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

Question (Jon Hilsenrath, Wall Street Journal): Thank you, Chair Yellen. Jon Hilsenrath from the Wall Street Journal. Two questions if I may. First, I wanted to ask you about a comment that New York Fed President William Dudley made recently that, in retrospect, the Fed should have raised interest rates more aggressively during the 2004–2006 cycle. This was in a footnote to a speech he gave. I wonder if you agree with that and whether there are any lessons from the 2004–2006 cycle that should be applied today. And, second, relating to Congress, the Fed has resisted past efforts in Congress to pass measures like an “Audit the Fed” bill or a measure to subject the Fed to a policy rule. There’s now a Shelby bill out there. I wonder if there’s anything in that that you can accept and, more broadly, whether there’s anything you could point to that Congress can do to make the Fed a more effective institution and a more accountable institution. Thank you.
Answer: Okay, so on the first question you asked about the 2004–06 rate increase cycle. Throughout that period, the Fed indicated that rates would rise at a measured pace, and that turned out to be, I believe, 17 meetings, with 25 basis point increases at each meeting. As I’ve emphasized, previously, we have—absolutely do not expect to follow any mechanical 25 basis points a meeting, 25 basis point every other meeting, no plan to follow any type of mechanical approach to raising the federal funds rate. We will evaluate incoming conditions and move in the manner that we regard as appropriate. So that’s one lesson. You know, conceivably, I think, with the benefit of hindsight, it might have been better to raise rates more rapidly or more during the 2004–06 cycle. You know, I’m not certain of that judgment, but I think there’s a case to be made. You asked about Audit the Fed and the Shelby bill. The Shelby bill has a title in it that addresses a number of issues pertaining to the Fed. I suppose I would ask, what exactly is the problem? We place high priority on being an accountable and transparent central bank, and I think that if you compare the transparency of monetary policy decisions in the Federal Reserve with other central banks, we are one of the most transparent central banks in terms of the information that we provide to the public in a whole variety of ways. To my mind, the Fed is accountable, and we work well as an institution. I’m not certain what the problem is that needs to be addressed.

Question (Peter Cook, Bloomberg): Peter Cook with Bloomberg Television. Madam Chair, if I could, just given your discussions over the past two days with your colleagues, the state of the economy right now, the improvements you’ve seen, do you think it’s still likely that we’ll see a rate increase this year? And to follow on that, something Ylan mentioned—that is, the comment from the IMF recently, earlier this month, and the encouragement you got from the IMF to hold off on raising rates until next year. Specifically, they said—your colleague Madam Lagarde mentioned specifically the risk—that even though there’s a risk of slight inflation by doing that, that there was concern that a rate hike could trigger market volatility, with financial stability consequences that go well beyond the U.S. borders. How do you respond to those concerns? Are you factoring in that international context to your decisionmaking? And was it appropriate for the IMF to make those kinds of specific recommendations?
Answer: Okay. So your first question was about a rate increase this year. You know, again, the Committee tries to give an indication in the Summary of Economic Projections about how economic conditions will unfold, their best projections of that and what the appropriate policy will be given in light of those expectations. And, clearly, most participants are anticipating that a rate increase this year will be appropriate. Now, that assumes, as you can see, that they’re expecting a pickup in growth in the second half of this year and further improvement in labor market conditions. And we will all be—we will be making decisions however that depend on the actual data that we see in the months ahead. So, certainly, we could see data in the months ahead that will justify the expectations that you see in the so-called dot plot. But, again, the important point is, no decision has been made by the Committee about what the right timing is of an increase. It will depend on unfolding data in the months ahead. But, certainly, an increase this year is possible. We could certainly see data that would justify that. In terms the IMF guidance, you know, I believe the IMF plays a very useful role by undertaking reviews of the economic policies of all of its members. Obviously, there is a range of opinion among outside observers and market participants as well as among the Committee’s participants, as you can see in the SEP, about how economic conditions are likely to unfold and, consequently, the appropriate timing of an initial rate hike. I think, however, we all agree, and the IMF agrees, that policies should be data dependent, and the Committee is always doing its best to assess the implications of incoming data. I would point out that we have had incoming data since that report was written. But, again, I want to emphasize—and I think the IMF would agree with this—that the importance of the timing of a first decision to raise rates is something that should not be overblown, whether it’s September or December or March—what matters is the entire path of rates. And, as I’ve said, the Committee anticipates economic conditions that would call for a gradual evolution of the fed funds rate toward normalization. With respect to international spillovers, this is something that we have been long attentive to. Obviously, we have to put in place a policy that is appropriate to evolving conditions in the U.S. economy, but we can’t promise that there will not be volatility when we make a decision to raise rates. What we can do is to do our very best to communicate clearly about our policy and our expectations to avoid any type of needless misunderstanding of our policy that could create volatility in the market and potential spillovers as well to emerging markets, and I have been trying to do that now for some time. I’ve been doing my best to make good on that pledge.

Question (Martin Crutsinger, Associated Press): Marty Crutsinger with the Associated Press. You just talked about the fact that you can’t promise that there won’t be volatility in the markets. There seem to be two schools of thought. One is that the Fed learned from the mistakes made in the—2013 with the taper tantrum, and that you’re going to telegraph this so well that that will limit it. And the more pessimistic school of thought seems to be that when you do start raising rates, they’ve been low for so long that it’s going to be—make the taper tantrum seem mild by comparison. Which camp are you falling in on that?
Answer: I think our experience suggests that it’s hard to have great confidence in predicting what the market reaction will be to Fed decisions, and there have been surprises in the past. I don’t think the Committee anticipated that its decision would cause the taper tantrum. And all I can say is that uncertainty in the markets at this point about long-term rates doesn’t appear to be unusually high, and we can only do what is in our power to attempt to minimize needless volatility that could have repercussions for other countries or for financial stability more generally, and that is to attempt to communicate as clearly as we can about our policy decisions, what they will depend on, and what we are looking at. We will be responding to incoming data. We’ve tried to make that clear. And I think it’s clear that the market is also responding to incoming data, and you can see that in daily market reactions to surprises in the economic data. And, of course, none of us can quite forecast what incoming data will be.

Question (Binyamin Appelbaum, New York Times): Your latest economic projections show that you expect the unemployment rate—or, many officials expect the unemployment rate—to fall more slowly this year and then to fall, by implication, more quickly next year. Could you talk about what has changed in your assessment of the labor market and how that influences the path of policy?
Answer: So we are—productivity growth has been—is a factor that affects the pace of improvement in the labor market. Productivity growth has been extremely slow for the last couple of years, and I think, in part, the pace of improvement in the labor market that we’re projecting reflects the notion that there’s likely to be some pickup in the pace of productivity growth. Obviously, that’s something that’s quite uncertain, and it’s conceivable that if productivity growth disappoints—something I hope that we won’t see, because that has very negative implications for living standards—we could conceivably see faster improvement in the labor market. But, in addition, there are other margins of slack that don’t show up in the unemployment rate. Labor force participation that has, at least, is—appears to be depressed, at least to some extent, because of cyclical weakness, and the fact that labor force participation rate has remained roughly stable for the last year or so when there’s an underlying downward trend suggests that some slack is being taken up by, in a sense, improved or diminished cyclical impact on labor force participation. I expect that to continue, and I would expect also to see some improvement in the degree of part-time employment that’s for economic reasons.

Question (Greg Robb, MarketWatch): Thank you. Greg Robb from MarketWatch. I’d like to turn your attention to the housing market for a question. Both rents and house prices have been rising rapidly recently, squeezing Americans on both sides. How comfortable are you with this, and does it impact monetary policy? Thank you.
Answer: Well, I mean, the house—the increase in house prices is restoring wealth of many households who have that as their major asset. It is an important part of the wealth of American household—the American household sector. And for all of the households that were underwater, those house price increases are improving their financial condition, although, of course, at the same time, it’s making housing less affordable for those who look to buy. At the same time, housing overall, given the low levels—still low level of mortgage rates, remains quite affordable. I think credit availability remains quite constrained for mortgages. Anyone who doesn’t have a pristine credit rating is—finds it very difficult at this point to qualify for a mortgage, and I think we’re seeing quite a bit of reluctance, given the job market and given what the history of what’s happened to house prices, of young people to want to buy homes. We’ve seen them delay marriage and wanting to have the flexibility to move. So the demand for multifamily housing to rent is very high, and rent prices are moving up, I think, because of that.

Question (Jeremy Tordjman, Agence France-Presse): Hi, Jeremy Tordjman with Agence France-Presse. I have a question on Europe. As you know, there is a growing political gridlock on Greece, and the scenario of a “Grexit” is getting every day more likely. So how concerned are you by these developments? Do you feel it could impact the global and the U.S. economy, and could it influence in anywhere—in any way, sorry, when you will decide to increase the interest rates?
Answer: Well I—unfortunately, Greece and its creditors are faced with very difficult and consequential decisions at this point and in the days ahead, and my hope is that they will continue to work together to try to find a solution to the, you know, current difficulties and impasse. Obviously, European leaders place great value on preserving European monetary, economic, and political integration, and the Greek people have made clear that it’s important to them to remain in the euro area. So this is a very difficult situation. In the event that there is not agreement, I do see the potential for disruptions that could affect the European economic outlook and global financial markets. I would say that the United States has very limited direct exposure to Greece, either through trade and financial—or financial channels. But to the extent that there are impacts on the euro-area economy or on global financial markets, there would undoubtedly be spillovers to the United States that would affect our outlook as well.

Question (Peter Barnes, Fox Business): Peter Barnes, Fox Business. Madam Chair, I wanted to shift over to the decision in the AIG case this past Monday. And in it, the judge in the case said in his opinion, quote, “There is nothing in the Federal Reserve Act or any other federal statute that would permit a Federal Reserve Bank to take over a private corporation and run its business as if the government were the owner, yet that is precisely what the Federal Reserve Bank of New York did,” and the judge went on to cite the replacement of AIG’s chief executive officer and taking control of AIG’s business operations. I wanted to ask you, did the Fed break the law in assisting AIG back in the crisis? And if this decision is upheld on appeal, how does that affect the Fed’s toolbox? How does it affect its ability to help firms in trouble in a future financial crisis? Would it make that kind of assistance illegal, or would you have to get Congress to change the law and make a fix? Thank you.
Answer: So the Federal Reserve strongly believes that its actions with respect to AIG in 2008 were legal, proper, and effective, and it believes that they were necessary, given the threat that a disorderly failure of that company would have likely implications for the economy, for the flow of credit to households, in businesses in the economy. And it believes that the—we believe that the terms of that intervention were tough, and appropriately so, in order to protect taxpayers from the risks that those rescue loans presented at the time they were made. Now, I should emphasize that Dodd-Frank changed our 13(3) authority and said that the Federal Reserve may not in a future crisis intervene to attempt to address the issues of a particular company. At the same time, it gave the government a set of new tools that it could use in a situation like the AIG situation or Lehman to try to resolve such a situation that poses systemic risks in an orderly way. The—I’d just say at this point, the Federal Reserve under Dodd-Frank can continue, if necessary, in some future crisis to engage in broad-based programs similar to the program we had in effect—the programs we had in effect in 2008 to provide support for the issuance of asset- backed securities that enabled loans to small businesses and to students and for credit cards and, you know, for credit throughout the economy, or to support the issuance of commercial paper. At this point, I believe we are working with the Department of Justice to decide on next steps.

Question (Mark Hamrick, Bankrate): Madam Chair, Mark Hamrick with Bankrate.com. So much discussion about rising rates seems to focus on the potential negatives, and I’m wondering if you could talk a little bit if you envision some possible unintended benefits of higher rates. And one of the things I’m thinking about is the fact that savers have suffered through so many years of miserly returns, and many may be actually anticipating in a positive way seeing a better return on their investment. Thank you.
Answer: So let me say, to my mind, the most important positive is that it—I believe a decision to raise rates would signify very clearly that the U.S. economy has made great progress in recovering from the trauma of the financial crisis and that we’re in a different place. I think, hopefully, that would be something that would be confidence-inducing for many households and businesses. From the point of view of savers, of course this has been a very difficult period. Many retirees—and I hear from some almost every day—are really suffering from low rates that they had anticipated would bolster their retirement income. This, you know, obviously has been one of the adverse consequences of a period of low rates. The—you know, we have a good reason for having kept rates at the levels that we have. We—our charge from Congress is to pursue the goals of maximum employment and price stability. That’s what we’ve been doing. And obviously there are benefits from a strong economy to every household in the economy, including savers, from having a better job market and a more secure economy. But, yes, when the time comes for us to raise rates, I think there will be some benefits that flow through to savers.

Question (James Puzzanghera, Los Angeles Times): Hi, Jim Puzzanghera from the L.A. Times. Just to follow up on that question, I think a lot of savers, people on fixed incomes, were hopeful that they would see a rate increase if not this meeting, soon. What sort—what kind of assurances can you give them and people out there who think the Fed is never going to raise rates? I’ve got some e-mails today from people saying, “They’re never going to raise rates.” What kind of assurance can you give to people who are waiting for that to happen?
Answer: I can’t give an ironclad promise, but I think it’s clear from our Summary of Economic Projections that we anticipate that the economy will grow, that the labor market will improve, that inflation will move back up to 2 percent as we—is our objective over the medium term. And if economic conditions unfold in the way that most of my colleagues and I anticipate, we see it as appropriate to raise rates. And, as you can see, the largest number of participants anticipate that those conditions should be in place later this year. Obviously, we have to—you know, there can be surprises—that might not happen. It’s not an ironclad guarantee, but we anticipate that that’s something that will be appropriate later this year.

Question (Michael Derby, Dow Jones Newswires): Mike Derby with Dow Jones Newswires. Could you shed some additional light on how large reverse repo operations are likely to be in their initial phase? And, additionally, how important are financial conditions to the pace of the Fed’s tightening cycle? I mean, how important is the market’s reaction in determining how fast or slow and the ultimate endpoint of a Fed tightening cycle?
Answer: So, with respect to—you asked first about overnight reverse repos. And we communicated in our minutes that the Committee has an intention to make sure that they are available—overnight repos are available in large quantity at liftoff to ensure that we have a smooth liftoff, that there will be an elevated level of provision of overnight RRP. However, it is our expectation and plan that fairly quickly after liftoff we will reduce the level of the overnight RRP facility, and we have a variety of ways in which we can do that. With respect to market reactions, we always, in evaluating the economic outlook, have to take account of financial conditions, whether it’s the level of long-term interest rates or the value of the dollar in assessing the economic outlook. To the extent that there are market reactions and market movements, whether they’re in reaction to decisions of ours or in reaction to other events—foreign events or unfolding economic conditions—we will always take those into account in deciding on the appropriate path of policy.

Question (Steven Beckner, MNI): Steve Beckner of MNI. Madam Chair, good to see you. You mentioned that the dollar has stabilized. And, in fact, since mid-March, I believe it’s given up a good bit of its gains from last summer. To what extent now do you think that there will be an ongoing drag from the dollar, taking into account this dollar retreat? And, overall, how important is the dollar exchange rate in monetary policy these days relative to the past?
Answer: Well, I think we still are, since last summer—have seen an appreciable increase in the value of the dollar vis-à-vis most of our trading partners, including emerging markets. So it is a significant appreciation of the dollar, and I think we have seen that it’s had a negative effect on net exports and so served as something of a drag on the economy, and probably that drag is going to continue for some time to come. So it is a factor affecting the outlook. In addition, import prices for non-oil imports continue to fall, and I think that’s serving to push down core inflation a little bit. Eventually, I expect that impact to ebb, but it is a factor affecting the outlook. That said, we obviously have no target for the dollar. We take movements in the dollar and its economic impact as one of many factors affecting the outlook. And, in spite of the appreciation of the dollar, the Committee obviously thinks that the economy is likely to do well enough to call—likely call for some tightening later this year.

Question (John Heltman, American Banker): Hi, John Heltman with American Banker. I’d like to ask a regulatory question, if I could. Last month, Senator Elizabeth Warren and Congressman Elijah Cummings sent a letter to the GAO asking about an inquiry into the Fed and other regulators’ implementation of the Community Reinvestment Act, a concern being that the CRA, as it’s implemented now, is not giving communities—blighted communities, like in Baltimore or other places—enough access to basic banking services. Do you think that the Fed is doing everything it can in its CRA implementation to give access to those communities to these kinds of services? Do you think it needs to be doing more?
Answer: So we take CRA very seriously and evaluate for those banks that we supervise. We have a set of guidelines and are very conscientious in attempting to evaluate CRA performance. It’s something that we certainly take into account in assessing applications that we receive for mergers, and we have very active programs to try to bring together community groups with banking organizations to try to provide them with information about how they can assess community needs and best address them. But we are looking at CRA and continue to look to see whether there are ways in which implementation could be improved.