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

Question (Martin Crutsinger, Associated Press): Marty Crutsinger with the Associated Press. I guess the word is “finally.” The—we have asked you for so long, “Why were you delaying? Why were you delaying?” So, I’ll ask, given developments around the world that still—there is still weakness, and the inflation is still nowhere near your target. What made you say “Do it now”? Some have said it was because you feared a lack of credibility if you didn’t move. Did that play a role in your decision?
Answer: We decided to move at this time because we feel the conditions that we set out for a move—namely, further improvement in the labor market and reasonable confidence that inflation would move back to 2 percent over the medium term—we felt that these conditions had been satisfied. We have been concerned, as you know, about the risks from the global economy, and those risks persist, but the U.S. economy has shown considerable strength. Domestic spending that accounts for 85 percent of aggregate spending in the U.S. economy has continued to hold up. It’s grown at a solid pace. And while there is a drag from net exports, from relatively weak growth abroad, and the appreciation of the dollar, overall, we decided today that the risks to the outlook for the labor market and the economy are balanced. And we recognize that monetary policy operates with lags. We would like to be able to move in a prudent and, as we’ve emphasized, gradual manner. It’s been a long time since the Federal Reserve has raised interest rates, and I think it’s prudent to be able to watch what the impact is on financial conditions and spending in the economy, and moving in a timely fashion enables us to do this. Again, I think it’s important not to overblow the significance of this first move. It’s only 25 basis points. It—monetary policy remains accommodative. We have indicated that we will be watching what happens very carefully in the economy in terms of our actual and forecast— our projected conditions relative to our employment and inflation goals and will adjust policy over time as seems appropriate to achieve those goals. Our expectation, as I’ve indicated, is that policy adjustments will be gradual over time, but, of course, they will be informed by the outlook, which in turn will evolve with incoming data.

Question (Steve Liesman, CNBC): Madam Chair, thank you. Steve Liesman, CNBC. Under the old regime, before you were raising rates, it was easy to understand within your mandate what you wanted to do. You wanted the unemployment rate to fall, you wanted inflation to rise, and it was easy for the public to judge the success or failure of your policy. Could you explain under the new regime what you’re looking for? Do you want the unemployment rate to stop falling? Do you want it to rise? And what is it you hope for from inflation, which I think is a little more understandable, or is “neutral” itself now a policy goal?
Answer: “Neutral” is not a policy goal. It is an assessment. It’s a benchmark that I think is usual—is useful for assessing the stance of policy. Neutral is essentially a stance of policy, a level of short-term rates, which, if the economy were operating near its potential— and we’re reasonably not quite at that, but reasonably close to it—it would be a level that would maintain or sustain those conditions. So, at this point, policy we judge to be accommodative. The Committee forecasts that the unemployment rate will continue to decline, and I think that’s important and appropriate for two reasons. First of all, as I’ve indicated, I continue to judge that there remains slack in the economy, margins of slack that are not reflected in the standard unemployment rate, and, in particular, I’ve pointed to the depressed level of labor force participation and also the somewhat abnormally high level of part-time employment. So a further decline in the unemployment rate and strengthening of labor market conditions will help to erode those margins of slack. But also we want to see inflation move up back to our 2 percent objective over the medium term, and so seeing above-trend growth and continuing tightness— greater tightness in labor and product markets—I think that will help us achieve our objective as well with respect to inflation.

Question (Jon Hilsenrath, Wall Street Journal): Chair Yellen, Jon Hilsenrath from the Wall Street Journal. In the sentence in your statement about gradual increases, in that section, the Committee says that it “will carefully monitor” progress—actual and expected progress on inflation. That’s going to read like some kind of code to a lot of people on Wall Street. Can you describe—what do you mean when you say “carefully monitor”? And, specifically, with regard to what you do next, do you need to see inflation actually rise at this point in order to raise interest rates again?
Answer: Well, we recognize that inflation is well below our 2 percent goal. The entire Committee is committed to achieving our 2 percent inflation objective over the medium term, just as we want to make sure that inflation doesn’t persist at levels above our 2 percent objective. The Committee is equally committed—this is a symmetric goal—and the Committee is equally committed to not allowing inflation to persist below our 2 percent objective. Now, I’ve tried to explain—and many of my colleagues have as well—why we have reasonable confidence that inflation will move up over time, and the Committee declared it had reasonable confidence. Nevertheless, that is a forecast, and we really need to monitor over time actual inflation performance to make sure that it is conforming, it is evolving, in the manner that we expect. So it doesn’t mean that we need to see inflation reach 2 percent before moving again, but we have expectations for how inflation will behave. And were we to find that the underlying theory is not bearing out, that it is not behaving in the manner that we expect, and that it doesn’t look like the shortfall is transitory and disappearing with tighter labor markets, that would certainly give us pause. And we have indicated that we’re reasonably close—not quite there, but reasonably close—to achieving our maximum employment objective, but we have a significant shortfall on inflation. And so we’re calling attention to the importance of verifying our—that things evolve in line with our forecasts.

Question (Jon Hilsenrath, Wall Street Journal): Just to follow up, do you need to see it rise? Not necessarily get to the 2 percent goal, but in order to move again, do you want to see inflation measures actually moving higher?
Answer: I’m not going to give you a simple formula for what we need to see on the inflation front in order to raise rates again. We’ll also be looking at the path of employment as well as the path for inflation. But if incoming data were—led us to call into question the inflation forecast that we have set out, and that could be a variety of different kinds of evidence, that would certainly give the Committee pause. But I don’t want to say there’s a simple benchmark. We—you know, the Committee expects inflation—over the next year, the median expectation is for inflation to be running about 1.6 percent, and—both core and headline. So we do expect it to be moving up, but we don’t expect it to reach 2 percent.

Question (Craig Torres, Bloomberg): What would that action look like?
Answer: Well, you know, if the economy were disappointing, we—you know, our actions wouldn’t purely be based on inflation, we would also take employment into account. So I can’t give you a simple answer, but we would pursue a more accommodative policy because we do—certainly are committed to achieving 2 percent over the medium term.

Question (Binyamin Appelbaum, New York Times): Binya Appelbaum, the New York Times. Bill Dudley has talked about the need for the Fed to adjust policy based on the responsiveness of financial markets as you begin to increase rates. You didn’t talk about that today. Is it a point that you agree with? And, if so, what is it that you’re looking for? How will you judge whether financial markets are accepting and transmitting these changes?
Answer: Well, there are number of different channels through which monetary policy is transmitted to spending decisions. The behavior of longer-term—longer-term interest rates, short-term interest rates matter. The value of asset prices and the exchange rate, also— these are transmission channels. We wouldn’t be focused on short-term financial volatility, but were there unanticipated changes in financial conditions that were persistent and we judged to affect the outlook, we would of course have to take those into account. So we will watch financial developments, but what we’re looking at here is the longer-term economic outlook: Are we seeing persistent changes in financial market conditions that would have a bearing, a significant bearing, on the outlook that we would need to take account in formulating appropriate policy? Yes, we would, but it’s not short-term volatility in markets.

Question (Binyamin Appelbaum, New York Times): In part, what I was attempting to say is, if you didn’t see changes, you would be concerned and have to move more, quickly. Are you concerned that if markets don’t tighten sufficiently you may need to do more?
Answer: Well, look, you know, we—this is not an unanticipated policy move, and we have been trying to explain what our policy strategy is. So it’s not as though I’m expecting to see a marked, immediate reaction in financial markets. Expectations about Fed policy have been built into the structure of financial market prices, but we obviously will track carefully the behavior of both short- and longer-term interest rates, the dollar, and asset prices, and if they move in persistent and significant ways that are out of line with the expectations that we have, then of course we will take those into account.

Question (Rebecca Jarvis, ABC News): Thank you. Rebecca Jarvis, ABC News. Historically, most economic expansions fade after this long. How confident are you that our economy won’t slip back into recession in the near term?
Answer: So let me start by saying that I feel confident about the fundamentals driving the U.S. economy, the health of U.S. households, and domestic spending. There are pressures on some sectors of the economy, particularly manufacturing and the energy sector, reflecting global developments and developments in commodity markets and energy markets, but the underlying health of the U.S. economy I consider to be quite sound. I think it’s a myth that expansions die of old age. I do not think that they die of old age. So the fact that this has been quite a long expansion doesn’t lead me to believe that it’s one that has—its days are numbered. But the economy does get hit by shocks, and there are both positive shocks and negative shocks. And so there is a significant odd, you know, probability in any year that the economy will suffer some shock that we don’t know about that will put it into recession. And so I’m not sure exactly how high that probability is in any year, but maybe at least on the order of 10 percent. So, yes, there is some probability that that could happen, and of course we’d appropriately respond, but it isn’t something that is fated to happen because we’ve had a long expansion, and I don’t see anything in the underlying strength of the economy that would lead me to be concerned about that outcome.

Question (Rebecca Jarvis, ABC News): In the event of an outcome like that, in the most negative of scenarios, are there other policy measures outside of interest rates, outside of traditional quantitative easing, that you inside of the Fed have discussed and contemplated for another environment like something which we saw throughout the Great Recession? Have you talked about anything that would be more direct to the economy?
Answer: Well, during the years in which we were—you know, the economy was recovering from the Great Recession and we put further policy and measures in place, we studied our policy options quite carefully. As you know, communications policy to affect market expectations about the path of interest rates played an important role. That’s something we did in conjunction with asset purchases. Obviously, we lowered our overnight interest rate effectively to zero. Now, we have seen some foreign central banks, Europe—the ECB and others—that have taken their overnight rate into negative territory, and that’s something that—I don’t contemplate that we will need to do this, but it is something that we could study. Of course, we have balance sheet policies, and there might be a range of direct policies that we could use as well. But this is something that we have thought about, our range of options.

Question (Peter Barnes, Fox Business): Peter Barnes at Fox Business, ma’am. On financial market conditions, is there a problem developing in the high-yield sector of the bond market, the junk bond sector? As you know, last week a mutual fund, Third Avenue Management, halted redemptions so that it wouldn’t have to—because of a sharp selloff in these kinds of bonds. Are you concerned at all, and did you discuss in the meeting, any risk to the financial system, a systemic risk, because of the conditions in the junk bond market? And, you know, individual investors and institutions hold trillions of dollars of these bonds, which were sold heavily because of low rates, and did the Fed’s low interest rate policy help lay—sow the seeds for this development? Thank you.
Answer: Well, risk spreads in the high-yield bond market have been widening since last year, partly reflecting falling oil prices—only partly, but partly—and redemptions in high-yield bond funds have been increasing in recent months. But Third Avenue Focused Credit Fund was a rather unusual open-end mutual fund. It had very concentrated positions in especially risky and illiquid bonds, and it had been facing very significant redemption pressures. My understanding is that the SEC is in touch with Third Avenue. And, as you probably know, the SEC has proposed some reforms to address what’s a structural problem of liquidity mismatch in open-end mutual funds. So we continue to believe that financial conditions are supportive of economic growth. We will be—we have been and will continue to track developments in financial markets very carefully. I would say that I think we have a far more resilient financial system now than we had prior to the financial crisis and highly capital[ized] banks that are well situated to support corporate lending. I’d also point out that many corporations during these years have reduced their interest payments and extended their debt profiles, and I think that should help to mitigate spillovers, but we will be evaluating this carefully.

Question (James Puzzanghera, Los Angeles Times): Hi, Jim Puzzanghera from the L.A. Times. You said it’s important not to overblow the significance to this first move, but, as you know, there’s been a lot of attention paid to it. Can you explain to average Americans what if anything might be different in the next few weeks or few months for them because of this interest rate hike?
Answer: So I think the first—the first thing that Americans should realize is that the Fed’s decision today reflects our confidence in the U.S. economy, that we believe we have seen substantial improvement in labor market conditions, and while things may be uneven across regions of the country and different industrial sectors, we see an economy that is on a path of sustainable improvement. So, in thinking about their labor market prospects and their financial prospects going forward, I hope they will take this decision as one that signals the FOMC’s confidence that conditions will continue to strengthen and job market prospects will be good. It is a very small move. It will be reflected in some changes in borrowing rates. Longer- term interest rates—loans that are linked to longer-term interest rates are unlikely to move—to move very much. Some—for example, some corporate loans are linked to the prime rate, which is likely to move up with the fed funds rate, and those interest rates will adjust. There are some consumer borrowing rates, I think credit card rates, that are linked to short-term rates that might move up slightly. But, remember, we have very low rates, and we have made a very small move.

Question (John Heltman, American Banker): Madam Chair, John Heltman with American Banker. How concerned are you with interest rate risk in banks now that you’ve obviously ended the zero-rate era and began the 0.25 percent–rate era? Is that a factor in decisions going forward? Is it something that you’re concerned about?
Answer: Interest rate risk at banks is something that we have been monitoring very carefully for quite a long time. The community banks and smaller banking organizations that we work with—part of our supervision has been ensuring that they manage appropriately for interest rate risk. And the larger banking organizations that are subject to the stress tests and capital planning—the scenarios that we have presented in each of the last three years look at their ability to withstand what would be much sharper increases in interest rates than we’re envisioning would happen. But we want to make sure that if there were sharper increases— unlike our expectations—that they would be well positioned to handle it. And we have concluded that—that their capital positions are sufficient for them to weather it. So this has been very much on our minds.

Question (Steven Beckner, MNI): Chair Yellen, Steve Beckner of MNI. You have often said that the Fed is going to be data dependent, but you’ve also said in the past that you want to avoid being mechanical. Now, if the data seem to warrant rate hikes at successive meetings, how will you avoid the perception—a market perception—that you’re falling into a pattern or becoming mechanical?
Answer: Well, we will try to avoid that. I do want to emphasize that while we have said “gradual,” gradual does not mean mechanical, evenly timed, equally sized interest rate changes. So that is not what the Committee means by it. My guess is that the economy will progress in a manner that is not sufficiently even that we will decide to make evenly spaced hikes. I recognize we want to do what’s appropriate, and I recognize that’s a danger. But I do want to assure you that we will be data dependent. As the outlook evolves, we’ll respond appropriately. I strongly doubt that it will mean equally spaced hikes, and it certainly is not the intention of the Committee to follow any mechanical formula of that type.

Question (Brendan Greeley, Bloomberg): Brendan Greeley, Bloomberg. You just mentioned that it may be possible that structural factors are holding down inflation as well, and the dynamic that’s happening in top-line inflation is happening in core as well. In September, the median projection was revised down. Again today, the median projection was revised down, and this is happening at other central banks as well. Additionally, markets see much lower inflation in the future than central bank models do. Within the Fed, how are you adapting your models to look at what is now—seems to be a new reality, and what are you learning as you do that?
Answer: Well, so the reason—the main reason that we revised down our projection ever so slightly—it’s hardly revised for core inflation—is because we have seen further appreciation of the dollar that’s holding down import prices that spills over into core inflation. I mean, my own estimation is that core inflation will pick up. There are various idiosyncratic factors that affect core inflation—for example, nonmarket price increases, which are a little bit hard to understand, have been running at a slow pace. There were factors that have been affecting inflation in medical care prices that may change over time. So there is some idiosyncratic factors. But I personally don’t think we’re in a world where inflation is being determined in a different way than it has historically. I see import prices and energy prices as holding down headline but also core, and I do believe it will pick up. But as we’ve said, if that theory is wrong and we do not see inflation is unfolding in the way the Committee expects, we will make adjustments over time in policy.

Question (Brendan Greeley, Bloomberg): You have a background as an academic. Are you looking into these models to see whether they need to be adapted?
Answer: I mean, we have many people who are studying inflation models. I’ve, you know, tried to—let me express some humility about them. I do not think that they’re perfect. Monetary policy is based on economic forecasts. There are theories of how the economy works that govern many aspects of economic forecasting. Whether it’s consumer spending or residential investment or inflation, the underlying theories are not perfect, and they are subject to uncertainty. And this is true in all aspects of forecasting, which is why we change our forecasts and our models. We throw out models that are persistently not working. We’re always trying to develop better models. I’m not aware, I will say, of a different model of inflation that would be superior to the one that we employ. But we have to verify that inflation is moving in the manner that we expect, and if it’s not, we need to adjust policy accordingly.

Question (Nancy Marshall-Genzer, Marketplace): Wage growth is not quite where you would like it to be. How much is that going to play into your thinking next year as you’re trying to decide whether to raise interest rates more and when?
Answer: So my expectation is that in a strengthening labor market that we would see faster wage growth, and I believe there is, with the 2 percent inflation objective, space for wage growth to be higher than it’s been. We may be seeing some incipient signs of faster wage growth. We’ve seen a pickup in measures of hourly compensation and some slight firming in recent months in average hourly earnings. I hesitate to say that this is a firm trend. We’ve been disappointed in the past. Wage growth is not—there are many factors that affect it—it’s not definitive in any sense in determining our policy, but it does have a bearing on the inflation outlook. It also has a bearing on assessing how much slack there is in the labor market, and I think a number of my colleagues looking at the slow pace of wage growth have—you’ve seen that their estimates of the longer-run normal unemployment rate have come down. And I think that is one of the factors that has prompted those adjustments. So, you know, it does affect views about just how much slack there is in the labor market and the inflation outlook.