vice versa. We have been trying very carefully—we’ve made a commitment to emerging market policymakers that we would do our best to communicate as clearly as we could about our policy intentions to avoid spillovers that might result from abrupt or unanticipated policy moves. I think this move has been expected and well communicated—at least, I hope that it has. So I don’t think it’s a surprise. This action takes place in the context of a U.S. economy that is doing well and is a source of strength to the emerging markets and other economies around the globe. And so—that is, there can be negative spillovers through capital flows, but remember, there are also positive spillovers from a strong U.S. economy. My general view is that many emerging markets are in a stronger position than they would have been in the 1990s—for example, that they have stronger macroeconomic policies. They have taken steps to strengthen their financial systems and are better positioned to deal with this. On the other hand, there are vulnerabilities there, and there are countries that have been badly affected by declining commodity prices, so we will monitor this very carefully. But we have taken care to avoid unnecessary negative spillovers.