Federal Reserve press conference, 2016-03-16 — Chair Janet Yellen

Question (Steve Liesman, CNBC): Steve Liesman, CNBC. Madam Chair, as you know, inflation has gone up the last two months. We had another strong jobs report, the tracking forecasts for GDP have returned to 2 percent, and yet the Fed stands pat while it’s in a process of what it said it launched in December was a “process of normalization.” So I have two questions about this: Does the Fed have a credibility problem, in the sense that it says it will do some—one thing under certain conditions but doesn’t end up doing it? And then, frankly, if the current conditions are not sufficient for the Fed to raise rates, well, what would those conditions ever look like?
Answer: Well, let me start—let me start with the question of the Fed’s credibility, and you used the word “promises” in connection with that. And, as I tried to emphasize in my opening statement, the paths that the participants project for the federal funds rate and how it will evolve are not a preset plan or commitment or promise of the Committee. Indeed, they are not even—the median should not be interpreted as a Committee-endorsed forecast, and there’s a lot of uncertainty around each participant’s projection. And they will evolve—those assessments of appropriate policy are completely contingent on each participant’s forecast of the economy and how economic events will unfold. And they are, of course, uncertain, and you should fully expect that forecasts for the appropriate path of policy on the part of all participants will evolve over time as shocks, positive or negative, hit the economy that alter those forecasts. So you have seen a shift this time in most participants’ assessments of the appropriate path for policy, and, as I tried to indicate, I think that largely reflects a somewhat slower projected path for global growth—for growth in the global economy outside the United States—and for some tightening in credit conditions in the form of an increase in spreads. And those changes in financial conditions and in the path of the global economy have induced changes in the assessment of individual participants in what path is appropriate to achieve our objectives. So that’s what you see. That’s what you see. Now, I guess you asked me also what would we need to see to continue raising rates, and I think it’s worth pointing out here that the Committee—most participants do continue to envision that if economic developments unfold as they expect, that further increases in the federal funds rate will prove appropriate over time. Most participants anticipate that, and that the pace will be gradual. As I emphasized, most empirical work attempting to assess what the equilibrium level of the fed funds rate is, a level that would be neither expansionary nor contractionary is—those assessments are quite low at this time. So there is accommodation in the stance of policy, and we do expect, over time, that neutral rate to move up, but, you know, we’re not positive what rate—what the pace of change of that will be over time. But, given that the economy is now close to our maximum employment objective, you know, hopefully inflation is moving up—I mentioned, as you mentioned, recent readings on inflation have moved up. There may be some—you know, I want to warn that there may be some transitory factors that are influencing that. But, certainly, our projections are for a gradual increase in inflation, and the Committee—at least, most participants continue to expect that if we follow along this course, that some further adjustments in the federal funds rate will be appropriate but gradual.

Question (Sam Fleming, Financial Times): Sam Fleming from the Financial Times. Can I just follow up on this inflation point? Because the numbers have been ticking up, as you said—somewhat, at least. And we’re also, as you said, also at a point where we have quite close to full employment. Is there a risk that we’re heading for an overshoot in inflation, and is there, given the greater symmetry the Fed has been flagging up, in terms of its inflation target, a greater tolerance for a modest overshoot, especially given the long period of undershoots that we’ve been through?
Answer: So I want to make clear that our inflation objective is 2 percent, and we are projecting a move back to 2 percent. And we are not trying to engineer an overshoot of inflation, not to compensate for past undershoots, so 2 percent is our objective. But it is a symmetric objective, and we certainly don’t seek to overshoot our objective. But some undershoots and overshoots are part of how the economy operates, and our tolerance for those is symmetric with respect to under- and overshoots. We did take note in the statement of the fact that inflation has picked up in recent months. I see some of that as having to do with unusually high inflation readings in categories that tend to be quite volatile without very much significance for inflation over time. So I’m wary and haven’t yet concluded that we have seen any significant uptick that will be lasting in, for example, in core inflation. But we note—the Committee notes, as it did in December, that we continue to monitor development trends and developments closely, and that would include both the fact that recent inflation readings have been on the high side, and, as I mentioned, on the other side, that readings on measures of inflation compensation and some survey measures have been on the low side. So, in that sense, there are risks around the inflation forecast in both—in both directions.

Question (Lindsay Dunsmuir, Reuters): Hi, Lindsay Dunsmuir with Reuters. Your statement did note that, as you’re saying, that inflation has picked up in recent months, and you do still see it going back to 2 percent over the medium term. Yet policymakers have downgraded GDP growth forecasts for this year and one of the inflation measures. So that to me would indicate a weakening economic environment, and I’m wondering how, in that environment, you justify the possibility of two rate hikes this year.
Answer: So there has been a slight downgrading of the assessment of economic growth for this year. But, nevertheless, growth is expected to run in—somewhat in excess of potential, so that the labor market is expected to continue to tighten, and by the end of the year, even edge below levels that—of the unemployment rate—that are estimated to be longer in the normal run, and inflation is expected to gradually move back to 2 percent over time. We still have, weighing on inflation, the influence of earlier declines in energy prices and a prolonged effect from the appreciation of the dollar, but we do expect those transitory influences to fade. And with a continuing—continuing improvement in the labor market, I think we’ll see upward pressure on inflation. And, in that context, the Committee sees it appropriate to—if things unfold in that way, to have some further increases in the federal funds rate. It remains accommodative. As I indicated in December—the Committee indicated in December, we want inflation to go back to 2 percent. But we also want to be careful not to see some significant overshoots, so that we would get behind the curve and potentially be faced with a need to tighten in a very rapid fashion later in a way that could undermine the sustainability of the employment gains we have had. But we do see some continued tightening in monetary policy to be appropriate in that event.

Question (Peter Barnes, Fox Business): Chair Yellen, over here. Hi, Peter Barnes with Fox Business. Could you get a little bit more specific about the global and economic financial developments that continue to pose risks to the U.S. economy? You did mention a strong dollar there just a second ago and slowing global growth. But are you specifically concerned about, for example, China, the emerging markets, and the E.U.? Could you expand on the risks?
Answer: So there has been, by many forecasters, a slight downgrading of forecasts of global growth in—over the coming several years. The IMF has slightly downgraded their forecasts, and other international agencies have as well. Chinese growth hasn’t proven a great surprise. We’ve anticipated that it would slow over time, and it seems to be slowing as well. Japanese growth in the fourth quarter was negative, and that was something of a surprise. And with respect to the euro area, recent indicators suggest perhaps slightly weaker growth. So there’s been a number of emerging markets—as you know, we’re suffering under the weight of declines in oil prices that are affecting their economic activity. Our neighbors both to the north and south, Canada and Mexico, are feeling the impacts of lower oil prices on their growth. So our projection for global growth, for those reasons, is slightly lower—not dramatically lower, but enough lower to make some difference to our forecast. And, as I indicated, I think that’s part of the reason, along with the associated increase we have seen in some spreads that are involved in—enter into corporate borrowing rates, and can affect investment decisions. It’s a reason to think that a slightly lower path for the federal funds rate will be appropriate to achieve our objectives. And so what you see here is a virtually unchanged path of economic projections and a slightly more accommodative path that most participants are writing down for what’s necessary to achieve that.

Question (Martin Crutsinger, Associated Press): Marty Crutsinger, Associated Press. You said in—the policy statement in December said that the risks to the outlook were “balanced,” and you raised rates. That phrasing disappeared then in January and March. Could you talk a little bit about—but in your comments today, you seem to be indicating that not that much has changed. Could you help us understand what needs to happen to get back to “balanced,” and is that the language we need to look for to see the next rate hike?
Answer: So let me say that, in recent weeks, I think the Committee certainly thinks that risks to the outlook have diminished. Nevertheless, we continue to see risks, which we highlighted. Now, I would point out that we decided not to describe the balance of risks as weighted to the downside. So the Committee did not reach that judgment, and there is no collective judgment in this statement on whether the risks are balanced or not. My—we declined to make a collective assessment. You know, my guess is that some participants see them as balanced, and some see them as weighted somewhat to the downside. But I think it is important to note a couple of things. First of all, the U.S. economy has been very resilient in recent months in the face of shocks, and we highlighted that right at the beginning of our statement, where we said that “economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months.” And that—that is important, that the U.S. economy continues to do well. Second, I would say that while global developments do pose some downside risks, the risks are not all one sided. A number of countries—including China, the euro area, the Bank of Japan—have taken measures to stimulate the economy, so there is also upside risk to the economic outlook. And, in addition, oil prices have rebounded from their lows, and that eases concerns about the financial condition of some energy firms and the stresses facing some oil-producing economies. And, at the same time, low oil prices continue to boost household purchasing power. So there are risks. We’re attentive to them. We have not described them as unbalanced to the out—to the downside, and they are two sided. One can identify both upside and downside risks there.

Question (James Puzzanghera, Los Angeles Times): Hi, Jim Puzzanghera with the L.A. Times. Wage growth thus far has been disappointing. It’s been very uneven. It was disappointing, figures in last month’s jobs report. Why do you think that is, and how important is sustained wage growth to removing your wariness on inflation?
Answer: So I must say I’m—I do see broad-based improvement in the labor market, and I’m somewhat surprised that we’re not seeing more of a pickup in wage growth. But at least—and I have to say, in anecdotal reports, we do hear quite a number of reports of firms facing wage pressures and even broad-based, slightly faster increases in wages—wage increases that they’re granting. But in the aggregate data, one doesn’t yet see any convincing evidence of a pickup in wage growth. It’s mainly isolated to certain sectors and occupations. So I do think, consistent with the 2 percent inflation objective, that there is certainly scope for further increases in wages. The fact that we have not seen any broad-based pickup is one of the factors that suggests to me that there is continued slack in the labor market, but I would expect wage growth to move up some.

Question (Patrick Gillespie, CNN): Patrick Gillespie with CNNMoney. Chair Yellen, numerous polls show—by CNN and others—show that the U.S. economy is American voters’ number one concern right now. There’s a lot of negative sentiment about the economy, yet unemployment is low, job gains have been pretty good for the past year, and consumer confidence has picked up. Why do you think there is such disparity between the progress—between the economy and its progress and how voters feel? And my second question is, how does any negative sentiment about the economy factor into your economic outlook and the decisions you make on monetary policy? Thank you.
Answer: Let me start with your second question, if I might. So in trying to judge the outlook for the economy, we do look at measures pertaining to consumer sentiment, and they are in solid territory. Household balance sheets are much improved. Gains in inflation- adjusted disposable income are running at a healthy pace. As I mentioned, households have benefited pretty significantly from lower oil prices, and measures of consumer sentiment do reflect—do reflect that. So they are not at low levels. And, really, the labor market, I think, has improved a great deal. And every demographic group that, you know, we track regularly has seen improvement in their labor market situation—perhaps not all equally, but almost all demographic groups have seen improvement. So I—I think it’s right to say the economy is improving, and most groups are seeing benefits. That said, we know that inequality has been rising in the United States over many years, not just the last several but going back to the mid-’80s. There has been downward pressure on real wage groups—on real wage gains for groups, particularly those that are less skilled and educated, and those longer-term trends that may be associated with a number of factors— technological change and globalization—have been a concern for many, many years, and that may be part of what you’re—we’re seeing expressed.

Question (Christopher Condon, Bloomberg): Thank you, right here. Chair Yellen, there seems to be some growing sentiment that even if the direct economic ties between the U.S. and other economies is still relatively modest, that the impact through financial markets and exchange rates has become more robust. And because of that, it’s becoming more difficult or will become more difficult for the Fed to diverge from other major central banks with its benchmark interest rate. Would you generally agree with that sentiment? Why or why not? And, very briefly, second, if I may—in your mind, does it undermine in any way the standing of the Federal Reserve as a nonpartisan institution when one of its sitting Governors contributes to the campaign of a national political figure? Thank you.
Answer: So let me start with the question pertaining to exchange rates. We have global capital markets. In—in a world with highly integrated capital markets, monetary policy actions in any country have effects—spillovers to other countries. That’s true of our monetary policy, and it’s true of other countries’ monetary policies. In part, that shows up through movements in exchange rates, and those movements are a factor that any country needs to take into account in deciding what is the appropriate stance of monetary policy. So the fact that there are these linkages is an important factor in designing a monetary policy. But it does not mean that monetary—U.S. monetary policy is somehow constrained in a way that makes it impossible for our monetary policy to diverge from policies abroad. There are many periods when monetary policies in different countries have moved in different directions, and, you know, the United States has been growing more strongly and had better success in the labor market than many other advanced countries. And, at this point, it’s natural that there should be some divergence in our monetary policies. Movements in exchange rates partly reflect that. So I wouldn’t want to endorse the notion if, you know—that you’re suggesting, that our policy is in some way crippled by the fact that there are these interlinkages. That’s simply how the global financial system works. We—this is one reason we meet—meet frequently with other economic policymakers in other countries, exchange notes about how we see economic developments evolve, and try to keep one another apprised of economic developments and likely policy responses. Your second question concerned the political contributions. So I want to start by saying that I’ve been involved for many years in the Federal Reserve System, and we are a nonpartisan, independent institution devoted to pursuing our congressionally mandated objectives, and I have never seen political views in any way influence the policy judgments that are made inside the Federal Reserve. I want to say that emphatically. The political activities of Governors, participants, government employees are governed by the Hatch Act. We are all subject to that, and the Hatch Act does allow campaign contributions to be made. It outlaws other forms of partisan activity. And I would say, within that, so it is each—it’s up to each individual to decide what is appropriate, in their point of view. But the Federal Reserve is not—is not a partisan political organization.

Question (Binyamin Appelbaum, New York Times): Binya Appelbaum, the New York Times. The policy, the projections—the new economic projections appear to reflect an increase in your estimate of the extent of labor market slack. You talked about one possible reason for that, which is the softness of wage growth. Are there other considerations that have led you to increase your estimate of how much slack there is in the labor market?
Answer: So I—the path of rate increases maybe slightly reflects the modest decline in estimates of the longer-run normal unemployment rate. That, I would say, reflects, for those who brought it down, an estimate of greater slack in the labor market. The fed funds rate projection is not just that. It’s also, as I mentioned, a reflection of shifts in other views about, for example, the likely pace of global growth that affects what we need, as a policy path, to achieve our objectives. But the slow pace of wage growth, the fact that part-time employment for economic reasons and voluntary part-time employment remains high—we have seen an upward move in labor force participation, which is heartening and suggests that there was scope there for further improvement in the labor market. My guess is that those things influenced individuals who wrote down a slightly lower number for the longer-run unemployment rate.

Question (Nancy Marshall-Genzer, Marketplace): Nancy Marshall-Genzer from Marketplace. We’ve heard a lot of talk today about President Obama’s pick for the Supreme Court, but there are a number of vacancies on the Fed Board of Governors, and there’s a new position, the Vice Chair[man] for Supervision, that the President hasn’t even nominated anyone for. Would you like the President to nominate someone for that position, and what effect are those vacancies having on the Fed?
Answer: Well, I think Congress intended for the Federal Reserve Board to have seven members, and that tends to bring on board people with a wide spectrum of views and experience and perspectives. I think that’s valuable, and I would like to see the Senate move forward and consider these nominees so that we could operate with a full complement. With respect to the nomination for Vice Chair[man] [for] Supervision, that’s a question that I think you need to pose to the White House. I, you know, would say that we are doing a very good job on supervision, and, you know, we are very focused on and devote a great deal of time to that issue. So, really, it’s—the nomination question is one for the White House.

Question (John Heltman, American Banker): Thank you, Madam Chair. John Heltman with American Banker. The President last week expressed concern about what he termed “cynicism” on both sides of the aisle concerning progress made since the crisis to reform the banking sector and the financial sector more generally. Do you share that concern about, kind of, public attitudes that either not enough has been done or what has been done has not been effective in changing the regulatory landscape in banking? Just what are your thoughts?
Answer: So I feel a great deal has been done. We have been working at this for a number of years, and I believe we have made very substantial progress. We have a—much more capital, higher-quality capital, liquidity in the banking system. Our supervision has—we have made very meaningful changes for—in our supervision, for example. The stress tests—the stress-test methodology that we use routinely to evaluate the robustness of the capital positions and plans of the largest institutions constitutes a quantum leap in terms of, I think, the quality of the supervision we are providing, especially of the largest firms. So we have finished writing most of the Dodd-Frank rules. We are working very hard on “too big to fail,” which is of grave concern to the American people. In addition to having a financial system that is more robust and less likely to experience a failure, we have also worked very hard, continue to work on making sure we have the ability to resolve a firm if it were to fail in spite—in spite of having more capital and liquidity. And there, too, I think, we have made very substantial progress. A month or so ago, we came out with a rule—so-called TLAC rule—that would require the largest firms to hold a substantial buffer of long-term debt that, in the event that they were to fail, could be bailed in to protect the taxpayer from having to bear any burden in terms of injecting capital into the firms—it would provide loss absorption in that event. And working jointly, closely with the FDIC, firms have made a great deal of progress with their living wills. We’re in the process of evaluating the most recent submissions. And working with the FDIC, I think, potential techniques that could be used in the event of a failure of a significant financial institution, we have also made a lot of progress there. I think I was at the meeting of financial regulators with the President when he made those comments, and I understood that what he was trying to tell the American people, that they should understand there really has been very substantial progress, and that’s something they should be aware of.

Question (Karen Mracek, MNI): Karen Mracek with Market News International. In the SEP today, the unemployment rate forecast for future years—for 2017, 2018—was marked down without changes to inflation, and there seems to be a growing debate about the relationship between higher—lower unemployment and higher inflation. What is your view about the strength of this relationship, the Phillips curve, and how does that view weigh in to just how much actual inflation versus anticipation—anticipated inflation you’ll need to see?
Answer: Okay, so that was a complicated question, and there—let me start with the Phillips curve. So the Phillips curve posits that there is a relationship between the degree of slack in the labor market and inflation, and it is an empirical relationship that, while not absolutely tight, has been a consistent relationship over time, and I believe that relationship still holds. But the impact of shifts in the unemployment rate on inflation should not be overstated. The Phillips curve has become, according to most estimates, quite flat in the sense that movements in unemployment have only a modest impact on inflation, so we shouldn’t overblow how large that is. In addition, the Phillips curve theory suggests that inflation expectations are also an important driver of actual wage- and price-setting decisions and inflation behavior, and I believe there’s also solid empirical evidence for that. And it’s one of the reasons that I highlighted in my statement, and we continue to highlight in the FOMC statement, that we are tracking indicators of the inflation expectations that matter to wage and price setting. Now, unfortunately, we don’t have perfect measures of these things. We have survey measures. We know that household measures, even when households are asked about longer- term inflation—at longer-term inflation, they tend to move in response to salient changes in prices that they see every day. In particular, when gas prices go down, which is very noticeable to most households, you tend to see a view—you tend to see responses about long-term inflation marked down. So that’s kind of an overresponse to something that’s transitory. So it’s difficult to get a clear read from those survey measures. Inflation compensation as measured in financial markets also embodies a variety of risk premia and liquidity premia. And so, it’s also—we monitor those closely and discuss them in the statement in paragraph one, but, again, there’s not a straight read on what’s happening to the expectations that influence wage and price setting. But this model continues to at least influence my own thinking, and it certainly is a factor that I and at least some of my colleagues are incorporating in these projections.