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

Question (Ylan Mui, Washington Post): Hi, Ylan Mui from the Washington Post. As you mentioned, almost all of the FOMC participants believe that the first rate hike will come this year. But two of your colleagues believe that 2016 is the appropriate time, the IMF has called on 2016 as the appropriate time for liftoff as well, and markets seems to place a greater probability of liftoff in January than they do in September. So what are—what is the misunderstanding here? What is—what do they have wrong, and why do you think that waiting until 2016 is a mistake?
Answer: Well, there are obviously a range of opinions, both in the market and among Committee members, at this time on what the appropriate stance of policy is likely to be later this year and next year. But, importantly, the—when the people write down their dots in the SEP, they’re making forecasts about what unfolding data is likely to show. But the participants will all be—their views will evolve with unfolding data. For all of us, the appropriate policy decision is going to be data dependent, and all of us will be looking at incoming data. And our opinions about the appropriate timing of normalization are likely to shift as we look at how the data evolves. Differences in the appropriate assessments of the appropriate stance of policy—in addition to reflecting different views on the outlook, there are a set of risks that all of us need to weigh in judging on the— judging the appropriate time of the beginning of normalization. On the one hand, waiting too long to begin normalization can risk significantly overshooting our inflation objective given the lags in the operation of monetary policy. And, on the other hand, beginning too early could risk derailing a recovery that we have worked for a very long time to try to achieve. And so we’re trying to assess those risks. But I want to emphasize, sometimes too much attention is placed on the timing of the first increase in the federal funds rate. And what should matter to market participants is the entire trajectory, the entire expected trajectory of policy. And, again, while our actual policy decisions will have to evolve in light of what really does happen in the economy, the Committee, as you can see by the SEP projections, currently anticipates that conditions will evolve in the economy in a manner that will make it appropriate to raise the federal funds rate gradually over time.

Question (Steve Liesman, CNBC): Madam Chair, I wonder if you might characterize the progress made towards fulfilling the Fed’s two criteria. Are you somewhat more confident, not confident at all that you’re moving towards 2 percent? Has there been a lot of improvement in the labor market? Some improvement? And how should we judge when those two criteria have been fulfilled?
Answer: Well, it’s a judgment that the Committee is—will have to make, and, as I’ve said previously and as we’ve said in the statement, it will depend on a wide range of data and not on any simple indicators. So I can’t provide you—it would be wrong for me to provide you a roadmap that said something as simple as, if the unemployment rate declines to X, that then the labor market will have improved enough for us to begin to raise policy. Obviously, we have to look at the pace of job creation. We have to look at what’s happening to labor force participation, to part-time employment for economic reasons, to job openings, to the pace of quits, to wage inflation, and other indicators of the state of the labor market. I did say when we agreed that labor market slack has diminished to some extent in the intermeeting period, and, clearly, over a longer span of time, over the last several years, obviously we’ve made considerable progress in moving toward our goal of maximum employment. So, in spite of the fact that there is some progress on that front, the Committee wants to see some further progress before feeling that it will be appropriate to raise rates. On inflation, again, there has been some progress, in the sense energy prices appear to have stabilized. Now, inflation is going to—overall inflation is likely to run at a low level for a substantial period of time. The big declines in energy prices came toward the end of last year and the beginning of this year, and they’re not going to wash out of the inflation data until late in this year. But the fact that energy prices have stabilized means that the pressure from that source is diminishing. In addition, the dollar appears to have largely stabilized. And, with respect to core inflation, it has been running under our 2 percent objective, but declining import prices have been reducing that pressure. I believe that as the labor market continues to improve and as our confidence in that forecast rises, at least for me, my confidence will also rise that inflation will move back up toward 2 percent. I expect that to, over time, put upward pressure on core inflation.

Question (Jonathan Spicer, Reuters): Jonathan Spicer with Reuters. To your point, Madam Chair, on needing more decisive evidence in order to initiate the first rate hike, how close do you feel the economy is to full capacity now? And given that, you know, employer costs and monthly wages are at a pace that’s at a six-year high now, what is the risk—or, how does the risk change that inflation could strengthen quicker than you’re expecting?
Answer: So the Committee estimates that the longer-run normal level of the unemployment rate is 5.0 to 5.2. At 5.5 percent, where we have an unemployment rate that still exceeds the Committee’s best attempts to estimate what is a normal unemployment rate for this economy, and, as I mentioned, there appear to be unusually large elements of slack over and above that in the form of somewhat still-depressed labor force participation and part-time work for economic reasons. So I think it’s fair to say that most members, most participants on the Committee, wouldn’t judge yet—although some might—that most wouldn’t judge us to be at, quote, “maximum employment.” Wage increases are still running at a low level, but there have been some tentative signs that wage growth is picking up. We have seen an increase in the growth rate of the employment cost index and a mild uptick in the growth of average hourly earnings. I would call these tentative signs of stronger wage growth. I think it’s not yet definitive, but that is a hopeful sign. Still, however, inflation—not only headline, but, stripping out food and energy underlying inflation, core inflation—is still running below the Committee’s objective. So I think we need to see additional strength in the labor market and the economy moving somewhat closer to capacity—the output gap shrinking—in order to have confidence that inflation will move back up to 2 percent, but we have made some progress.