Federal Reserve press conference, 2017-09-20 — Chair Janet Yellen

Question (Sam Fleming, Financial Times): Thanks very much. Sam Fleming from the Financial Times. The Fed’s staff spoke recently about elevated asset prices in the markets in the most recent—in the meeting before this one held today. How are buoyant market conditions affecting the debate at the moment about how quickly to rein in stimulus? And have they, in your own mind, helped to counter some of the concerns you’ve had about the inflation shortfalls that we’ve been seeing? Thanks.
Answer: So at every meeting we try to assess the economic outlook and take account of information that’s been accumulated about the real economy and also developments in financial markets and put all of that together in assessing the course of the economy. So developments affecting asset prices and longer-term interest rates, the exchange rate—all of those aspects of financial conditions factor into our thinking. But it’s not easy to get a clear read on the implications of asset prices for the overall outlook. Sometimes movements—upward movements in asset prices can, for example, reflect a change in market participants’—reduction in market participants’ estimates of the longer-run level of interest rates. So there has been—there have been downward revisions both to the Committee’s and to market participants’ estimates of the longer-run normal level of interest rates, which in turn reflects in some sense a view that, going out many years, aggregate demand globally is likely to be weakened by continuing low productivity growth and aging populations. And, of course, we don’t know if that view is correct, but that’s a factor that could be reflected— could be one reason why asset prices have moved as they have. So, you know, why are asset prices moving? That’s important in determining the impact on the overall outlook, but, certainly, we are taking account of movements in asset prices in evaluating the appropriate stance of policy.

Question (Ann Saphir, Reuters): Hi, Ann Saphir with Reuters. I wanted to ask you, markets seem to be pricing in still a shallower path of rate hikes than the Fed does in the SEP, and I wonder, what do you think that markets might be missing here, and, sort of, what’s your conviction about, you know, that your view is the correct one on the gradual—the pace that “gradual” means, which seems to be a little bit faster than what markets are pricing?
Answer: So I’m not really going to try to explain what market participants are thinking. I think all of us—both market and FOMC participants’ paths have come down. Not in the last couple of quarters, but over the last several years, there’s been a growing recognition that the so-called neutral interest rate, consistent with the economy operating at maximum employment, that that rate seems to have come down, and most of the economic papers and research bearing on this topic suggest that it’s quite low. Market—SEP—the FOMC participants—you can see by their estimates of the longer-run normal rate of interest, it is—this time it came down from—the median came down from 3 percent to 2.75 percent. So that shows that even in the long run, FOMC participants, in light of incoming data, are adjusting their views. I would say they still believe that, in real terms, that neutral rate will be rising somewhat over the next few years. With a 2 percent inflation rate, that long-run estimate in real terms amounts to 75 basis points, which is higher than the zero or slightly positive rates now. So that’s one factor that explains the path in the SEP. Market participants may have lower estimates or believe that a low neutral rate may be more persistent. I mean, let me emphasize that, as I said before, there’s nothing set in stone about the policy paths that you see in the summary of projections. There’s a great deal of uncertainty around them. Not only is there disagreement, there’s also uncertainty, and FOMC participants have been revising their views over time, and they will continue to do so. I’d also point out a couple of technical reasons why it’s difficult to compare what you see in the SEP and market-implied paths. One is that FOMC participants are writing down what they think is the most likely, or modal, outcome for rates. But, of course, there are downside risks. And the mean rate, if they were asked to write that down, would take account of weighing all possible outcomes and likely would be lower than what participants are writing down as their most likely outcome. In addition, in markets, many economists have suggested that there are term premia that can affect moving from the so-called market-implied path to the view for what the future federal funds rate path is, and if those term premia are negative, as many economists think they likely are, there’s a little bit less difference between what you see in the FOMC plot and the market-implied plot.

Question (Adam Shapiro, Fox Business): Adam Shapiro, Fox Business. Chair Yellen, a month ago you delivered a speech in Wyoming in which you said, “The balance of research suggests that the core reforms we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth.” I have a two-part question based on that quote. First, 1 Chair Yellen intended to say that she met with President Trump early in his term. what message do you want Congress and President Trump to hear from that statement? And then, regarding economic growth, the accommodative process that the Fed has followed for the last 10 years has helped bring us to full employment, but economists point out that there have been people who haven’t benefited. For instance, 52 percent of Americans own stock, 48 percent don’t—they’ve not participated in the gains in the stock market. Housing prices—the median house price is now at a record high, and 39 million Americans, according to a Harvard study, spend more than 30 percent for housing. So what would you say to those people about Fed policies and the impact they’ve had on their lives?
Answer: Okay. So you asked me, what was the main—first, what was the main message of my speech, and I would say it’s that we put in place, since the financial crisis, a set of core reforms that have strengthened the financial system, and, in my personal view, it’s important they remain in place. And those core reforms are more capital, higher-quality capital, more liquidity—especially in systemically important banking institutions—stress testing, and resolution plans. And those four prongs of improvements in banking supervision have really strengthened the financial system and made it more resilient, and I believe they should stay in place. But I also tried to emphasize—and I believe that they have contributed to growth and the availability of credit. I’ve also tried to emphasize that all regulators should be attentive to undue regulatory burden and look for ways to try to scale that back. And this is especially true after years in which we have implemented a large number of complex regulations, and we have been committed to doing that. I would point out particularly community banks that are laboring under significant regulatory burden. We have been looking for ways to scale back burdens, running the EGRPRA process, where we’ve listened to concerns among community banks and are looking for ways, for example, to simplify capital standards and reduce burdens, and that’s very important. More generally, we want to tailor—we want to, and we would like to see Congress as well—we can do things to appropriately tailor regulations to the risk posed by different kinds of banking organizations. There are some things that Congress could also do to help that process, and we have made some concrete suggestions. And then some of the regulations that we have put in place with other regulators since the crisis, like the Volcker rule, are really quite complex, and we’re working—we believe we should—and we’re working with other regulators to try to see if we can find ways, while carrying out what Dodd-Frank intended, that banking organizations not be involved in proprietary trading. Nevertheless, the implementation can be less complex. So that was my main message. Your second question asked about what impact the Fed has had on income distribution because of the fact that stocks and homes tend to be disproportionately owned. So, I would say, look, we were faced with a huge recession that took an enormous toll in terms of depriving large numbers of people—and disproportionately lower-income people who are less advantaged in the labor market—found themselves without work. We had a 10 percent unemployment rate, and our congressional mandate is maximum employment and price stability. So we set monetary policy not with a view toward affecting the distribution of income, but toward pursuing those congressionally mandated goals. And I am pleased to see the unemployment rate and every other measure that I know of pertaining to the labor market show dramatic improvement over these years, and that is hugely important to the economic well-being not at the top end of the wealth and income distribution, but to the bottom end of the income distribution. And we have seen this year median income in real terms rise significantly, with gains throughout the income distribution.

Question (Martin Crutsinger, Associated Press): Marty Crutsinger, Associated Press. Madam Chair, the next month, with the departure of Vice Chair Fischer, the Fed’s going to lose its quorum—the Fed Board—you’ll go to three members. Do you have—is that going to present operational challenges for you? Do have contingency plans? Has the Senate assured you that Mr. Quarles will be—his confirmation will be approved? And in your discussions with the Administration, have they given you any assurances that the pace of nominations is going to pick up soon?
Answer: So first let me say that I will greatly miss Vice Chair Fischer. He’s made enormous contributions to the FOMC and to the broader work of the Federal Reserve, and I have really enjoyed working with him and appreciated his wise counsel and friendship. It is conceivable that we will be down to three Governors. I have full confidence that even if that happens, we will be able to carry out our complement of responsibilities. There’s—every action that we are allowed to take under the Federal Reserve Act can be taken, even if we are a Board of three, although we will have to abide, as we always do, by the restrictions that are part of the Government in the Sunshine Act. I would welcome a full complement of colleagues. We have a lot of work to do, and it would be nice to distribute it over more people. But, perhaps more important than that, I think it’s very important to have a broad range of views around the table as we deliberate on policy actions. I’ve had very good interactions with Randy Quarles and hope he will be confirmed. I look forward to working with him, and, you know, I hope that the Administration will make other nominations to fill our slots.

Question (Nancy Marshall-Genzer, Marketplace): Nancy Marshall-Genzer from Marketplace. When you testified before Congress last July, you said that you might be prepared to take enforcement actions against Wells Fargo if it proved to be appropriate. Do you think it’s appropriate, and what actions could you take?
Answer: So let me say that I consider the behavior of Wells Fargo towards its customers to have been egregious and unacceptable. We take our supervision responsibilities at the company very seriously, and we are attempting to understand what the root causes of those problems are and to address them. I’m not able to discuss confidential supervisory information and not yet able to tell you what actions we may take, but I do want to say that we are committed to taking the actions we regard as necessary and appropriate to make sure that the right set of controls are in place in that organization.

Question (Nancy Marshall-Genzer, Marketplace): Can you give me any kind of a timeline?
Answer: We are working very hard on it.

Question (David Harrison, Dow Jones Newswires): Hi, thank you. David Harrison with Dow Jones. I’d like to follow up on the balance sheet question, if I may. What specifically would it take for you to reverse the decision to wind down the balance sheet, and under what conditions would you consider adding to the balance sheet again? And separately, as a follow-up to that, looking more broadly, how do you think history will judge the effectiveness of your asset purchases and the conditions under which that policy should be used? Thank you.
Answer: So, starting with the last part of the question, I mean, my own judgment, based on my experience and the economic research that has tried to estimate the effectiveness of our balance sheet actions starting in 2008 and has also looked at the similar balance sheet actions in other parts of the world, including the euro area, is that these actions were successful in making financial conditions more accommodative and, I believe, in stimulating a faster recovery than we otherwise would have had. A recent Fed working paper estimated that the full set of balance sheet actions that we took during the crisis may have lowered long-term interest rates by about 100 basis points. Obviously, there are different—there are different estimates around—of what difference it made, but I would say that it’s effective. It will be up to future policymakers to decide, in the event of a severe downturn, whether they think it’s appropriate to again resort to balance sheet—to adding assets to a balance sheet. I would say that if economists are correct that we’re living in a world where the level of neutral interest rates not only in the United States, but around the world is likely to be low in the future due to slow productivity growth and demographics—now, we don’t know that that view will bear out to be correct, but it is a view that many people adhere to when there is evidence of it— then future policymakers will be faced with the question of, in the event of a severe downturn where they’re not able to provide as much stimulus as they would ideally like by cutting overnight interest rates, what other actions are available to them? And during the crisis, we bought longer-term assets and used forward guidance, and for my own part, I would want to keep those things in the toolkit as being available. It will be up to future policymakers to decide how to rank those, or whether or not there might be other options that are available to them, but I don’t think this issue will go away, although perhaps it’s only— well, this could well be a decision that future policymakers will have to face in the event of a significant asset—economic shock. I mean, you asked me what would it take for us to resume reinvestment, and I can’t really say much more than we said in the guidance that we provided, which is that if there is a material deterioration in the economic outlook and we thought we might be faced with a situation where we would need to substantially cut the federal funds rate and could be limited by the so-called zero lower bound, it is that type of determination that our Committee is saying would—might lead us to resume reinvestment. So that’s—our Committee has been unanimous in affirming this statement of intentions, so, you know, I think that’s where our Committee stands. So that is a somewhat high bar to resume reinvestments, and that’s why, in answering previous questions, I would say, well, you know, if there’s some small, negative shock, our first tool—our most important and reliable tool—will be the federal funds rate. But if there is a significant shock that’s a material deterioration to the outlook, we would consider resuming reinvestment.

Question (Victoria Guida, Politico): Hi, Chair Yellen. Victoria Guida with Politico. You’ve been on the Financial Stability Oversight Council for a few years now, and I was wondering if you had any thoughts on whether the designation process for Systemically Important Financial Institutions should be changed or improved in any way. And a somewhat separate, but related, question: The situation with Equifax—I was wondering if there’s anything related to that that might raise systemic issues that FSOC would need to discuss.
Answer: So you asked first about the designation process. So during the time that I’ve been on the FSOC, only one firm was—several firms were designated before I participated. MetLife was designated during the time that I was there, and I have seen how the designation process works. I do think designation is important. We saw during the financial crisis that some systemically important nonbanking organizations like Lehman and AIG—that their distress produced broad systemic consequences that were adverse for the U.S. economy. And having the ability to designate firms when the FSOC makes the determination that their distress or failure could have systemic repercussions, I believe that’s an important—that’s an important policy tool for FSOC to have available. Now, it’s not meant to be a one-way street, in the sense that a firm that’s designated—the procedures require annual reviews. Firms may change their business models or just how they conduct their business, and we should welcome de-designation of firms if their business model is changed in a way that leads us to believe that their failure or distress would no longer be systemically important and those are decisions that we make every year. So, you know, I’m satisfied with that process so far. GE Capital dramatically changed its business model and was de-designated, and, you know, I believe it’s a process that works. So I know that the Treasury is looking at this and may make recommendations, and if they do, I’d be, you know, glad to consider them as, you know, part of the FSOC process, but I think it’s been important and basically working. You asked about Equifax and, you know, of course that is a very serious data breach. We would really urge consumers now to be very careful in monitoring their credit reports and financial situation. And, through our supervision, we’re working with the banks that we supervise to make sure that they take appropriate actions with respect to their business processes in light of the fact that there could be breaches or fraudulent transactions or information that they received that they might use—for example, in credit determinations—could be contaminated by bad data. More generally, it points to the importance of strong cybersecurity controls and attention to cybersecurity risks, which we do see as one of the most significant risks to the financial sector. And we are very focused in our banking supervision in making sure that banks have appropriate controls in place. And the Equifax breach, I think, highlights the importance of that.