Federal Reserve press conference, 2017-03-15 — Chair Janet Yellen

Question (Sam Fleming, Financial Times): Thanks very much. Sam Fleming from the Financial Times. Could I take you up on the last topic, which is the balance sheet normalization? Clearly you said you don’t want to start pulling in the size of the balance sheet until normalization “is well under way.” Could you give us some sort of sense about what “well under way” means, at least in your mind? What kind of hurdles are you setting? What kind of economic conditions would you like to see? Is it just a matter of the level of the short-term federal funds rate as being the main issue? And what kind of role do you see the role of the balance sheet playing in the normalization process over the longer term? Is it an active tool, or is it a passive tool? Thanks.
Answer: So let me start with the second question first. We’ve emphasized for quite some time that the Committee wishes to use variations in the fed funds rate target—our short-term interest rate target—as our key active tool of policy. We think it’s much easier in using that tool to communicate the stance of policy. We have much more experience with it and have a better idea of its impact on the economy. So while the balance sheet, asset purchases are a tool that we could conceivably resort to if we found ourselves in a serious downturn where we were, again, up against the zero bound and faced with substantial weakness in the economy, it’s not a tool that we would want to use as a routine tool of policy. You asked what “well under way” means. I can’t give you a specific answer to that. And I think the right—the right way to look at it is in qualitative and not quantitative terms. It doesn’t mean some particular cutoff level for the federal funds rate that, when we’ve reached that level, we would consider ourselves well under way. I think what we want to have is confidence in the economy’s trajectory, a sense that the economy will make progress, that we’re not overly worried about downside risks and adverse shocks that could hit the economy that could quickly—after setting it off on the path to shrinking the balance sheet gradually over time— cause us to want to begin to add monetary policy accommodation. So I think it has to do with the balance of risks and confidence in the economic outlook and not simply the level of the federal funds rate.

Question (Jason Lange, Reuters): Hi, thank you. Jason Lange with Reuters. You mentioned that you don’t—that you don’t—you want to not have to raise rates rapidly if you were to fall behind the curve. In the current context, “gradual” has been very, very gradual. Could you describe what a rapid rate of increases should be—how that should be understood?
Answer: So I’m not sure that I can tell you what “a rapid rate of increases” is. I think the trajectory that you see is the median in our projections, which, this year, looks to a total of three increases. That certainly qualifies as gradual. My comfort in using the term “gradual” comes back, in part, to my judgment that the neutral level of the federal funds rate— namely, the level of the federal funds rate that would keep the economy operating on an even keel, that it’s a rate where we neither are pressing on the brake nor pushing down on the accelerator—that level of interest rates is quite low. So, at present, I see monetary policy as accommodative—namely, the current level of the federal funds rate is below that neutral rate, but not very far below the neutral rate. We’re closing in, I think, on our employment objective. We’re coming closer on our inflation objective. As we reach those objectives, and particularly in light of the fact that we see the risks to the outlook as roughly balanced at this point—and that’s been our assessment for the last several meetings—it looks to us to be appropriate to gradually raise the federal funds rate back in the direction of neutral. And exactly how many increases is that? You know, the SEP gives you a sense of what Committee participants envision in a concrete sense. But, you know, if it’s one more or one less, I think that still—that still qualifies to my mind as gradual, I think, if you compare it with any previous tightening cycle. I remember when rates were raised at every meeting starting in mid-2004. And I think people thought that was a gradual pace, a measured pace. And we’re certainly not envisioning something like that.

Question (Ana Swanson, Washington Post): Ana Swanson, the Washington Post. You said that the neutral level of the federal funds rate is quite low. How close do you judge it to be to the inflation rate? And what do you anticipate will be the force pushing up the neutral interest rate over the next few years? Could fiscal policy be among those?
Answer: So I’ve given a number of recent speeches on this topic where I’ve developed my views more fully. I would say, over the longer run—that means going several years out—I think the evidence suggests that the neutral rate may be something, in real terms, that might be close to 1 percent or a little bit under that. That would be consistent with the median longer-run value of the federal funds rate in our economic projections for the last several meetings. Three percent is the longer-run normal federal funds rate that participants estimate. In real terms, with a 2 percent inflation objective—that’s 1 percent in real terms. And I’ve indicated—why is it so low? Well, I think there’s very strong evidence that’s accumulated that this rate has been falling not just in the United States, but in many advanced nations, and the decline probably predates the financial crisis. I think in part it reflects slowing population growth and also slow productivity growth here and in many other advanced nations. But some recent work suggests that, at the present time, the neutral real rate is yet lower than that, and some estimates place it around zero in real terms. So I think the lower current rate arguably reflects headwinds that are left over from the financial crisis. One form of headwind, I think, has been caution and restraint and risk aversion on the part of households and businesses that’s held back spending decisions. And, I suppose, my judgment that it’ll move up over time reflects a notion that part of that will gradually dissipate over the years. So that’s a sense of where I think—now, there is uncertainty about the neutral rate. And, as you mentioned, it is—it can be affected by shifts in fiscal policy. How the neutral rate is affected by fiscal policy—that really depends importantly on the nature, the size of the fiscal shift and the effect it has both on demand and supply in the economy.

Question (Nick Timiraos, Wall Street Journal): Thank you. Nick Timiraos of the Wall Street Journal. Chair Yellen, between the release of the minutes of the previous meeting late last month and your speech in Chicago earlier this month, market expectations about an increase in rates today changed quite dramatically. What happened over the course of those two weeks to make officials far more interested in signaling the idea of raising rates at today’s meeting? And why do you think the market was so out of sync with where the central bank was?
Answer: So, when I look at our sequence of communications, they seem to me to have been reasonably consistent over this entire period. We had indicated in December that we expect—we saw the risks as balanced, and if the economy continued to progress along the lines we expected, that several rate increases would likely be appropriate. The minutes of our January meeting indicated that many participants thought that an increase in the funds rate would be appropriate fairly soon if things continued along those lines. I indicated in my congressional testimony that I thought that, indeed, the economy was progressing in line with our expectations. And, as I think all of us—having that expectation and that if the economy continued to progress along the lines that we expected and we continued to see the risks as balanced—do regard it as appropriate to gradually remove accommodation that’s in place by having several interest rate increases this year. As we saw the data continue to come in in line with our expectations, my colleagues and I spoke out and indicated that, indeed, that had been and continued to be our expectations. Now, you know, when you ask me, how did we get out of sync with the market, this is something I tried to reflect on a bit in the remarks I made in Chicago. And, of course, it is true that in 2015 and in 2016 each, we raised the federal funds rate only once, and perhaps market participants have been influenced by that pattern. I did try to explain the reasons why we had moved so slowly during those two years. And it reflects, I think, a set of shocks partly emanating from the global economy and risks that we saw to the outlook as well as more fundamental assessments—reassessments pertaining to the neutral level of the federal funds rate and the longer-run normal level of the unemployment rate. So I think there are reasons, but it is important for the public to understand that we’re getting closer to reaching our objectives; that policy is accommodative; that although the level of the neutral federal funds rate is probably quite low, we nevertheless have an accommodative stance of policy; and it will be appropriate to gradually move toward a neutral stance if we continue on the path we’re on.

Question (Binyamin Appelbaum, New York Times): Binya Appelbaum, the New York Times. The Bank for International Settlements has raised concerns that central banks are being insufficiently attentive to asset price—excuse me, asset price inflation. And stock market investors in the United States certainly don’t seem to be waiting for the Trump Administration to actually implement its fiscal policies. And I guess I’m just curious to know how much of a concern that is for you. And, if not, why not, given the remarkably elevated level of stock price evaluations?
Answer: Well, we do look at financial conditions in formulating our view of the outlook, and stock prices do figure into financial conditions. So I think the higher level of stock prices is one factor that looks like it’s likely to somewhat boost consumption spending. We also noticed that, in the last several months, that risk spreads, particularly for lower-grade corporate issuers, have narrowed, which is another signal that financial conditions have become somewhat easier. Now, on the other side, longer-term interest rates are up some in recent months, and the dollar is a little stronger. How does that net out? There are private-sector analysts that produce financial conditions indices that attempt to aggregate all these different factors affecting financial conditions. And for some of the more prominent analysts and indices, I think the conclusion they have reached is that financial conditions, on balance, have eased, and that’s partly driven by the stock market. So that is a factor that affects the outlook.

Question (Martin Crutsinger, Associated Press): Marty Crutsinger, Associated Press. You and Secretary Mnuchin will be meeting with your G-20 colleagues in Germany this weekend. What do you expect to find there? Do you think the group assessment is going to be that the world economy is finally out of the woods, doing better? Or do you think that there’s still going to be worries about risk? And would one of those risk worries be that the Fed might raise rates too quickly?
Answer: Well, we always exchange views on the economic outlook and developments in our country, and it will be my objective to explain—explain U.S. monetary policy and to try to make the same points to them that I’ve made here already today about what the outlook is for monetary policy in the United States. I think it’s fair to say that the global economy is doing better. It’s growing a bit more strongly than it was, perhaps, the last time I got together that the—with my counterparts in the G-20—that the risks do look somewhat more balanced. But there remain a set of very significant risks, medium term, facing the global economy, and I’m sure that those will be discussed as well.

Question (Kate Davidson, Dow Jones Newswires): Thank you, Madam Chair. Kate Davidson from Dow Jones. There’s a perception out there that the Fed could somehow stand in the way of some of the economic growth policies that the new Administration is pursuing. Given that the Fed is projecting 1.8 percent growth in the long run, is this a potential point of conflict for the Fed and the new Administration?
Answer: So I don’t believe it is a point of conflict. We would certainly welcome stronger economic growth in a context of price stability. And if policies were put in place to speed growth that I’ve certainly urged Congress and the Administration to consider— policies that would boost productivity growth and raise the economy’s so-called speed limit or potential to grow—I think that those would be—those would be very welcome changes that we would like to see.

Question (Kathleen Hays, Bloomberg): [Inaudible] Just quickly, then, I just want to underscore—I want to ask you, so following on that, you expect it to move. But what if it doesn’t? What if GDP doesn’t pick up? What if you don’t see wage measures rising? What if you don’t—what if the core PCE gets stuck at 1.7 percent? Would you—is it your view, perhaps, that if there’s a risk right now in the median forecast for dots, that it’s fewer hikes this year, rather than the consensus, or more?
Answer: Well, look, our policy is not set in stone. It is data dependent, and we’re—we’re not locked into any particular policy path. Our—you know, as you said, the data have not notably strengthened. I—there is noise always in the data from quarter to quarter, but we haven’t changed our view of the outlook. We think we’re on the same path, not—we haven’t boosted the outlook, projected faster growth. We think we’re moving along the same course we’ve been on, but it is one that involves gradual tightening in the labor market. I would describe some measures of wage growth as having moved up some. Some measures haven’t moved up, but there’s some evidence that wage growth is gradually moving up, which is also suggestive of a strengthening labor market. And we expect policy to remain accommodative now for some time. So we’re—we’re talking about a gradual path of removing policy accommodation as the economy makes progress moving toward neutral. But we’re continuing to provide accommodation to the economy that’s allowing it to grow at an above-trend pace that’s consistent with further improvement in the labor market.

Question (John Heltman, American Banker): Hi, John Heltman with the American Banker. A regulatory question, if I may. The Administration has recently reiterated its support for a reinstatement of Glass-Steagall. Treasury Secretary Mnuchin has called for a “21st century Glass-Steagall.” Keeping in mind that there are no specifics on this proposal, is the fundamental idea of separating commercial banking from investment banking a fruitful line of inquiry? Is this the right path to be pursuing?
Answer: So I’ve not seen any concrete proposals along this line. I don’t really know what a “21st century Glass-Steagall” would look like. I think my reading on the financial crisis is that that wasn’t the major source of the financial crisis. In fact, many of the problems emanated from firms that were investment banking units. To me, an important reform in the aftermath of the crisis was to make sure that investment banking activities where—that were a core part of the shadow banking system where leverage had built—that those were appropriately capitalized, had appropriate liquidity, and their management was strengthened, and that’s what we have tried to do. But, obviously, we would look at any proposals that are put forward. I’m not aware of anything concrete to react to.

Question (John Heltman, American Banker): So—so you don’t think it’s necessarily [inaudible] a really good idea?
Answer: Well, I don’t think it was the cause of the financial crisis, and I do feel that we have significantly strengthened supervision of bank holding companies that incorporate investment banking activities.

Question (Jo Ling Kent, NBC News): Hi, Chair Yellen. I’m Jo Ling Kent with NBC News. I just want to know, what message are you trying to send consumers with this particular rate hike?
Answer: I think that’s a great question. I appreciate your asking it. And the simple message is, the economy is doing well. We have confidence in the robustness of the economy and its resilience to shocks. It’s performed well over the last several years. We have created, since the trough in employment after the financial crisis, around 16 million jobs. The unemployment rate has moved way down, and many more people feel optimistic about their prospects in the labor market. There is job security. We’re seeing more people who are feeling free to quit their jobs, getting outside offers, looking for other opportunities. So I think the job market, which is an important focus for us, is certainly improving. That’s not to say that it’s a—good labor market conditions for every individual in the United States. We know there are problems that face, particularly, people with less skill and education and in certain sectors of the economy, but many Americans are enjoying a stronger labor market and feel better—feel very much better about that. And inflation is moving— moving up, I think, toward our 2 percent objective. And we’re operating in an environment where the U.S. economy is performing well and risks seem pretty balanced. So I think people can feel good about the economic outlook.

Question (Jeanna Smialek, Bloomberg): How well can you tolerate an overshoot?
Answer: Well, we would—if there were an overshoot and it appeared to be persistent, we would put in place policies to try to bring inflation back to 2 percent. That’s the core set of principles that we have adopted in our statement on longer-run goals and strategy. And exactly how long it would take to get back to 2 percent would depend, in part, on what was happening with respect to employment and our other objectives. So there’s no hard and fast answer to that.

Question (Patrick Gillespie, CNN): Chair Yellen, Patrick Gillespie with CNN. Some fiscal policy proposals, such as the border adjustment tax, would cause the dollar to strengthen significantly over a short period of time. I realize you can’t comment on the specific policy proposal, but if the dollar were to strengthen quickly over a short period of time, perhaps some 20 percent for whatever reason, what would—what do you think the impact would be on the U.S. economy, particularly in exports and manufacturing? And what do you think would be any implications for U.S. monetary policy?
Answer: So that’s a—that’s a difficult question to answer. You asked that question not in an isolated way: What would the impact of a large appreciation of the dollar be? But, as I understand it, you asked about it in the context of a border tax adjustment. Is that right? Because the argument that is made is that what a border tax would do without an exchange rate adjustment is to raise the price of imported goods into the United States. And that large movement in the dollar that analysts claim would occur would essentially—if it were complete, would fully offset the impact of the border tax on U.S. import goods. So, it wouldn’t end up having an impact on U.S. inflation or GDP growth. But a question that’s a very different—that’s a very different matter than if, suddenly, for some reason, the dollar were simply to begin appreciating by a large amount, say, because there were flight-to-safety flows into the dollar. I mean, if—if the latter were to occur, there were just a big boost in the dollar, it would tend to put downward pressure on inflation and would have a negative effect on U.S. export growth and tend to boost imports. But that’s a, that’s a different— that’s a different exercise. I would just say, it’s very uncertain exactly what would happen to the dollar. There has been a lot of discussion of that, and I think it’s complicated and uncertain.

Question (Victoria Guida, Politico): Hi, Chair Yellen. Victoria Guida with Politico. My question is about Republicans on the House Financial Services Committee wrote to you asking that the Fed not put forward any regulations until a Vice Chair of Supervision is in place. So I have a couple of questions about that. One is, are you all pulling back at all on any regulations—maybe not all regulations, but, you know, maybe only going forward with ones that you see as more time sensitive? And during the hearing before that committee, you mentioned specifically the CCAR stress-test rule would have to come out sometime before that next cycle. Are there any other time-sensitive regulations?
Answer: So at this point we don’t have a lot of time-sensitive regulations. There is nothing right now that we need to get out that’s a significant rule. So we have a relatively light regulatory agenda at this point. We recognize, of course, that we do have an obligation to write the rules that Congress, you know, dictates in laws that they pass, and so that is an ongoing obligation—obligation that we have. But our calendar is relatively light at this point.

Question (Nancy Marshall-Genzer, Marketplace): Some Fed critics have said it’s too soon to raise interest rates because wages haven’t risen enough to justify a rate increase. What would you say to that?
Answer: Well, I don’t—I would like to see wages increase and think there’s some scope for them to increase somewhat further. But our objectives are maximum employment and inflation, and we need to consider what path of rates is appropriate to foster those objectives. Unfortunately, one of the things that’s been holding down wage increases is very slow productivity growth. And I think we are seeing some upward pressure as the labor market tightens. I take that as a signal that we’re coming closer to our maximum employment objectives. But productivity is—for those focusing on wage growth, productivity is an additional important factor.