Federal Reserve press conference, 2015-09-17 — Chair Janet Yellen

Question (Steve Liesman, CNBC): Steve Liesman, CNBC. Madam Chair, this notion of uncertainty in economic and global developments—is it fair to say that it could be many months before those global developments work their way through the U.S. economic data, and that you would not have the certainty that you’re looking for to raise interest rates for many months and perhaps well into next year?
Answer: Well, Steve, I think you can see from the SEP projections that most participants continued to think that economic conditions will call for or make appropriate an increase in the federal funds rate by the end of this year. Four participants moved their projections into 2016 or later, but the great majority of participants continued to hold that view. And, of course, there will always be uncertainty. We can’t expect that uncertainty to be fully resolved. But, in light of the developments that we have seen and the impacts on financial markets, we want to take a little bit more time to evaluate the likely impacts on the United States. And, as I mentioned, the inflation outlook has softened slightly. We’ve had some further developments—namely, lower oil prices and a further appreciation of the dollar—that have put some downward pressure in the near term on inflation. Now, we fully expect those further effects, like the earlier moves in the dollar and in oil prices, to be transitory. But there is a little bit of downward pressure on inflation, and we would like to see some further developments. And this, importantly, could include—is likely to include—further improvements in the labor market that would bolster our confidence that inflation will move back to 2 percent over the medium term.

Question (Sam Fleming, Financial Times): Sam Fleming from the Financial Times. Could I ask about the next meeting, which is in October? Do you view that as a live meeting even though there isn’t going to be a scheduled press conference at that time? And what kind of developments would you need to see to be confident in moving in the near term? Is it more important, the developments in the financial markets, or is it more to do with the upcoming data? Thanks very much.
Answer: So, as I’ve said before, every meeting is a live meeting where the Committee can make a decision to move to change our target for the federal funds rate. That certainly includes October. As you know, and I’ve stressed previously, were we to decide to do that, we would call a press briefing, and you’ve participated in an exercise to make sure that you would know how to participate in that press briefing should it happen. So, yes, October remains a possibility. And we will be looking at incoming developments, both financial and economic, to try to make sure we feel, really, that the U.S. economy is doing well. You know, I want to emphasize, domestic developments have been strong. We see domestic demand growing at a solid pace, the labor market continuing to improve. Of course, we will watch incoming data to confirm our expectation that that will continue. And we, of course, will watch global financial and economic developments. I can’t give you a recipe for exactly what we’re looking to see, but, as we say, we want to see continued improvement in the labor market, and we would like to bolster our confidence that inflation will move back to 2 percent. And, of course, a further improvement in the labor market does serve that purpose. There could be other things we would see that could bolster that confidence, but further improvement in the labor market will serve to do that.

Question (James Puzzanghera, Los Angeles Times): Hi. Jim Puzzanghera from the L.A. Times. There were a group of protesters out here before your meeting. There was a similar group at Jackson Hole. They and others have warned the Fed not to raise the rate because—out of concern that the labor market is not fully healed, wages haven’t risen fast enough. What impact, if any, has that had on you and your colleagues in your decision today?
Answer: So, we have been receiving advice from a large number of economists and interested groups, and that’s of course appropriate, and we value hearing the opinions of many—you know, many different groups and individuals with different perspectives. But, look, at the end of the day, it’s the Committee’s job to come together to analyze the data that we have on the economy, to decide how it affects the outlook, and to try to deliberate and arrive at a Committee judgment about the appropriate path of policy, and that’s what we did today. As I said, although we are close to many participant’s [estimates] and the median estimate of the longer-run normal rate of unemployment, at least my own judgment—and this has been true for a long time—is that there are additional margins of slack, particularly relating to very high levels of part-time involuntary employment and labor force participation, that suggest that, at least to some extent, the standard unemployment rate understates the degree of slack in the labor market. But we are getting closer. The labor market has improved. And, as I’ve said in the past, we don’t want to wait until we’ve fully met both of our objectives to begin the process of tightening policy given the lags in the operation of monetary policy.

Question (Kate Davidson, Wall Street Journal): Thank you. Kate Davidson from the Wall Street Journal. Madam Chair, do you think, over the past two months since your last meeting, that you’ve gotten closer to or further away from the Fed’s inflation goals? And then, separately, you’ve received a congressional subpoena relating to the disclosure of information from the Fed’s September 2012 policy meeting. Are you any closer to complying with that? Have you turned over any new information to Congress?
Answer: So, your first question was, have we come closer or moved further away from our inflation goal. So we’ve used the same language, which is that we expect to achieve our 2 present goal over the medium term, and I would say, although we—as we say in our statement, recent developments seem likely to put some downward pressure. We’re, after all, way below our inflation target. But an important reason for that is that declines in import prices reflecting the appreciation of the dollar and declines in energy prices are holding down inflation well below our target and well below core inflation. We expect those effects to be transitory, and with well-anchored inflation expectations, we expect inflation to move back to 2 percent. Now, in the intermeeting period, we have seen some further appreciation of the dollar and some further downward pressure on energy prices, and that creates a bit of further drag on inflation that I would view as transitory—is very likely to be transitory. So I continue and the Committee continues to expect that inflation will move back to 2 percent, so this should be a small thing. And, in the meantime, the labor market has continued to improve, so a tighter labor market, a labor market moving toward full employment, is one that historically has generated upward pressure on inflation. So that bolsters my confidence in inflation. On the other hand, we’ve had a long period in which inflation has been running below our objective. I consider it, and the Committee does, very important that we—we achieve our inflation objective and defend against inflation that is persistently above our inflation objective and also persistently below our inflation objective. And we want to have not only an expectation, but a good degree of confidence that that will occur. We did take note in the statement of a decline in inflation compensation, and it’s hard to get a direct read on inflation expectations out of these measures. They can be pushed down by factors pertaining to liquidity in the Treasury—in the TIPs market and other issues pertaining to risk premia, but we have taken note of that, and I would say that that’s something that has caught our attention and is a factor that we’re watching. So we’d like to have a little bit more confidence, but I would not interpret developments during the intermeeting period as significantly undermining confidence. And the labor market is really important that as it continues to improve—it has, and we want to see it improve further—that serves to bolster confidence. Oh, I’m sorry, you asked about the September 2012 leak. We are working very closely with House Financial Services Committee that’s requested information to satisfy their request. We’re working very closely with them.

Question (Binyamin Appelbaum, New York Times): Binya Appelbaum, the New York Times. The economic projections that you all released today show that Committee members expect roughly a three- year period in which the unemployment rate will be at its lowest sustainable level and yet inflation will not rise above 2 percent. That seems extraordinary. Could you talk about why, as a moment ago you said we would expect inflationary pressures when unemployment is at a low level? Why is inflation going to be so weak for so long under those circumstances, and does it indicate—when you are projecting that basically much of a decade will have passed without the Fed reaching its inflation target—does it indicate that you have failed to do enough to revive this economy in recent years?
Answer: Well, we have been very focused, Binya, on doing everything we can to revive this economy and to achieve our maximum employment objective. And after we took the funds rate down to zero, as you know, we put in place a number of other extraordinary measures—including forward guidance and large-scale asset purchases—in order to speed the recovery and attain both our inflation objective and our maximum employment objective. And, I mean, when you look at the projection, you see, as you mentioned, that we see sufficient growth to push the unemployment rate. It’s already very close to participants’ estimates of its longer-run normal level. We expect the unemployment rate to fall slightly—or, at least, participants project that it will fall slightly below that level. As that occurs, we would expect labor force participation, the cyclical component of that, to diminish over time, and we would hope to see some decline in the portion of slack that’s reflected in high levels of part-time involuntary employment. Now, inflation is going back in our projection to 2 percent. It takes to 2018 to get there. It’s awfully close in 2017, and it’s not terribly far away even next year. We have very large drags from import prices and energy prices, and over the next year or so, those things should dissipate. And the behavior of inflation should mainly—if we—if our understanding of the inflationary process is correct and if inflation expectations are well anchored at 2, which I believe they are, as the labor market heals and as that healing progresses, we will see further upward pressure on inflation. That’s what we expect. Now, it’s a slow process, it’s characterized by lags, and that’s why it takes a few years as the inflation—as the unemployment rate falls and even overshoots its longer-run normal level, it just takes some time for inflation to get back to 2 percent. But the overshooting helps it get back faster than it otherwise would. And it’s certainly important for us, and I think our credibility hinges on defending our inflation target not only from threats that it rises above, but also that we not have—that over the medium term, that we want to see inflation get back to 2 percent. And we believe the policies we’re following are designed to accomplish that and will do so.

Question (Ylan Mui, Washington Post): Hi, thanks. Ylan from the Washington Post. I want to kind of piggyback on Binya’s question a little bit and bring up the old thresholds of 6.5 percent unemployment and 2.5 percent inflation as the period during which the Fed promised to keep interest rates low. That had sort of assumed—I guess sort of suggested that the Fed was comfortable with inflation rising above 2 percent. But you just said moments ago that you don’t want to wait until inflation actually hits your target before you are ready to lift off. So I wonder if you could explain that a little bit. Is there a shift in how much inflation the Fed is actually willing to accept?
Answer: So let me be clear—2 percent is our objective. We want to see inflation go back to 2 percent; 2 percent is not a ceiling on inflation. So we’re not trying to push the inflation rate above 2. It’s always our objective to get back to 2, but 2 percent is not a ceiling. And if it were a ceiling, you would have to be conducting a policy that, on average, would hold the inflation rate below 2 percent. That is not our policy. We want to see the inflation rate get back to 2 percent as rapidly as we can. But there are lags in the impact of monetary policy on the economy. And if we waited until inflation is back to 2—and that would probably mean that unemployment had declined well below our estimates of the natural rate— and only then did we start to—begin to—and, you know, the word “tighten” monetary policy I don’t think is really right because we have an immensely accommodative monetary policy in place. So, let me say, just to begin to diminish the extraordinary degree of accommodation for monetary policy, we would be overshoot—we would likely overshoot substantially our 2 percent objective, and we might be faced with then having to tighten policy in a way that could be disruptive to the real economy. And I don’t—I don’t think that’s a desirable way to conduct policy.

Question (Jeanna Smialek, Bloomberg): Jeanna Smialek, Bloomberg News. You mentioned earlier that, you know, there is always going to be some uncertainty in the global economy, yet it seems that uncertainties are what kept you from hiking this month. You know, how do you communicate to markets what is the kind of uncertainty that keeps you from lifting rates and what is the kind of uncertainty you can overlook and, you know, move in spite of?
Answer: So, that’s a very hard question, and, you know, it’s why we come together and have very careful evaluations of a wide range of factors. But, at the end of the day, what we’re focused on are two things: the path for employment and whether or not we feel confident that we’re on a road that will take us to our maximum employment objective and whether or not we see the risks around obtaining that as balanced. Of course, there will be uncertainty around it and whether or not we have reasonable confidence that inflation, will, over the medium term, go back to 2 percent. And it’s really through that filter that we’re trying to look at uncertainty. Of course, there are many uncertainties in the global economy, but we’re asking ourselves how economic and financial developments in the global economy affect the risk to our outlook for our two goals and whether or not they create unbalanced risks that we want to wait to resolve, to some extent.

Question (Ann Saphir, Reuters): Ann Saphir with Reuters. Just to piggyback on the global considerations—as you say, the U.S. economy has been growing. Are you worried that, given the global interconnectedness, the low inflation globally, all of the other concerns that you just spoke about, that you may never escape from this zero lower bound situation?
Answer: So I would be very—I would be very surprised if that’s the case. That is not the way I see the outlook or the way the Committee sees the outlook. Can I completely rule it out? I can’t completely rule it out. But, really, that’s an extreme downside risk that in no way is near the center of my outlook.

Question (Michael McKee, Bloomberg): Michael McKee from Bloomberg Radio and Television. If the economy develops as the Summary of Economic Projections suggests, you will see improvement in labor markets, but it won’t push inflation up any faster. So I’m wondering what the argument is for raising rates this year as suggested by the dot plot, because even allowing for long and variable lags, you’re not forecasting an inflation problem that would seem to suggest the need for a steeper and faster rate path for at least a couple of years.
Answer: So, if we maintain a highly accommodative monetary policy for a very long time from here and the economy performs as we expect—namely, it’s strong and the risks that are out there don’t materialize—my concern will be that we will have much more tightening in labor markets than you see in these projections. And the lags will be probably slow, but eventually we will find ourselves with a substantial overshoot of our inflation objective, and then we’ll be forced into a kind of stop–go policy. We will have pushed the economy so far it will have become overheated, and we will then have to tighten policy more abruptly than we’d like. And instead of having slow, steady growth, improvement in the labor market, and continued improvement and good performance in the labor market, I don’t think it’s good policy to have to then slam on the brakes and risk a downturn in the economy.

Question (Martin Crutsinger, Associated Press): Marty Crutsinger, Associated Press. In July, when you were talking to us, you said that you yourself expected to see the first rate hike before the end of the year. Is that still your expectation? And also, when you talked about the developments in financial markets and what caused the August turbulence—you mentioned China and other things—you did mention the prospects of a Fed rate increase. Do you think that played a role as well?
Answer: So you ask me about my own expectation, and I’d say—I don’t want to—I speak on behalf of the Committee and try to explain Committee decisions, and we don’t identify who’s who in terms of our projections of the funds rate, and I don’t want to change that and have the focus be on my personal views on the path. You know, I have characterized the Committee view as, you know, a forecast that will likely, if it prevails, if that’s how the economy evolves, call for a funds rate increase later this year. And I think that’s a fair summary of the Committee’s assessment of things. You asked me, I think, also about uncertainty about our own policies?

Question (Michelle Fleury, BBC): Hi, Michelle Fleury, BBC News. You talked a lot about the strong dollar. I wondered, do you see your policy actions affecting the dollar? Is it something you consider when you are making your policy decisions?
Answer: So, monetary policy—U.S. monetary policy is directed toward trying to achieve the goals the Congress has laid out for us. When we—when monetary policy tightens and interest rates rise, it commonly is the case, either when it happens or in expectation—the expectation that that’s coming—interest rate differentials globally do tend to reduce capital flows that have impacts on exchange rates.1 So monetary policy often has some effect on the exchange rate, and it’s not, in my view, the main channel by which monetary policy works. It’s one of a number of different channels by which monetary policy works, but it does have some impact on exchange rates, and, of course, yes, we need to take that into account. 1 Chair Yellen intended to say that “interest rate differentials globally do tend to induce capital flows that have impacts on exchange rates.”

Question (Jon Prior, Politico): Thanks. What—I’m Jon Prior with Politico. What role did a possible government shutdown this year play in your decision today to delay the rate hike, and what would you say to lawmakers who are pursuing this strategy yet again?
Answer: Well, it played absolutely no role in our decision. I believe it’s the responsibility of Congress to pass a budget, to fund the government, to deal with a debt ceiling so that America pays its bills. We have a good recovery in place that’s really making progress, and to see Congress take actions that would endanger that progress—I think that would be more than unfortunate. So, to me, that’s Congress’s job. Congress charged us with forming an economic outlook that is focused on the medium term and taking appropriate policy actions based on that outlook, and that’s what we have done in the past and will continue to do going forward.

Question (Steven Beckner, MNI): Madam Chair, Steve Beckner of MNI. You said in your opening statement that the Fed’s policy of maintaining a large balance sheet—by not starting to shrink that balance sheet by curtailing reinvestments and rollovers—that helps add to your accommodative monetary stance on top of the near-zero federal funds rate. By delaying rate hikes, logically, are you not also delaying reducing the balance sheet? A year ago, the FOMC said it would not start shrinking the balance sheet and still it’s—until it started raising the funds rate. So is it a concern that you are delaying normalization of the balance sheet? Was that an issue that you and your colleagues discussed? Thank you.
Answer: We have been—and this was reported in the minutes of our July meeting—we have been discussing reinvestment policy. Our normalization principles indicated that we would not begin to either reduce or eliminate reinvestments until after we have begun to raise the federal funds rate. Our principles said that the exact timing of that would depend on economic and financial conditions and our evaluation of them, and that guidance continues to be accurate—we don’t have anything further on it. But it is certainly true that we have committed to wait to begin running down our balance sheet until after we’ve begun the process of normalization. So, yes, if we defer, this is not a very large matter that we’re talking about from a stimulus point of view. But it is, to some extent, true that if we delay raising the rate, it probably—maybe delays the timing at which that process will begin. But there’s no fixed— we’ve not given some fixed amount of time at so many months after we start. And we’re continuing to discuss what the appropriate timing would be of that policy and haven’t made any further decisions on that just yet.