Federal Reserve press conference, 2017-12-13 — Chair Janet Yellen

Question (Martin Crutsinger, Associated Press): I’m Marty Crutsinger, Associated Press. Madam Chair, could you give us any insight into the discussion and how it dealt with the major tax changes that Congress is considering now? There have been thoughts that with these changes happening at a time when the economy is already—with unemployment so low—that the Fed may be forced to increase its pace on rate hikes. Did any of that discussion come up in your meeting?
Answer: So, yes, we did discuss tax policy, and let me say that most of my colleagues factored in the prospect of fiscal stimulus along the lines of what’s being contemplated by Congress into their projections. Now, I should emphasize that some have been incorporating those expectations into their projections throughout the year, so changes to the projections that you see since September should not be viewed as an impact—an estimate of the impact of the tax package. And, in particular, broader expectations of changes to fiscal policy have been reflected in financial market conditions, I think, over the past year. For example, we have seen a significant increase in the stock market, and at least some portion of that, I would judge, likely partly reflected expected tax changes, and that effect—along with other financial market effects, which affects, for example, projected consumer spending and would have affected wealth—that’s been part of participants’ forecasts now for some time. I think my colleagues and I are in line with the general expectation among most economists that the type of tax changes that are likely to be enacted would tend to provide some modest lift to GDP growth in the coming years, and you see that—in part, that’s one of the reasons, I think, for the uptick you see in estimated growth and decline in the unemployment rate. The views of participants, I believe, have been informed by a wide range of analysis, including that of the Joint Committee on Taxation and other outside evaluators, and my sense is that their estimates are essentially in the same ballpark, although they recognize, as I emphasized, that there is considerable uncertainty about the impacts, and that will have to be monitored over time. More specifically, they tend to see the package as boosting both consumer spending and capital spending, to some extent. Now, to the extent that the changes do have positive impact on the growth of potential GDP and longer-run growth, let me just say that this is something that, should it occur, would be very welcome to participants, as long as it’s consistent with the attainment of our employment and inflation objectives. I guess I would also urge you to remember that when you look at the projections, that there are many factors that affect those projections, and changes in tax policy— that’s only one of a number of factors, including incoming data that has, to some extent, altered the outlook for growth and inflation. All of that factors into the projections you see. But I think, bottom line, when you look at assessments of the funds rate path, participants continue to see gradual increases in the target range for the federal funds rate as being appropriate to sustain a strong labor market and bring inflation back to 2 percent. And, look— importantly, there is a lot of uncertainty about what the likely effects will be, and my colleagues and I will be committed, as always, to evaluating incoming data and altering the outlook as appropriate.

Question (Nick Timiraos, Wall Street Journal): Thank you. Nick Timiraos, the Wall Street Journal. Chair Yellen, I wanted to follow up on the question about tax changes. When you addressed it earlier today, and when you spoke to Congress last month, you often describe that you would welcome higher growth in the context of the employment and inflation mandate. And I guess I wonder how you judge the major provisions of the House and Senate tax plans: the corporate rate cut, immediate expensing of big-ticket purchases, new rates for pass-throughs, temporary rate cuts for individuals. Do you see those, on balance, boosting the productive capacity of the U.S. economy as opposed to simply increasing aggregate demand? And, related to that, how would you view the benefit of such tax changes now, when the economy is nearing full employment, versus at earlier periods when there was greater resource slack?
Answer: So I think my colleagues and I mainly see the likely tax package as boosting aggregate demand, but also having some potential to boost aggregate supply. So changes on the corporate tax side—the reduction in the corporate tax rate, expensing—will lower the cost of capital. And while there are a range of estimates and uncertainty about how much stimulus that will provide to investment, in general I would see some stimulus to investment. In terms of aggregate supply effects, a stronger pace of investment could boost capital formation and thereby raise productivity growth and potential GDP or output to some extent. Exactly how large those effects might be remain uncertain, but that is a channel. And I suppose it’s also possible—I’m uncertain how significant this would be—that lower marginal effective tax rates for those groups that will see them could boost labor supply. And, again, there are a range of estimates in the literatures. I indicated I think participants have reviewed a number of pieces of analysis, including the Joint Committee on Taxation estimates, and the many outside analysts who have weighed in on this and been influenced by that kind of analysis—but there is a good deal of uncertainty about what the impacts would be. And, to the extent that there are larger impacts than those analyses assume on aggregate supply or potential GDP, in the context of an economy that has had disturbingly low productivity growth, that would be welcome and could support faster GDP growth, at least for some period, without—you know, without creating a need to tighten monetary policy to offset that. So there are potentially both demand and supply effects here. So, importantly, you really don’t, at the end of the day, see very much change in the federal funds rate path. Participants do recognize that the unemployment rate is lower than their estimates of its long-run sustainable rate, so I think we are in the vicinity of full employment.

Question (Heather Long, Washington Post): Heather Long from the Washington Post. You have mentioned that the Committee thinks there will be wage increases next year. I’m wondering if you could clarify if that is coming in part or mostly from the changes to the tax plan. Is that what the expectation is, would drive the wage increases? And I was also wondering, I’ve heard from so many female economists in academia and at the Fed about what an inspiration you’ve been to them and how melancholy they will be to see you go. I was wondering if you just had any final words to young females and minorities who may be looking to enter economics or a banking profession and rise to your level.
Answer: Well, I think, generally, in a strong labor market where many firms are having difficulty finding qualified workers, we would expect, just through normal demand and supply channels, to see some upward pressure on wage growth over time. And as the labor market is tightened, we’ve seen some very gradual drift upward in wage gains. They remain—it remains at a low level, but I would expect, in the context of an ongoing strong labor market, to see some upward pressure. And I believe that’s the main thing that my colleagues are factoring in. On your question on advice to women and minorities, in the Federal Reserve, my colleagues and I are very focused on wanting to see and do what we can to foster greater participation of women and minorities in economics. We would love to, if we could, increase our hiring ourselves of women and minorities, and we see that both women and minorities are studying economics in disproportionately and disturbingly low numbers. Although the women in STEM fields generally are about even with men—represent about 50 percent—in economics, women majors constitute something like 30 percent of undergraduate majors, and there is disproportionate low enrollment of minorities. I will just say, from my own experience, I think economics is a terrific field. I’ve thoroughly enjoyed my career in economics and think there are many different paths that people can follow that lead to satisfying careers, and that there are very interesting and important questions that economics addresses. And it is a great field, and I would like to encourage greater involvement and think that people will find that satisfying. And, just in terms of the kinds of research that’s done in the field, I think also a greater diversity, more women and minorities, may change the focus to some extent of the questions that people choose to look at and the analysis that they bring and a range of thinking that bears on research. And all of that would be a healthy development.

Question (Steve Liesman, CNBC): Has there been a directive, or, more importantly, has there been a directive about bitcoin to the banks and their dealings with bitcoin from the Federal Reserve?
Answer: I don’t believe there’s been anything specific about that, just, generally, banks have Bank Secrecy Act anti-money-laundering responsibilities, and this applies to bitcoin as it does in every other realm.

Question (Donna Borak, CNN): Hi, Chair Yellen, Donna Borak with CNN. To return back to the prospective tax bill questions, in your view at all, is the Republican tax bill an ill-timed fiscal stimulus, and are you concerned at all it will wind up squandering the tools both the Congress and the Fed have when it comes time to dealing with a recession?
Answer: So, look, I will just say that it is up to the Administration and Congress to decide on appropriate fiscal policy, and our job is to maintain our focus on employment and inflation. We continue to think, as you can see from the projections, that a gradual path of rate increases remains appropriate even with almost all participants now factoring in their assessment of the impact of the tax—the tax policy. You know, it is projected that the tax cut package will lead to additions to the national debt and boost, by the end of the horizon, the debt-to-GDP ratio. And I will say—and this is nothing new, this is something I’ve been saying for a long time—I am personally concerned about the U.S. debt situation. It’s not that the debt-to-GDP ratio at the moment is extraordinarily or worrisomely high, but it’s also not very low. And it’s projected, as the population continues to age and the baby boomers retire, that that ratio will continue to rise in an unsustainable fashion. So the addition to the debt, taking what is already a significant problem and making it worse, is—it is of concern to me, and I think it does suggest that in some future downturn, which, well, could occur just for whatever reason, the amount of fiscal space that would exist for fiscal policy to play an active role, it will be limited—may well be limited.

Question (Sam Fleming, Financial Times): Sam Fleming from the Financial Times. A couple of longer-term questions. First of all, midway through the year you talked about the issue of whether inflation targets might need to be raised. There’s obviously been a lot more debate in the Fed’s system since then about this. It may not be an imminent issue, but do you expect it to be something the Fed should be discussing over the coming years as some sort of change to the inflation target? Second of all, the amount of stimulus tools that the Fed may have at its disposal when the next downturn strikes are fairly limited. One of the incoming governors, Marvin Goodfriend, has talked about the merits of negative interest rates. I just wondered whether you see that as a potential—or at least in theory, for the Fed to consider should it run out of other options. Thanks.
Answer: So right now the FOMC is not discussing or considering its inflation target. We do see inflation as likely moving up to target over the next couple of years, and I would say—you said our stimulus tools are limited. I would want to emphasize that if there were a negative shock to the economy, we do have some scope to cut the fed funds rate, and there are other tools available, ones that we have used previously: forward guidance and asset purchases. So I think we’re not—I wouldn’t say that we’re out of ammunition, but certainly it’s been recognized—and I’ve emphasized myself that, in the longer run, we may be—and we’ll have to see how this works out, but we may be in low interest rate environments where it could prove useful to have additional scope to conduct monetary policy. And, in that context, I think additional research—the academic economists and others are thinking hard about what more could be done, and I think these are matters that are certainly worthy of further study.

Question (Sam Fleming, Financial Times): So you do believe that negative interest rates, at least in theory, are possible in the U.S. at some point if it should be necessary—at least in theory.
Answer: So, I mean, on that I would say we have—that’s not something that we have studied inside the Fed to any considerable extent and haven’t seriously thought about using ourselves during this last downturn and recovery. We have watched what’s happened in other countries. I think that’s worthwhile. And I would say it’s an area that academics may have interest in in the future and is worthy of some study, but it hasn’t been part of the Fed’s agenda.

Question (Victoria Guida, Politico): Hi, Chair Yellen. Victoria Guida with Politico. I just wanted to ask you quickly, on the regulatory side, in your testimony to Congress recently you spoke positively about the Senate bank regulatory reform bill, and I was wondering if there are— beyond that bill—if there are tweaks to Dodd-Frank that you think might still be beneficial. And then, somewhat related, Governor Powell recently said that there are currently no U.S. banks that are too big to fail. And I was wondering, do you agree with that assessment?
Answer: Well, I mean, you know, I think I’m not familiar with every detail of the bill, but I think the bill does address a wide range of issues that, you know, we’ve highlighted in the past as being ones where perhaps additional flexibility to tailor our supervisory requirements would be worthwhile. So I don’t have additional things on the congressional list. Sorry, and what—the other thing—

Question (Victoria Guida, Politico): Are there any banks that are too big to fail right now?
Answer: So, you know, we continue to work seriously on resolution and the resolution plans, the living wills, and the structure of systemic firms to ensure that it would be possible to resolve a firm—under the bankruptcy code would be the top choice of methods, or, alternatively, under the Orderly Liquidation Authority. And I think it’s fair to say that, over time, we have learned more ourselves and more clearly detailed our expectations for the firms that file living wills. And the firms themselves have made considerable progress in, you know, changing what they do, whether it’s adopting financial contracts that would facilitate a resolution rather than a disorderly unwinding of contracts, making sure that they’re appropriately dealing with shared services so that key services would be able to continue, governance arrangements, legal entity structures—the firms have all made progress in adapting to our expectations of what would enable a successful resolution. So I think it’s an ongoing process, and I believe we have made substantial progress.

Question (Craig Torres, Bloomberg): Should the process be more open somehow?
Answer: Well, I think the process has become more open, and in a number of the recent searches there has been outreach—public outreach, information on websites, acceptance of potential names and nominees, and those have gotten careful consideration. There has been—there have been meetings in some cases with community groups to try to enlarge the pool and get suggestions, and I think that’s appropriate, and I think it has moved in the direction you’re suggesting.

Question (John Heltman, American Banker): Do you mean me, or—as long as everyone gets a turn. This is John Heltman with the American Banker. Sort of a related question to what Nancy was asking—there have been some reservations among some Democratic senators recently during Governor Powell’s confirmation hearing and during the markup of the reg relief bill about the approach towards regulation that the new leadership appears to be adopting. Do you have any similar reservations about the new leadership’s ability to deregulate in an evenhanded way that keeps an eye towards the stability of the financial system and the—sort of, the advances that have come from post-crisis regulation?
Answer: So I would say that all of my colleagues on the Board have expressed a strong commitment to keep in place the core reforms that have produced a stronger financial system. And I’m considering there stronger capital, particularly for the most systemic institutions—higher-quality capital, stronger liquidity requirements, a rigorous stress-testing program, and resolution planning that will make it more possible to resolve a firm that encounters significant distress. So I have heard broad-based commitment to those things, and I think they are the core of the reforms we have put in place. I think all of us agree that it is appropriate to tailor regulatory requirements in all of those areas and others to the systemic footprint of firms. We have done a lot to do that, and I think there is more that could be done, and in some areas it would require legislation in order to do that. But I believe all of my colleagues and I are in agreement on that, and we’re also focused on community banks and want to find ways to relieve burdens. So in those important ways, I do think that all of my colleagues are in the same place with respect to their priorities.

Question (James Puzzanghera, Los Angeles Times): Hi, Chair Yellen. Jim Puzzanghera with the Los Angeles Times. I’m wondering, you mentioned this is your last news conference. What are your plans when you step down from the Fed? Are you going to remain in Washington? Will you go back to Berkeley? And, also, I’m curious if you have any disappointment that you’re not going to be continuing in this job as some of your predecessors have done.
Answer: So, on my plans, I don’t have anything definite for you, I guess. I have a home in Berkeley and expect to maintain it. But I would say, my spouse is on the faculty—he’s a professor at Georgetown and would like to stay in his job, and we expect to maintain Washington as our base. But I don’t have any definite plans. Let’s see. And you asked me if I’m disappointed. So let me just say that I have served in senior positions in the Federal Reserve now for quite a long time. I became president in San Francisco in 2004, and I’ve participated in the FOMC since that time as president, as Vice Chair, and as Chair, and it’s been an immensely rewarding experience for me. I feel very positive about what we’ve been able to accomplish and feel tremendous, you know, loyalty to the institution. So I did make the judgment that this is the right time for me to leave, but I feel I have served in senior positions at the Fed for a long time, and it’s really been an honor and a privilege for me to have had a chance to do so.

Question (Adam Shapiro, Fox Business): Adam Shapiro with Fox Business. Glad to hear you’re staying on the East Coast. I’m just curious, I wanted to follow up to the bitcoin questions, but—because you’ve lived through what we all experienced in 2007, 2008, and—should the Fed take a more active role in trying to identify who some of the counterparty and what the exposure is with bitcoin as a potential threat to financial stability? Just—the best minds at the Fed can sometimes miss these kinds of threats. Your predecessor, Mr. Bernanke, actually said in ’07 that the contagion from subprime would not affect the housing market or the economy. So are we underestimating the potential threat from bitcoin as it runs up in value?
Answer: Well, I certainly agree that it’s important for the Fed to attempt to understand emerging risks to financial stability and to be looking not just in the banking system but outside it for developments that could pose financial risks, and we are doing that. And, I would say, one of the changes during my tenure is, we devoted—decided in the aftermath of the crisis that we needed to devote considerable resources to financial stability to monitor for emerging threats, and now we have at the Board a full-blown division of financial stability that’s involved in doing that. Now, when you ask about bitcoin, I still see the financial stability risks from it as limited. Often, risks threatening financial stability arise when there’s exposure of the banking system to fluctuating asset valuations, and I really don’t see any significant exposure of our core financial institutions to threats from bitcoin if its value were to fluctuate. I don’t see a threat to our core financial institutions. So, undoubtedly, there are individuals who could lose a lot of money if bitcoin were to fall in price, but I really don’t see that as creating a full-blown financial stability risk.