Federal Reserve press conference, 2016-12-14 — Chair Janet Yellen

Question (Harriet Torry, Wall Street Journal): Thank you, Madam Chair. Harriet Torry with the Wall Street Journal. Why does the Fed now see three rate increases next year instead of two? Is it because the economy is at risk of overheating, or is the Fed behind the curve, or is this a reaction to Donald Trump’s election?
Answer: Well, I would like to emphasize that this is a very modest adjustment in the path of the federal funds rate and involves changes by only, you know, some of, you know, some of the participants. So in thinking about the paths and the revisions, there are a number of factors that were taken into account by participants. The unemployment rate is perhaps a touch, as I said, a touch lower than previously; you’ve seen some modest downward revisions in that— in that projection. For this year, there was a slight upward revision to inflation, and some of the participants, but not all of the participants, did incorporate some assumption of a change in fiscal policy into their projections. And that may have been a factor that was one of several that occasioned these shifts, but I want to emphasize that these—the shifts that you see here are really very tiny.

Question (Steve Liesman, CNBC): Steve Liesman, CNBC. In recent testimony, you said your advice was for fiscal authorities to increase the productive capacity of the economy. Do individual and business tax cuts increase the productive capacity of the economy? And how would the Fed’s reaction be different to fiscal policies that increase the productive capacity of the economy and those that don’t?
Answer: So the statement that I made, that it would be useful to increase the productive capacity of the economy, reflects my concern that productivity growth has been very low. It’s the ultimate determination of the evolution of living standards. Policies that would improve productivity growth would include policy changes that enhance education, training, workforce development; policies that spur either private or public investment to enhance the quality of capital in the United States that workers have to work with; and policies that spur innovation or competition or the formation of new firms. So tax policies can have that effect. It really depends on the specifics. I don’t think there’s anything that I could say in general about what tax policy would do, but that—and I really can’t tell you what the Fed’s response would be to any policy changes that are put into effect. I wouldn’t want to speculate until I were more certain of the details and how they would affect the likely course of the economy.

Question (Steve Liesman, CNBC): Okay. A quick follow-up—I’m sorry, but if there was a rush of fiscal policy that did not increase the productive capacity of the economy, would that mean the Federal Reserve would have to move more quickly with raising rates?
Answer: I—you know, it’s something I really just can’t generalize about because, while it would be desirable to have tax policies that do increase the productive capacity of the economy, an increase in the pace of productivity change is one of the factors that does affect the economy’s neutral rate. A boost to productivity could spur investment. As we have been saying, we estimate that the value of the neutral federal funds rate is quite low—has—and one of the reasons for that is slow productivity growth. And so it’s very hard to generalize about it because it could affect that neutral rate.

Question (James Puzzanghera, Los Angeles Times): Hi. Jim Puzzanghera with the L.A. Times. For the average American, can you explain what the impact of this hike and three additional hikes will be next year? And should they feel more confident in the economy now that you are raising rates at a slightly faster pace?
Answer: So let me say that our decision to raise rates is—should certainly be understood as a reflection of the confidence we have in the progress the economy has made and our judgment that that progress will continue. And the economy has proven to be remarkably resilient. So it is a vote of confidence in the economy. As you know, this was a decision that was well anticipated in markets, and I think it will have relatively small effect on market rates. It could boost very slightly some short-term interest rates that could have an effect on borrowing costs that are linked to them, but, overall, I think that households and firms will see very modest changes from this decision. But, certainly, it’s important for households and businesses to understand that my colleagues and I have judged the course of the U.S. economy to be strong, that we’re making progress toward our inflation and unemployment goals. We have a strong labor market, and we have a resilient economy.

Question (Sam Fleming, Financial Times): Sam Fleming from the Financial Times. Clearly, there’s been a lot of discussion already about fiscal—fiscal policy. But even if you discount or don’t know what the fiscal outlook is going to be next year, unemployment is already below the longer-run projection under the policy rule you cited in your August speech. That would suggest that policy ought to be tighter. Is there a risk that the Federal Reserve is already behind the curve, even before any fiscal impact steps in next year? Thanks.
Answer: So I would agree that—and as we said in our statement—policy remains accommodative. The degree of accommodation I would characterize as moderate. As I’ve emphasized and said in the statement, we currently judge the neutral level of the federal funds rate to be pretty low. So there is some accommodation. Remember that inflation is still below our objective. The Committee projects—at least the median projection shows a very modest undershoot of estimates of the longer-run normal rate of unemployment. The median unemployment rate here gets down to 4½ percent, which is just a few tenths below the estimated longer-run normal level of the unemployment rate. And we think that that’s appropriate because we want inflation to rise to our 2 percent objective in a timely fashion. So there is not a substantial undershoot of the natural rate of unemployment. We’re not seeing evidence in labor markets of very substantial upward pressures on labor that could signify extreme shortages of labor that could propel inflation higher in a very rapid way, and inflation is still operating below our objective. So I do not judge that we are behind the curve. I’ve—my judgment is that we’re on a good path to reaching our objectives. But, of course, the outlook is uncertain. We recognize that there are many sources of uncertainty affecting the outlook. And we will have to adjust our thinking as things evolve, as conditions—conditions evolve, and we learn more about economic policy changes that could affect the outlook.

Question (Lindsay Dunsmuir, Reuters): Hi, Lindsay Dunsmuir with Reuters. How comfortable are you with possible interference on Fed policy by the incoming President? And I’m talking there about the negative impacts his tweets on aerospace companies in the last week have had on their share prices. And do you feel having a President tweeting about individual companies—do you feel that that could begin to distort corporate decisionmaking?
Answer: Well, I’m not going to offer the incoming President advice about how to conduct himself in policy. I’m a strong believer in the independence of the Fed. We have been given the independence by Congress to make decisions about monetary policy in pursuit of our dual-mandate objectives of maximum employment and inflation, and that is what I intend to stay focused on. That’s what the Committee is focused on.

Question (Nancy Marshall-Genzer, Marketplace): Hi, Nancy Marshall-Genzer with Marketplace. Wondering about slack, when do you think the slack in the labor market will have worked its way through so we’re no longer talking about it at press conferences and it’s not such a big issue?
Answer: So this is not something that it’s possible to judge precisely. My colleagues write down their best estimates of a normal longer-run unemployment rate. The median stands at 4.8 percent, so we’re close, possibly—the unemployment rate right now is ever so slightly below, but in the neighborhood. If we look at larger, broader measures of slack, like the U-6 measure that includes involuntary part-time employment and those who are marginally attached to the labor force, they’re slightly higher than pre-recession levels, but they’ve come down considerably. We look at a broad array of indicators of the labor market, and if you look at job openings or the hires rate or the quits rate or difficulty of hiring workers as reported in business surveys, you know, I would say the labor market looks a lot like the way it did before the recession, that it’s—we’re roughly comparable to 2007 levels when we thought the, you know, there was a normal amount of slack in the labor market. The labor market was in the vicinity of maximum employment.

Question (Michael McKee, Bloomberg): Michael McKee from Bloomberg Television and Radio. Given President-elect Trump’s criticism of your low-rate policy during the campaign, like it or not, market participants are going to focus a lot in 2017 on you. You’ve suggested you will serve out your term, but I’m curious if that statement still holds, if you would like another term as Fed Chair, if you would accept another term as Fed Chair, and would you stay on the Committee if you were not Fed Chair?
Answer: So I guess the way I think about it is that I was confirmed by the Senate to a four-year term. The term of the Fed Chair was not meant to coincide with that of the President, and there were good reasons for that, too. It’s part of ensuring the independence of the Fed. And so I do intend to serve out my four-year term. I haven’t made any decision about the future. I, you know, I recognize I might or might not be reappointed. It’s a decision that I don’t have to make and don’t, you know, don’t have thoughts on at this time. And, as you said, I recognize too that I could stay on as a Board member, and that’s a decision for another day.

Question (Greg Robb, MarketWatch): Greg Robb from MarketWatch. I’d like to—two questions, if I might— follow up on the question about running the economy hot that you mentioned in your speech up in Boston a couple months ago. You brought it up. Are you now sort of distancing yourself from the idea?
Answer: Well, I want to make clear what I said and what I didn’t say. One of the things we’ve learned from our financial crisis and from a series of financial crises in history and around the globe is that, very commonly, when the economy takes a hit and falls into a recession, that productivity doesn’t pick up to pre-recession levels and that there looks like there is a permanent hit to the path of potential output for the economy, which is called “hysteresis.” And I raised the question as to whether or not this might operate in the opposite direction as well. We have seen quite a few people who lost their jobs during the Great Recession drop out of the labor force and, you know, lose their ties and become discouraged and not reenter. And I raised the question as to whether or not hysteresis could operate in the opposite direction. And that was a research question for economists to see if there is any evidence, because it could be important in determining policy. But I didn’t—I didn’t draw any policy conclusions from that. And, as I indicated, I think the path that you see—that the Committee has laid out in a tentative way that involves a modest degree of undershooting of normal longer-run levels of unemployment going down to around 4½ percent would remain for a couple of years—might provide some insight. So I was not recommending a substantially easier policy in order to test that hypothesis.

Question (Justine Underhill, Yahoo Finance): Justine Underhill, Yahoo Finance. So the Fed’s balance sheet has grown to over $4 trillion. And as the Fed begins removing policy accommodation, under what circumstances would you see the Fed removing or possibly winding down its balance sheet in either letting mature—securities mature or possibly outright selling bonds from the SOMA portfolio?
Answer: So we’ve indicated in our normalization principles that we expect to diminish the size of our portfolio over time largely by ceasing reinvestments of principal rather than by selling securities. We’ve indicated that once the process of normalization of the federal funds rate is well under way, we would probably begin to allow our portfolio to run off. We’ve not yet made any precise decisions about when that will occur. We want to feel that if the economy were to suffer an adverse shock, that we have some scope through traditional means of interest rate cuts to be able to respond to that. Now, there’s no mechanical rule about what level of the federal funds rate we might deem appropriate to begin that process. It’s not something that only depends on the level of the federal funds rate. It also depends on our judgment of the amount of momentum in the economy and possible concerns about downside risks to the economy. So we’ve not yet made this decision, but it is something that we have long planned, to begin to allow our balance sheet to run off. And then it would take several years. And we would end up, if all goes well, with a substantially smaller balance sheet than we have at present.

Question (Michael Derby, Dow Jones Newswires): Mike Derby from Dow Jones Newswires. I wondered if the unexpected outcome of the election and the sense that a lot of people are really upset with how the economy is performing despite having, you know, aggregate economic statistics that look pretty good—is that causing you in any way to think differently about how you evaluate the economy, like what sort of things you look for to get a sense of what’s going on in the economy? Is—you know, basically, did how things turned out in the election—is it making you think differently about how you evaluate the economy’s performance and how it’s doing?
Answer: Well, I mean, we’ve long been aware, and I’ve spoken about previously disturbing trends in the economy, particularly rising wage inequality, income inequality, and the fact that a significant share of our population hasn’t been enjoying significant real wage gains, if any. And so these are long-standing concerns. These are not new phenomenon, but the recession was very severe and probably exacerbated developments that had long been affecting many American workers and households. And I think they are quite disturbing. Now, they’re ones that the Fed is not well positioned—I think our policies can affect the general level of economic activity and slack in the labor market, the level—the rate of inflation, which we focus on. But I think it’s important for policymakers more broadly to be attentive to these trends and to think about policies that could address them. We’ve been quite attentive with respect to particular demographic groups in the labor market. Particularly, minorities tend to be very badly affected by downturns. We’ve discussed that. We’ve been focused on it—it’s not just since the election—and are pleased to see that they are enjoying gains. For example, the African American unemployment rate at this point is now rough—about back to 2007 levels as well. But these are important trends, and I think it’s important for policy to address them.