Category Archives: Janet Yellen

Janet Yellen’s September 20, 2017 Press Conference – Notable Aspects

On Wednesday, September 20, 2017 Janet Yellen gave her scheduled September 2017 FOMC Press Conference. (link of video and related materials)

Below are Janet Yellen’s comments I found most notable – although I don’t necessarily agree with them – in the order they appear in the transcript.  These comments are excerpted from the “Transcript of Chairman Yellen’s Press Conference“ (preliminary)(pdf) of September 20, 2017, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, September 2017“ (pdf).

From Janet Yellen’s opening comments:

Turning to inflation, the 12-month change in the price index for personal consumption expenditures was 1.4 percent in July, down noticeably from earlier in the year.  Core inflation-which excludes the volatile food and energy categories–has also moved lower.  For quite some time, inflation has been running below the Committee’s 2 percent longer-run objective.  However, we believe this year’s shortfall in inflation primarily reflects developments that are largely unrelated to broader economic conditions.  For example, one-off reductions earlier this year in certain categories of prices, such as wireless telephone services, are currently holding down inflation, but these effects should be transitory.  Such developments are not uncommon and, as long as inflation expectations remain reasonably well anchored, are not of great concern from a policy perspective because their effects fade away.  Similarly, the recent, hurricanerelated increases in gasoline prices will likely boost inflation, but only temporarily.  More broadly, with employment near assessments of its maximum sustainable level and the labor market continuing to strengthen, the Committee continues to expect inflation to move up and stabilize around 2 percent over the next couple of years, in line with our longer-run objective.  Nonetheless, our understanding of the forces driving inflation is imperfect, and in light of the unexpected lower inflation readings this year, the Committee is monitoring inflation developments closely.  As always, the Committee is prepared to adjust monetary policy as needed to achieve its inflation and employment objectives over the medium term.

also:

As I noted, the Committee announced today that it will begin its balance sheet normalization program in October.  This program, which was described in the June addendum to our Policy Normalization Principles and Plans, will gradually decrease our reinvestments of proceeds from maturing Treasury securities and principal payments from agency securities.  As a result, our balance sheet will decline gradually and predictably.  For October through December, the decline in our securities holdings will be capped at $6 billion per month for Treasuries and $4 billion per month for agencies.  These caps will gradually rise over the course of the following year to maximums of $30 billion per month for Treasuries and $20 billion per month for agency securities and will remain in place through the process of normalizing the size of our balance sheet.  By limiting the volume of securities that private investors will have to absorb as we reduce our holdings, the caps should guard against outsized moves in interest rates and other potential market strains.

Janet Yellen’s responses as indicated to the various questions:

NICK TIMIRAOS. Nick Timiraos, Wall Street Journal. Chair Yellen Fed Governor Leal Brainard recently gave a speech, in which she said trend inflation appeared to have moved lower by around half a percentage point. I wanted to ask do you agree? And what would the Fed need to do if anything to boost trend inflation if it has fallen? And related to that you’ve said you expect the inflation softness this year to prove transitory. Compared to three months ago how firm is your current expectation that the slowdown will remain transitory and what implications would that have for monetary policy if it has not.

CHAIR YELLEN. So the term trend inflation, usually there are a variety of statistical techniques that can be used to extract a trend from a series. Exactly what that means is, in some sense a statistical thing, and there are methodologies that would show some modest decline in recent years, in the trend. After all, we’ve had a number of years in which inflation has been low. As I said in answer to an earlier question, I think if you go back to, say 2013, and consider the until this year, the reasons why inflation was low are not hard to understand. It’s a combination of slack in the labor market, declines in energy prices, and the strong dollar that pulled down import price inflation. So, what’s important in determining inflation going forward, is inflation expectations. By some, by many, by some survey measures of professional forecasters, those have been rock solid. We do also look at household expectations, which have come down some. Market-based measures of inflation compensation, as we mentioned in the statement, they have declined, and they’ve been stable in recent months, but they have declined to levels that are low by historical standards. That might suggest that inflation expectations have come down, but one can’t get a clear read, there are risk premia built in to inflation compensation that make it impossible to extract directly what inflation expectations are. So, you know, there is a miss this year I can’t say I can easily point to a sufficient set of factors that explain this year why inflation has been this low. I’ve mentioned a few idiosyncratic things, but frankly, the low inflation is more broad-based than just idiosyncratic things. The fact that inflation is unusually low this year does not mean that that’s going to continue. Remember that in January and February, core inflation was running over a 12-month basis, at around 1.9 percent, and we look to be very close to 2 now. We’ve had several months of data that have meaningfully pulled, pulled that down, and what we need to do is figure out whether or not the factors that have lowered inflation are likely to prove persistent, or they’re likely to prove transitory, and that’s what we’re going to try to be determining on the basis of incoming data, and you asked me about the policy implications. Of course, if it, if we determined our view changed, and instead of thinking that the factors holding inflation down were transitory, we came to the view that they would be persistent, it would require an alteration in monetary policy to move inflation back up to 2 percent, and we would be committed to making that adjustment.

also:

ADAM SHAPIRO. 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 the quote. First, 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 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 prices 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?

CHAIR YELLEN. 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 Gripper 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, that’s very important. More generally, we want to tailor, we want to win, 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 is some things the Congress could also do to help, help that process, and we have made some concrete suggestions, and in 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, 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 disproportionate. So, I 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, who were 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, 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.

also:

DAVID HARRISON. Hi, thank you. David Harrison with Dow Jones. I’d like to followup on, on the Balance Sheet question if I may. What specifically would it take for you to reverse the decision to wind down the balance sheets, 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, should be used?

CHAIR YELLEN. So starting with the last part of the question, I mean, my own judgment, based on my experience in 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’ve 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. There is 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, adding assets to a balance sheet. I would, 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, and 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 if, 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, 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 the situation where we would need to substantially cut the federal Funds Rate, and could be limited by the so-called zero lower bound, it, it is that type of determination that our committee is saying would, might lead us to read, to resume reinvestment. So that’s, our committee has been unanimous and affirming this statement of intentions, so, you know, I think that’s where our committee stands, that so, that is a somewhat high bar to resume reinvestments, and that’s why in answering previous questions, I would say well, you know, to 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 some material deterioration to the outlook, we would consider resuming reinvestment.

 

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2503.97 as this post is written

Janet Yellen’s June 14, 2017 Press Conference – Notable Aspects

On Wednesday, June 14, 2017 Janet Yellen gave her scheduled June 2017 FOMC Press Conference. (link of video and related materials)

Below are Janet Yellen’s comments I found most notable – although I don’t necessarily agree with them – in the order they appear in the transcript.  These comments are excerpted from the “Transcript of Chairman Yellen’s Press Conference“ (preliminary)(pdf) of June 14, 2017, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, June 2017“ (pdf).

From Janet Yellen’s opening comments:

Following a slowdown in the first quarter, economic growth appears to have rebounded,
resulting in a moderate pace of growth so far this year. Household spending, which was
particularly soft earlier this year, has been supported by solid fundamentals, including ongoing
improvement in the job market and relatively high levels of consumer sentiment and wealth.
Business investment, which was weak for much of last year, has continued to expand. And
exports have shown greater strength this year, in part reflecting a pickup in global growth.
Overall, we continue to expect that the economy will expand at a moderate pace over the next
few years.

In the labor market, job gains have averaged about 160,000 per month since the start of
the year–a solid rate of growth that, although a little slower than last year, remains well above estimates of the pace necessary to absorb new entrants to the labor force. The unemployment rate has fallen about 1/2 percentage point since the beginning of the year and was 4.3 percent in May, a low level by historical standards and modestly below the median of FOMC participants’ estimates of its longer-run normal level. Broader measures of labor market utilization have also improved this year. Participation in the labor force has been little changed, on net, for about three years. Given the underlying downward trend in participation stemming largely from the aging of the U.S. population, a relatively steady participation rate is a further sign of improving conditions in the labor market. Looking ahead, we expect that the job market will strengthen somewhat further.

Janet Yellen’s responses as indicated to the various questions:

SAM FLEMING. Thank you very much. Sam Fleming from the Financial Times. We’ve
now had a very long streak of– or fairly long streak of weak inflation numbers at least measured by the CPI this morning as well. Marketplace-based inflation expectations are declining. What kind of vigilance are you now saying is needed in terms of weak inflation? How does that interact with your policy outlook? And would further disappointments argue for pressing pause on rate hikes or delaying balance sheet run-off? How do you think about those two potential responses to weak inflation?

CHAIR YELLEN. So, let me just say as I emphasized in my statement and always say monitory policy is not on a preset course. We indicated in our statement today that we’re closely
monitoring inflation developments and certainly have taken note of the fact there have been
several weak readings particular on core inflation. Our statement indicates that we expect
inflation to remain low in the near term. But on the other hand, we continue to feel that with a
strong labor market and labor market that’s continuing to strengthen, the conditions are in place for inflation to move up. Now, obviously we need to monitor that very carefully. And ensure especially with roughly five years of inflation running under our 2 percent objective that is a goal to which the committee is strongly committed. And we need to make sure that we have in place the policies that are necessary to achieve 2 percent inflation and I pledge that we will do that. But let me say with respect to recent readings, it’s important not overreact to a few readings and data on inflation can be noisy. As I pointed out, there have been some idiosyncratic factors I think that have held down inflation in recent months, particularly a huge decline in cell telephone service plan prices, some declines in prescription drugs. We had an exceptionally low reading on core PC in March, and that will continue to hold down 12-month changes until that reading drops out. But we are this morning’s reading on the CPI showed weakness in a number of categories and it’s certainly something that we will be closely monitoring in the months ahead. We will–we’re focused on in making our policy decisions on the medium term outlook and we will, you know, be looking carefully at incoming data and as always revising our outlook and policy plans as appropriate.

also:

BINYAMIN APPELBAUM. Binyamin Appelbaum, the New York Times. Measures of financial conditions show that since the Fed started raising interest rates two years ago, financial conditions actually have loosened. Consumer business borrowing costs in many cases are down. Do you have the sense that the market is not listening to you? How much of a concern is that for you? And at some point, does it convince you that you need to raise rates perhaps more quickly?

CHAIR YELLEN. Well, in deciding what the appropriate path of rates is, we take many
different factors into account. We have certainly noticed the stock market is up considerably over the last year. That usually shows up in financial conditions indexes and is an important reason why some of them show easier financial conditions. There has been a modest decrease recently in the value of the dollar although it’s up substantially since mid-2014. So, we take those factors into account in deriving our forecasts and deciding the appropriate stance of policy. We have done that and– but other things also affect the stance of policy. So there really can’t be any simple relationship. We’re not targeting financial conditions. We’re trying to set a path of the federal funds rate, the taking into account of those factors and others that don’t show up in the financial conditions index. We’re trying to generate paths for employment and inflation that meet our mandated objectives.

also:

NANCY MARSHALL-GENZER. Hi, Nancy Marshall-Genzer from Marketplace.  Recently, a group of economists send the Fed a letter earlier this month, disagreeing with your 2 percent inflation target and saying, they would like the economy to run a bit hotter. They don’t think the labor market is so tight. You say you’re committed to the 2 percent target, but what do you say to them?

CHAIR YELLEN. So, at the time that we adopted the 2 percent target, it was back in
2012, we had a very thorough discussion of the factors that should determine what our inflation objective should be. And, you know, I believe that was a well thought out decision. Now, at the moment, we are highly focused on trying to achieve our 2 percent objective. And we recognize the fact that inflation has been running below and it’s essential for us to move inflation back to that objective. Now, we’ve learned a lot in the meantime and assessments of the level of the neutral likely level currently and going forward of the neutral federal funds rate have changed and are quite a bit lower than they stood in 2012 or earlier years. And that means that the economy is– has the potential where policy could be constrained by the zero lower bound more frequently than at the time that we adopted our 2 percent objective. So, it’s that recognition that causes people to think we might be better off with a higher inflation objective, and that’s an important set. This is one of our most critical decisions and one we are attentive to evidence and outside thinking. It’s one that we will be reconsidering at some future time. And it’s important for our decisions to be informed by a wide range of views and research which is ongoing inside and outside the Fed. But a reconsideration of that objective needs to take account, not only of benefits of a higher in potential benefits, of a higher inflation target, but also the potential cost that could be associated with it. It needs to be a balanced assessment. But I would say that this is one of the most important questions facing monetary policy around the world in the future and we very much look forward to seeing research by economists that will help inform our future decisions on this.

also:

MICHAEL MCKEE. And the characterization of you as a low-interest rate person?

CHAIR YELLEN. Well, I have felt that it’s been appropriate for interest rates to remain
low for a very long time. We are in the process of as the economy strengthens normalizing
interest rates. But certainly, we’ve had a lot of years in which interest rates have been low. I
thought it was necessary to support the economy at that time and was strongly in favor of those policies.

also:

MICHAEL DERBY. Mike Derby from Dow Jones Newswires. In light of the plans to trim the balance sheet hopefully later this year, what have you learned about QE and your bond
buying policies as a tool for monetary policy? When they were launched, it wasn’t something
you had, you know, engaged in that scale before, a lot of fear and said it was going to create a
hyperinflation that hasn’t ever seem to come to pass. So, you know, in light of QE as potentially
a tool for the future, you know, it might come back again, what have you learned about how it
works in the economy? Like where do you see it affect things? You know, what are sort of the
lessons learned of the experience?

CHAIR YELLEN. Well, thanks. That’s a great question. I mean, staff in the Federal Reserve and outside economists who have done a great deal of work trying to evaluate QE, I think the general conclusion is that it has worked in that it has put some downward pressure on
longer term interest rates, so-called term premiums embedded in longer term interest rates.
There’s disagreement among economists about exactly how large those effects are and it’s
something that’s difficult to pin down. But obviously, it has not caused runaway inflation quite
the contrary. I mean, that was never my expectation but I do remember when people were afraid that that would happen. We do have the tools. We have, you know, even with a large balance sheet, we intend to shrink our balance sheet now. But even with a large balance sheet, we retain the ability to move the fed funds rate and set it as appropriate to the needs of the economy. So, I think we have learned that it works. It’s a valuable part of the toolkit. It’s something that if we were to encounter an episode in the future of extreme weakness where I’ve said, we want the fed funds rate and movements in short-term interest rates, that’s our go-to number one main policy tool. But if we were to hit the zero lower bound and constrained in our use of that tool, certainly balance sheet policies and forward guidance of the type that we provided, I believe based on the evidence of how they worked or to remain part of our toolkit. And we have said in the bullets that we released today on our balance sheet that in such of– an episode of such extreme weakness in the future, those are things we would consider going forward.

MICHAEL DERBY. One small follow-up. Is four and a half trillion sort of a natural limit
to how high you might want to push the balance sheet or could you envision it going higher if
you needed it to?

CHAIR YELLEN. Well, we’ve had no discussion of that issue, you know. And our focus
now is on getting it back to a more normal size. But I would say the use of QE in the United
States relative to the size of our economy is not as high as it’s been in some other countries that
have employed it. But that’s something we haven’t seriously even discussed.

 

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2432.46 as this post is written

Janet Yellen’s March 15, 2017 Press Conference – Notable Aspects

On Wednesday, March 15, 2017 Janet Yellen gave her scheduled March 2017 FOMC Press Conference. (link of video and related materials)

Below are Janet Yellen’s comments I found most notable – although I don’t necessarily agree with them – in the order they appear in the transcript.  These comments are excerpted from the “Transcript of Chairman Yellen’s Press Conference“ (preliminary)(pdf) of March 15, 2017, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, March 2017“ (pdf).

From Janet Yellen’s opening comments:

CHAIR YELLEN. Good afternoon. Today, the Federal Open Market Committee decided to raise the target range for the federal funds rate by 1/4 percentage point, bringing it to 3/4 to 1 percent. Our decision to make another gradual reduction in the amount of policy accommodation reflects the economy’s continued progress toward the employment and price stability objectives assigned to us by law. For some time the Committee has judged that, if economic conditions evolved as anticipated, gradual increases in the federal funds rate would likely be appropriate to achieve and maintain our objectives. Today’s decision is in line with that view and does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy. I’ll have more to say about monetary policy shortly, but first I’ll review recent economic developments and the outlook.

The economy continues to expand at a moderate pace. Solid income gains and relatively high levels of consumer sentiment and wealth have supported household spending growth. Business investment, which was soft for much of last year, has firmed somewhat, and business sentiment is at favorable levels. Overall, we continue to expect that the economy will expand at a moderate pace over the next few years.

Janet Yellen’s responses as indicated to the various questions:

SAM FLEMING. Thanks very much, Sam Fleming from the Financial Times. Picking up on the last topic, 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.

CHAIR YELLEN. 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.

also:

BINYAMIN APPELBAUM. Binyamin Appelbaum, the New York Times. The Bank for International Settlement 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 evaluation?

CHAIR YELLEN. 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 notice 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’ve 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.

also:

KATHLEEN HAYS. Chair Yellen, Kathleen Hays. Oh excuse me, Kathleen Hays from Bloomberg. I’m going to try to take the opposite side of this because, on this question about market expectations and how the markets got things wrong, and then how you say the Fed suddenly clarified what it already said. But, for example, if the–if you look at the Atlanta Fed’s latest GDP tracker for the first quarter, it’s down to 0.9 percent. We had a retail sales report that was mixed, granted the, you know, upper divisions of previous months make it look better, but the consumer does not appear to be roaring in the first quarter, kind of underscoring the waitand-see attitude you just mentioned. If you look at measures of labor compensation, you note in this statement that they’re not moving up. And, in fact, they are–and if you look at average–there are so many things you can look at. And you, yourself, have said in the past that the fact that that is happening is perhaps an indication there’s still slack in the labor market. I guess my question is this, in another sense, what happened between December and March? GDP is tracking very low. Measures of labor to compensation are not threatening to boost inflation any time fast. The consumer is not picking up very much. Fiscal policy–we don’t know what’s going to happen with Donald Trump. And, yet, you have to raise rates now. So what is the, what is the motivation here? The economy is so far from your forecast, in terms of GDP, why does the Fed have to move now? What is this signal, then, about the rest of the year?

CHAIR YELLEN. So, GDP is a pretty noisy indicator. If one averages through several quarters, I would describe our economy as one that has been growing around 2 percent per year. And, as you can see from our projections, we, that’s something we expect to continue over the next couple of years. Now that pace of growth has been consistent with a pace of job creation that is more rapid than what is sustainable if labor force participation begins to move down in line with what we see as its longer run trend with an aging population. Now, unemployment hasn’t moved that much, in part because people have been drawn into the labor force. Labor force participation, as I mentioned in my remarks, has been about flat over the last 3 years. So, in that sense, the economy has shown, over the last several years, that it may have had more room to run than some people might have estimated, and that’s been good. It’s meant we’ve had a great deal of job creation over these years. And there could be, there could be room left for that to play out further. In fact, look, policy remains accommodative. We expect further improvement in the labor market. We expect the unemployment rate to move down further, and to stay down for the next several years. So, we do expect that the path of policy we think is appropriate is one that is going to lead to some further strengthening in the labor market.

KATHLEEN HAYS. Just quickly then, I just want to underscore. I want to ask you, so following on that, you expect it to move. 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?

CHAIR YELLEN. 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’s 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.

also:

JO LING KENT. 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?

CHAIR YELLEN. I think that’s a great question; I appreciate your asking it. And the simple message is the economy’s 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’ve 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’s 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 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 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 a, in an environment where the U.S. economy is performing well, and we seem pretty balanced. So, I think people can feel good about the economic outlook.

also:

NANCY MARSHALL-GLENZER 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?

CHAIR YELLEN. 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.

 

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2381.38 as this post is written

Janet Yellen’s December 14, 2016 Press Conference – Notable Aspects

On Wednesday, December 14, 2016 Janet Yellen gave her scheduled December 2016 FOMC Press Conference. (link of video and related materials)

Below are Janet Yellen’s comments I found most notable – although I don’t necessarily agree with them – in the order they appear in the transcript.  These comments are excerpted from the “Transcript of Chairman Yellen’s Press Conference“ (preliminary)(pdf) of December 14, 2016, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2016“ (pdf).

From Janet Yellen’s opening comments:

CHAIR YELLEN: Good afternoon. Today, the Federal Open Market Committee decided to raise the target range for the federal funds rate by 1/4 percentage point, bringing it to 1/2 to 3/4 percent. In doing so, my colleagues and I are recognizing the considerable progress the economy has made toward our dual objectives of maximum employment and price stability. Over the past year, 2-1/4 million net new jobs have been created, unemployment has fallen further, and inflation has moved closer to our longer-run goal of 2 percent. We expect the economy will continue to perform well, with the job market strengthening further and inflation rising to 2 percent over the next couple of years. I’ll have more to say about monetary policy shortly, but first I’ll review recent economic developments and the outlook.

Economic growth has picked up since the middle of the year. Household spending continues to rise at a moderate pace, supported by income gains and by relatively high levels of consumer sentiment and wealth. Business investment, however, remains soft, despite some stabilization in the energy sector. Overall, we expect the economy will expand at a moderate pace over the next few years.

Job gains averaged nearly 180,000 per month over the past three months, maintaining the solid pace that we’ve seen since the beginning of the year. Over the past seven years, since the depths of the Great Recession, more than 15 million jobs have been added to the U.S. economy. The unemployment rate fell to 4.6 percent in November, the lowest level since 2007, prior to the recession. Broader measures of labor market slack have also moved lower, and participation in the labor force has been little changed, on net, for about two years now, a further sign of improved conditions in the labor market given the underlying downward trend in participation Page 2 of 20 stemming largely from the aging of the U.S. population. Looking ahead, we expect that job conditions will strengthen somewhat further.

Janet Yellen’s responses as indicated to the various questions:

JAMES PUZZANGHERA. Hi. Jim Puzzanghera with the LA Times. For the average American, can you explain what the impact of this hike and three additional hikes will be next year? And should they feel more confident in the economy now that you are raising rates to a slightly faster pace?

CHAIR YELLEN. So, let me say that our decision to raise rates is– should certainly be understood as a reflection of the confidence we have in the progress the economy has made and our judgment that that progress will continue and the economy is proven to be remarkably resilient. So it is a vote of confidence in the economy. As you know, this was a decision that was well anticipated in markets and I think it will have relatively small effect on market rates. It could boost very slightly some short-term interest rates that could have an effect on borrowing costs that are linked to them. But overall, I think that households and firms will see very modest changes from this decision. But certainly, it’s important for households and businesses to understand that my colleagues and I have judged the course of the U.S. economy to be strong so that we’re making progress toward our inflation and unemployment goals. We have a strong labor market and we have a resilient economy.

also:

BINYAMIN APPLEBAUM. About how the system should be improved?

CHAIR YELLEN. About how– Financial rate. Yeah. So, OK on financial regulation, I feel that we lived through a devastating financial crisis that took a huge toll on our economy. And most members of Congress and the public came away from that experience feeling that it was important to take a set of steps that would result in a safer and stronger financial system. And I feel that we have done that. That has been our mission since the financial crisis for the last six or seven years. That’s what Dodd-Frank was designed to do. I think it’s very important that we have reduced the odds that a systemically important firm could fail by requiring higher capital, higher liquidity by performing stress tests that provide us another way of insuring that the firms we count on to supply credit to households and businesses would be able to go on doing that even in the face of a severely adverse shock. The firms, the largest firms have a great deal more capital than they did before the crisis. Those are important changes. We have placed the toughest regulations on those firms that are systemically important. I would advise that– and we have been trying to do this, that it’s important to look for ways to relieve regulatory burden on community banks and smaller institutions to tailor regulation so that it’s appropriate for the systemic risk profile of the particular institutions. I think there was broad agreement also that we should end too big to fail and that means not only reducing the odds of the failure of a systemically important institution but also making sure that should such a firm fail that it could be resolved in an orderly way. And the living wills process has been about that and I think we’ve made considerable progress in making sure that the largest and most systemic firms conduct their businesses in a day-to-day way with some thought about– with important thinking in place about whether or not the way they are conducting their business would aid resolution in the event that they encountered a severe negative shock. So, this is progress, I would say, is very important not to roll back. There may be some changes that could be made and we’ve suggested a few like eliminating the burden of compliance with the Volcker rule or incentive compensation, regulations for smaller banks or modestly raising the threshold for banks that are subject to enhanced prudential supervision. But I would urge that it’s important to keep this in place.

also:

NANCY MARSHALL-GENZER. Hi, Nancy Marshall-Genzer with Marketplace. Wondering about slack, when do you think the slack in the labor market will have worked its way through so we’re no longer talking about it at press conferences and it’s not such a big issue?

CHAIR YELLEN. So, this is not something that it’s possible to judge precisely. My colleagues write down their best estimates of a normal longer run unemployment rate. The median stands at 4.8 percent, so we’re close possibly– the unemployment rate right now is ever so slightly below but in the neighborhood. If we look at larger, broader measures of slack like the U6 measure that includes involuntary part-time employment and those who are marginally attached to the labor force. They’re slightly higher than pre-recession levels, but they’ve come down considerably. We look at a broad array of indicators of the labor market, and if you look at job openings or the hires rate or the quick rate or difficulty of hiring workers as reported in business surveys, you know, I would say the labor market looks a lot like the way it did before the recession that it’s– We’re roughly comparable to 2007 levels when we thought the, you know, there was a normal amount of slack in the labor market. The labor market was in the vicinity of maximum employment.

also:

PETER BARNES. On equity prices, you have talked about whether or not the valuations are still– are within historical ranges of norms. Is this Dow 20,000 kind of within historical norms? Are you comfortable with that?

CHAIR YELLEN. Well, I think rates of return in the stock market relative to– Remember that the level of interest rates is low and taking that into account, I believe it’s fair to say that they remain within normal ranges.

also:

JUSTINE UNDERHILL. Justine Underhill, Yahoo Finance. So the Fed’s balance sheet has grown to over $4 trillion dollars. And as the Fed begins removing policy accommodation, under what circumstances would you see the Fed removing or possibly winding down its balance sheet? And either letting mature– securities mature or possibly outright selling bonds from the– SOMA portfolio?

CHAIR YELLEN. So, we’ve indicated in our normalization principles that we expect to diminish the size of our portfolio over time largely by ceasing reinvestments of principal rather than by selling securities. We’ve indicated that once the process of normalization of the federal funds rate is well under way, we would probably begin to allow our portfolio to run off. We’ve not yet made any precise decisions about when that will occur. We want to feel that if the economy were to suffer an adverse shock, that we have some scope through traditional means of interest rate cuts to be able to respond to that. Now there’s no mechanical rule about what level of the federal funds rate we might deem appropriate to begin that process. It’s not something that only depends on the level of the federal funds rate, it also depends on our judgment of the amount of momentum in the economy and the possible concerns about downside risks of the economy. So, we’ve not yet made this decision, but it is something that we have long planned to begin to allow our balance sheet to run off. And then it would take several years. And we would end up if all goes well with the substantially smaller balance sheet than we have at present.

also:

MIKE DERBY. Mike Derby from Dow Jones Newswires. I’m wondering if the unexpected outcome of the election and the sense that a lot of people are really upset with how the economy is performing despite having, you know, aggregate economic statistics that look pretty good. Is that causing you in any way to think differently about how you evaluate the economy, like what sort of things you look for to get a sense of what’s going on in the economy. Is, you know, basically, did– how things turn on the election, is it making you think differently about how you evaluate the economy’s performance and how it’s dealing?

CHAIR YELLEN. Well, I mean, we’ve long been aware. And I’ve spoken about previously disturbing trends in the economy, particularly, rising wage inequality, income inequality, and the fact that a significant share of our population hasn’t been enjoying significant real wage gains if any. And so, these are longstanding concerns. These are not new phenomenon, but the recession was very severe and probably exacerbated developments that had long been affecting many American workers and households. And I think they are quite disturbing. Now, they’re ones that the Fed is not well-positioned, I think our policies can affect the general level of economic activity and slack in the labor market, the level, the rate of inflation which we focus on. But I think it’s important for policymakers more broadly to be attentive to these trends and to think about policies that could address them. We’ve been quite attentive with respect to particular demographic groups in the labor market, particularly minorities tend to be very badly affected by downturns. We’ve discussed that, we’ve been focused on it. It’s not just since the election, and are pleased to see that they are enjoying gains. For example, the African-American unemployment rate at this point is now rough– about back to 2007 levels as well. But these are important trends, and I think it’s important for policy to address them.

 

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2262.03 as this post is written

Janet Yellen’s September 21, 2016 Press Conference – Notable Aspects

On Wednesday, September 21, 2016 Janet Yellen gave her scheduled September 2016 FOMC Press Conference. (link of video and related materials)

Below are Janet Yellen’s comments I found most notable – although I don’t necessarily agree with them – in the order they appear in the transcript.  These comments are excerpted from the “Transcript of Chairman Yellen’s Press Conference“ (preliminary)(pdf) of September 21, 2016, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, September 2016“ (pdf).

From Janet Yellen’s opening comments:

Economic growth, which was subdued during the first half of the year, appears to have picked up. Household spending continues to be the key source of that growth. This spending has been supported by solid increases in household income as well as by relatively high levels of consumer sentiment and wealth. Business investment, however, remains soft, both in the energy sector and more broadly. The energy industry has been hard hit by the drop in oil prices since mid-2014, and investment in that sector continued to contract through the first half of the year. However, drilling is now showing signs of stabilizing. Overall, we expect that the economy will expand at a moderate pace over the next few years.

also:

Ongoing economic growth and an improving job market are key factors supporting our inflation outlook. Overall consumer price inflation–as measured by the price index for personal consumption expenditures–was less than 1 percent over the 12 months ending in July, still short of our 2 percent objective. Much of this shortfall continues to reflect earlier declines in energy and import prices. Core inflation–which excludes energy and food prices that tend to be more volatile than other prices–has been running about 1-1/2 percent. As transitory influences holding down inflation fade, and as the job market strengthens further, we continue to expect inflation to rise to 2 percent over the next two to three years.

Janet Yellen’s responses as indicated to the various questions:

NANCY MARSHALL-GENZER. Nancy Marshall-Genzer with Marketplace. You mentioned commercial real estate. Are you worried that bubbles could form in the economy because of our prolonged low interest rates?

CHAIR YELLEN. Yes. Of course, we are worried that bubbles could form in the economy, and we routinely monitor asset evaluations. While nobody can know for sure what type of valuation represents a bubble–that’s only something one can tell in hindsight–we are monitoring these measures of valuation, and commercial real estate valuations are high. Rents have moved up over time, but still valuations are high relative to rents. And so, it is something we’ve discussed. We called this out in our Monetary Policy Report and in other presentations.

And we are, in our supervision with banks, as I indicated, we have issued supervisory guidance to make sure that underwriting standards are sound on these loans, and we’re aware– this is something also that we look at in stress tests of the large– the larger banks to see what would happen to their capital positions and to make sure that the hold sufficient capital. And, of course, I think the soundness and state of the banking system is improved substantially, but of course we are focused on such things.

also:

KAREN MRACEK. Karen Mracek with Market News International. You mentioned in the previous answer the need to be forward looking but you’ve also pointed to the economy not overheating as a reason you could, you know, hold off on raising rates at this one. Monetary policy is traditionally operated with long and variable lags. Do you think this timeline has changed since the financial crisis or due to the use of unconventional tools the Fed used and how does that factor into your decision making?

CHAIR YELLEN. So, I think the notion that monetary policy operates with long and variable lags, that statement is due to Milton Friedman and it is one of the essential things to understand about monetary policy and it is not fundamentally changed at all. And that is why I believe we have to be forward looking and I’m not in favor of the whites of their eyes rights sort of approach. We need to operate based on forecasts. But the global economy and the US economy have changed a lot. History doesn’t always exactly replay itself. Many of the– those of us sitting around the table, we learned the lesson that if policy is not forward looking, that inflation can pick up to highly undesirable levels that inflation expectations can be dislodged upward and the consequence of that can be that endemically higher inflation takes place which it is very costly to reduce. And absolutely, none of us want to relive an episode like that. And so I believe and my colleagues that it is important to be forward looking. We’re going to make that mistake again. But the structure of the economy changes, things do change. The nature of the inflation process is changed I think significantly since the bad days of the ’70s when the Fed had to face this chronic high inflation problem. We’ve seen inflation respond less to the economy, to movements in the unemployment rate that sometimes said the Phillips curve has become flatter. So we’ve seen less of a response, that’s something we need to factor into our decision making. Inflation expectations appear to be better anchored, and perhaps that’s been a result of a long period of low and stable inflation. That’s an asset, it’s something we didn’t have in the 1970s. And in addition, we have to be attentive to the fact there we’ve now had a long period in which inflation is actually undershooting our 2 percent objective. And we see some signs that what I– I would conclude inflation expectations are reasonably well-anchored at 2 percent. But we are seeing signs suggesting possible slippage there and we’re long way from being– facing the problems that Japan faces. But there always a– should be a reminder to us that we also would not want to find ourselves in a period where inflation is chronically running below our objective. Inflation expectations are slipping and with a low neutral rate that becomes more important. So, things are changed, but principle of forward looking absolutely hold.

 

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2177.18 as this post is written

Janet Yellen’s June 15, 2016 Press Conference – Notable Aspects

On Wednesday, June 15, 2016 Janet Yellen gave her scheduled June 2016 FOMC Press Conference. (link of video and related materials)

Below are Janet Yellen’s comments I found most notable – although I don’t necessarily agree with them – in the order they appear in the transcript.  These comments are excerpted from the “Transcript of Chairman Yellen’s Press Conference“ (preliminary)(pdf) of June 15, 2016, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, June 2016“ (pdf).

From Janet Yellen’s opening comments:

CHAIR YELLEN: Good afternoon. Today, the Federal Open Market Committee (FOMC) maintained the target range for the federal funds rate at 1/4 to 1/2 percent. This accommodative policy should support further progress toward our statutory objectives of maximum employment and price stability. Based on the economic outlook, the Committee continues to anticipate that gradual increases in the federal funds rate over time are likely to be consistent with achieving and maintaining our objectives. However, recent economic indicators have been mixed, suggesting that our cautious approach to adjusting monetary policy remains appropriate. As always, our policy is not on a preset course and if the economic outlook shifts, the appropriate path of policy will shift correspondingly. I will come back to our policy decision, but first I will review recent economic developments and the outlook.

also:

Our inflation outlook also rests importantly on our judgment that longer-run inflation expectations remain reasonably well anchored. However, we can’t take the stability of longer-run inflation expectations for granted. While most survey measures of longer-run inflation expectations show little change, on balance, in recent months, financial market-based measures of inflation compensation have declined. Movements in these indicators reflect many factors and therefore may not provide an accurate reading on changes in the inflation expectations that are most relevant for wages and prices. Nonetheless, in considering future policy decisions, we will continue to carefully monitor actual and expected progress toward our inflation goal.

also:

Although the financial market stresses that emanated from abroad at the start of this year have eased, vulnerabilities in the global economy remain. In the current environment of sluggish global growth, low inflation, and already very accommodative monetary policy in many advanced economies, investor perceptions of, and appetite for, risk can change abruptly. As our statement notes, we will continue to closely monitor global economic and financial developments.

Janet Yellen’s responses as indicated to the various questions:

BINYAMIN APPLEBAUM. The Fed created a Labor Market Conditions Index a couple of years ago that was designed to sort of bring together a lot of these factors in labor market that you’ve talked about, as I’m sure you know it’s been falling since January. That suggests to some people that it was your decision to raise rates in December that has caused this weakening in the labor market. Could you address what role if any you think the Fed’s decision to raise rates has played in the slow down we are now seeing?

CHAIR YELLEN. Well, let me just say the Labor Market Conditions Index is a kind of experimental research product that’s a summary measure of many different indicators and essentially that measure tries to assess the change in the labor market conditions. As I look at it and as that index looks at things, the state of the labor market is still healthy, but there’s been something of a loss of momentum. The 200,000 jobs a month we saw, for example, in the first quarter of the year that’s slowed in recent months. Exactly what the reasons are for that slowing, it’s difficult to say. It may turn out– you know, again, we should never pay too much attention to, for example, one job market report. There’s a large error around that we often see large revisions, we should not over blow the significance of one data point especially when other indicators of the labor market are still flashing green. Initial claims for unemployment insurance remain low, perceptions of the labor market remain fine. Data from the jolts on job openings continue to reach new highs. So, there’s a good deal of incoming data that does signal continued progress and strength in the labor market, but, as I say, it does bear watching. So, the committee doesn’t feel and doesn’t expect and I don’t expect that labor market progress in the labor market has come to an end. We have tried to make clear to the public and through our actions and through the revisions you see have seen over time in the dot plot that we do not have a fixed plan for raising rates over time, we look at incoming data and are prepared to adjust our views to keep the economy on track and in light of that data dependence of our policy I really don’t think that a single rate increase of 25 basis points in December has had much significance for the outlook. And we will continue to adjust our thinking in light of incoming data and whatever direction is appropriate.

also:

JUSTINE UNDERHILL. Justine Underhill, Yahoo Finance. So, now that the Fed has started the process of raising rates, various Fed officials have said, including Ben Bernanke, that the Fed could go cash flow negative in this scenario as capital losses are taken on the portfolio bonds. Do you still see this happening, and when might this happen?

CHAIR YELLEN. So, you’re talking about our income going negative?

JUSTINE UNDERHILL. Yes.

CHAIR YELLEN. Well, it is conceivable in a scenario when–where growth and inflation really surprise us to the upside that we would have to raise short-term interest rates so rapidly that the rates we would be paying on reserves would exceed what we’re earning on our portfolio. Now even then, we have about $2 trillion of liabilities, namely currency on which we pay no interest. So, this does requires an extreme scenario with very rapid increases in short-term interest rates. So, it is conceivable, but quite unlikely that that it could happen. But, you know, if it were to happen, we would have an economy that would be doing very well. This is probably an economy that everybody would feel very pleased, was performing well and better than expected, and where monetary policy–you know, our goal is price stability and maximum employment, and we would probably feel that we had done very well in achieving that. So, we usually make money. We’ve been making a lot of money in recent years. But the goal of monetary policy is not to maximize our income. And, you know, in a very strong economy like that, the Treasury we would be seeing a lot of inflows in the form of tax revenues, too.

also:

NANCY MARSHALL-GENZER. How much do you–oh, Nancy Marshall-Genzer from Marketplace. How much are you watching oil process and their impact on inflation and how that could affect the timing of future rate increases and how much you might increase rates?

CHAIR YELLEN. Well, oil prices have had many different effects on the economy, and so, we’ve been watching oil prices closely. As you said, falling oil prices pull down inflation. You know, it takes falling oil prices to lower inflation on a sustained basis. Once they stabilize at whatever level, their impact on inflation dissipates over time. So, we’re beginning to see that happening. Not only have they stabilized, they have moved up some, and their inflation is–their impact on inflation is winning over time. But oil prices have also had a very substantial negative effect on drilling and mining activity that’s led to weakness in investment spending and job loss in manufacturing and, obviously, in the energy sector. Now, you know, it has different effects in different countries and different sectors. For American households, it’s been a boon. We’ve estimated that since mid-2014 the decline in energy prices and oil prices has probably resulted in gains of about $1,400 per U.S. household, and that’s had an offsetting positive impact on spending. But in many countries around the world that are important commodity exporters, the decline we’ve seen in oil prices has had a depressing effect on their growth, their trade with us and other trade partners, and caused problems that have had spillovers to the global economy as well. So, it’s a complicated picture.

 

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2077.99 as this post is written

Janet Yellen’s March 16, 2016 Press Conference – Notable Aspects

On Wednesday, March 16, 2016 Janet Yellen gave her scheduled March 2016 FOMC Press Conference. (link of video and related materials)

Below are Janet Yellen’s comments I found most notable – although I don’t necessarily agree with them – in the order they appear in the transcript.  These comments are excerpted from the “Transcript of Chairman Yellen’s Press Conference“ (preliminary)(pdf) of March 16, 2016, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, March 2016“ (pdf).

From Janet Yellen’s opening comments:

CHAIR YELLEN: Good afternoon. Today, the Federal Open Market Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. Our decision to keep this accommodative policy stance reflects both our assessment of the economic outlook and the risks associated with that outlook. The Committee’s baseline expectations for economic activity, the labor market, and inflation have not changed much since December: With appropriate monetary policy, we continue to expect moderate economic growth, further labor market improvement, and a return of inflation to our 2 percent objective in two to three years. However, global economic and financial developments continue to pose risks. Against this backdrop, the Committee judged it prudent to maintain the current policy stance at today’s meeting. I will come back to our policy decision momentarily, but first let me review recent economic developments and the outlook.

also:

This view is implicitly reflected in participants’ projections of appropriate monetary policy. The median projection for the federal funds rate rises only gradually to 0.9 percent late this year and 1.9 percent next year. As the factors restraining economic growth are projected to fade further over time, the median rate rises to 3 percent by the end of 2018, close to its longerrun normal level. Compared with the projections made in December, the median path is about 1/2 percentage point lower this year and next; the median longer-run normal federal funds rate has been revised down as well. In other words, most Committee participants now expect that achieving economic outcomes similar to those anticipated in December will likely require a somewhat lower path for policy interest rates than foreseen at that time.

Janet Yellen’s responses as indicated to the various questions:

PETER BARNES. 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 EU? Could you expand on the risks?

CHAIR YELLEN. So there has been, by many forecasters, slight downgrading of forecast of global growth in, over the coming, several years. The IMF has slightly downgraded their forecast, 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’ve 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.

also:

STEVEN MUFSON. Two questions. The oil, lower oil prices–I think a lot of people expected to lead to more consumer spending. What do you–how do you see and how do you explain that that hasn’t worked out as well–the way a lot of people expected? And also, if oil prices were to pop back up to, say, $50, not that high by some standards, what impact would that have on inflation? Would you be paying more attention to the overall inflation rate? Or would you then look to the core rate to determine what the Fed’s policies would be?

CHAIR YELLEN. So let me start with the impact of oil prices on consumer spending. I have to say it’s very difficult, when you look at patterns of consumer spending, to–there are many factors that influence it. And to definitively say that lower oil prices have not boosted consumer spending, I’m not sure we can really arrive at that conclusion in any rigorous way. The typical, the average household in the United States with oil prices, where they are now, is probably benefiting around $1,000 a year. And some very detailed microdata that I’ve seen on household spending patterns suggest that there may be a linkage you would expect from reduced bill, you know, reduced amounts that people pay at the pump to other spending like eating out for restaurant meals and other things. But the aggregate data, you know, is not as strong as it– and spending is not as strong as it could be, given the decline. And of course, on the other side, we are–and maybe that it will take a while and it’s something that we’ll slowly strengthen over time if oil prices stay low–on the other side of course, we have seen a marked decline in drilling activity, which is a depressed investment spending, and of course very substantial layoffs in the energy sector.

With respect to impact of oil prices on inflation and what would happen if they move up, the Committee has generally tended to look through movements in oil prices, whether they were on the upside or on the downside, viewing it as a factor that should have a transitory influence. When I say that, what I mean is that if oil prices move up during the time that it’s moving up, it raises inflation. But they don’t need to move down again to their previous levels for that influence to disappear. They only need to stabilize at a higher level. And similarly, oil prices have obviously moved down a great deal over the last year. And we’re not expecting them to move back to their previous levels, but to stabilize at some level. They’re obviously volatile. But as they stabilize, the influence will move out of both headline–of headline inflation. And that’s what you see in the forecasts of participants. So, if oil prices were to increase to 50, I mean, that would probably slightly move up our expected path for core inflation, maybe speed how rapidly we would move back to 2 percent. But I wouldn’t think that that would be something alone that would have great policy significance.

also:

JIM PUZZANGHERA. Hi, Jim Puzzanghera with the L.A. Times. Wage growth thus far has been disappointing. It’s been very uneven. It was disappointing, the figures in the last month’s job’s report. Why do you think that is and how important is sustained wage growth to removing your wariness on inflation?

CHAIR YELLEN. So, I must say I do see broad-based improvement in the labor market. And I’m somewhat surprised that we’re not seeing more of a pick-up 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 pick-up 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 pick-up is one of the factors that suggest to me that there is continued slack in the labor market. But I would expect wage growth to move up some.

PATRICK GILLESPIE. 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.

CHAIR YELLEN. Well, 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 inflationadjusted 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’re not at low levels. And really, the labor market, I think, has improved a great deal, and every demographic group that, you know, we tracked regularly has seen improvement in their labor market situation, perhaps not all equally but almost all demographic groups have seen improvement. So, 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.

also:

ERIC SCHATZKER. Eric Schatzker, Bloomberg Television, Madam Chair, thank you. Notwithstanding what the dots tell us about rate expectations, has there been any discussion among members of the Committee about the potential need for further stimulus? And even if there hasn’t been such a discussion yet, could you share with us what you have learned from the reevaluation of negative interest rates, whether you consider negative interest rates effective, how effective relative to quantitative easing, and whether the Committee would hypothetically use them instead of or in conjunction with quantitative easing in the event that the economy should warrant further stimulus?

CHAIR YELLEN. OK, so, what I would like to make clear is that this is not actively a subject that we are considering or discussing. The Committee continues to feel that we are on a course where the economy is improving, and inflation is moving back up. And as I indicated, if events continue to unfold in that way, we are likely to gradually raise rates over time. Again, that’s not fixed in stone. We’ll watch how the economy behaves. We’re prepared to respond if things transpire differently. But we are not spending time actively debating and considering things we could do for additional accommodation and certainly not actively considering negative rates. We are looking at the experience in other countries, and I guess I would judge they seem to have mixed effects, you know, some positive and some negative things.

But look, if we found ourselves in the unlikely situation where we needed to add accommodation, we have a range of tools, and we know from the things we did in the past that we have a number of options with respect to the maturity, for example, of our portfolio, with respect to asset purchases or forward guidance that remain available to us that are tools we could turn to in the unlikely event that we need to add accommodation. So, negative rates is not something that we’re actively considering.

 

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2041.66 as this post is written

Janet Yellen’s December 16, 2015 Press Conference – Notable Aspects

On Wednesday, December 16, 2015 Janet Yellen gave her scheduled December 2015 FOMC Press Conference. (link of video and related materials)

Below are Janet Yellen’s comments I found most notable – although I don’t necessarily agree with them – in the order they appear in the transcript.  These comments are excerpted from the “Transcript of Chairman Yellen’s Press Conference“(preliminary)(pdf) of December 16, 2015, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2015“ (pdf).

From Janet Yellen’s opening comments:

CHAIR YELLEN: Good afternoon. Earlier today, the Federal Open Market Committee decided to raise the target range for the federal funds rate by 1/4 percentage point, bringing it to 1/4 to 1/2 percent.

This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression. It also recognizes the considerable progress that has been made toward restoring jobs, raising incomes, and easing the economic hardship of millions of Americans. And it reflects the Committee’s confidence that the economy will continue to strengthen. The economic recovery has clearly come a long way, although it is not yet complete. Room for further improvement in the labor market remains, and inflation continues to run below our longer-run objective. But with the economy performing well and expected to continue to do so, the Committee judged that a modest increase in the federal funds rate target is now appropriate, recognizing that even after this increase monetary policy remains accommodative. As I will explain, the process of normalizing interest rates is likely to proceed gradually, although future policy actions will obviously depend on how the economy evolves relative to our objectives of maximum employment and 2 percent inflation.

also:

Since March, the Committee has stated that it would raise the target range for the federal funds rate when it had seen further improvement in the labor market and was reasonably confident that inflation would move back to its 2 percent objective over the medium term. In our judgment, these two criteria have now been satisfied.

The labor market has clearly shown significant further improvement toward our objective of maximum employment. So far this year, a total of 2.3 million jobs have been added to the economy, and over the most recent three months, job gains have averaged an estimated 218,000 per month, similar to the average pace since the beginning of the year. The unemployment rate, at 5 percent in November, is down six tenths of a percentage point from the end of last year and is close to the median of FOMC participants’ estimates of its longer-run normal level. A broader measure of unemployment that includes individuals who want and are available to work but have not actively searched recently and people who are working part time but would rather work full time also has shown solid improvement. That said, some cyclical weakness likely remains: The labor force participation rate is still below estimates of its demographic trend, involuntary parttime employment remains somewhat elevated, and wage growth has yet to show a sustained pickup.

also:

The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen. Although developments abroad still pose risks to U.S. economic growth, these risks appear to have lessened since late summer. Overall, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced.

Janet Yellen’s responses as indicated to the various questions:

MARTIN CRUTSINGER. Marty Crutsinger with the Associated Press. I guess the word is “finally.” The–and we have asked you for so long, “Why were you delaying? Why were you delaying?” So, I’ll ask, given developments around the world that still–there is still weakness and the inflation is still nowhere near your target. What made you say “do it now?” Some have said it was because you feared a lack of credibility if you didn’t move. Did that play a role in your decision?

CHAIR YELLEN. We decided to move at this time because we feel the conditions that we set out for a move, namely further improvement in the labor market and reasonable confidence that inflation would move back to 2 percent over the medium term, we felt that these conditions had been satisfied. We have been concerned, as you know, about the risks from the global economy. And those risks persist, but the U.S. economy has shown considerable strength. Domestic spending that accounts for 85 percent of aggregate spending in the U.S. economy has continued to hold up. It’s grown at a solid pace. And while there is a drag from net exports, from relatively weak growth abroad, and the appreciation of the dollar, overall, we decided today that the risks to the outlook for the labor market and the economy are balanced.

And we recognize that monetary policy operates with lags. We would like to be able to move in a prudent, and as we’ve emphasized, gradual manner. It’s been a long time since the Federal Reserve has raised interest rates, and I think it’s prudent to be able to watch what the impact is on financial conditions and spending in the economy and moving in a timely fashion enables us to do this.

Again, I think it’s important not to overblow the significance of this first move. It’s only 25 basis points. It–monetary policy remains accommodative. We’ve indicated that we will be watching what happens very carefully in the economy in terms of our actual and forecast our projected conditions relative to our employment and inflation goals and will adjust policy over time as seems appropriate to achieve those goals. Our expectation as I’ve indicated is that policy adjustments will be gradual over time, but of course they will be informed by the outlook, which in turn will evolve with incoming data.

STEVE LIESMAN. Madam Chair, thank you. Steve Liesman, CNBC. Under the old regime, before you were raising rates, it was easy to understand within your mandate what you wanted to do. You wanted the unemployment rate to fall, you wanted inflation to rise, and it was easy for the public to judge the success or failure of your policy. Could you explain under the new regime what you’re looking for? Do you want the unemployment rate to stop falling? Do you want it to rise? And what is it you hope for from inflation, which I think is a little more understandable, or is neutral itself now a policy goal?

CHAIR YELLEN. Neutral is not a policy goal. It is an assessment. It’s a benchmark that I think is useful for assessing the stance of policy. Neutral is essentially a stance of policy, a level of short-term rates, which if the economy were operating near its potential–and we’re reasonably, not quite at that, but reasonably close to it–it would be a level that would maintain or sustain those conditions. So if this point, policy, we judge to be accommodative. The Committee forecasts that the unemployment rate will continue to decline. And I think that’s important and appropriate for two reasons. First of all, as I’ve indicated, I continue to judge that there remains slack in the economy, margins of slack that are not reflected in the standard unemployment rate. And in particular, I pointed to the depressed level of labor force participation and also the somewhat abnormally high level of part-time employment. So further decline in the unemployment rate and strengthening of labor market conditions, will help to erode those margins of slack but also we want to see inflation move back to our 2 percent objective over the medium term, and so seeing above trend growth and continuing tightness, greater tightness in labor and product markets, I think that will help us achieve our objective as well with respect to inflation.

STEVE LIESMAN. Just to follow up, how does raising rates help get you to either of those goals?

CHAIR YELLEN. We have kept rates at an extremely low level and had a high balance sheet for a very long time. We have considered the risks to the outlook and worried about the fact that with interest rates at zero, we have less scope to respond to negative shocks than to positive shocks that would call for a tightening of policy. That is a factor that has induced us to hold rates at zero for this long. But we recognize that policy is accommodative, and if we do not begin to slightly reduce the amount of accommodation, the odds are good that the economy would end up overshooting both our employment and inflation objectives. What we would like to avoid is a situation where we have waited so long that we’re forced to tighten policy abruptly, which risks aborting what I would like to see as a very long-running and sustainable expansion. So, to keep the economy moving along the growth path it’s on with improving and solid conditions in labor markets, we would like to avoid a situation where we have left so much accommodation in place for so long that we overshoot these objectives and then have to tighten abruptly and risk damaging, damaging that performance.

also:

REBECCA JARVIS. Thank you, Rebecca Jarvis, ABC News. Historically most economic expansions fade after this long. How confident are you that our economy won’t slip back into recession in the near term?

CHAIR YELLEN. So let me start by saying that I feel confident about the fundamentals driving the U.S. economy, the health of U.S. households and domestic spending. There are pressures on some sectors of the economy particularly manufacturing and the energy sector reflecting global developments and developments in commodity markets and energy markets, but the underlying health of the U.S. economy, I considered to be quite sound. I think it’s a myth that expansions die of old age. I do not think that they die of old age. So the fact that this has been quite a long expansion doesn’t lead me to believe that it’s one that has, that its days are numbered. But the economy does get hit by shocks, and they were both positive shocks and negative shocks. And so there is a significant odd, you know, probability in any year that the economy will suffer some shock that we don’t know about that will put it into recession. And so, I’m not sure exactly how high that probability is in any year but maybe at least on the order of 10 percent. So yes, there is some probability that that could happen and of course we’d appropriately respond, but it isn’t something that is fated to happen because we’ve had a long expansion and I don’t see anything in the underlying strength of the economy that would lead me to be concerned about that outcome.

also:

YLAN MUI. Hi, Ylan from the Washington Post. You said earlier that expansions don’t die of old age, but I think the other half of that is that it’s often central banks that kill them off instead. So I’m wondering how worried you are about the possibility that the Fed will have to turn around after hiking rates. Other central banks that have tried to raise rates have had to do just that. And how damaging you think that might be to the Fed’s credibility?

CHAIR YELLEN. So, when you say that central banks often kill them, I think the usual reason that that has been true when that has been true is that central banks have begun too late to tighten policy, and they’ve allowed inflation to get out of control. And at that point, they have had to tighten policy very abruptly and very substantially, and it’s caused a downturn, and the downturn has served to lower inflation. So, if you don’t mind my flipping the question on you, I would point out that it is because we don’t want to cause a recession through that type of dynamic at some future date that it is prudent to begin early and gradually.

Now, it is true that some central banks have raised rates and later turned around. Not in every case has that reflected a policy mistake. Economies are subject to shocks. Sometimes when they have raised rates, it hasn’t been the wrong thing to do, but conditions have changed in a way that they have had to reverse policy to respond to shocks.

I’m not denying that there are situations where central banks have moved too early. We have considered the risk of that. We have weighed that risk carefully in making today’s decision. I don’t believe we’ll have to do it. But, look, you know, as I’ve–as the Committee has said, we’re watching economic developments closely, and we will adjust policy in whatever way is necessary to support the attainment of our objectives.

 

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2041.89 as this post is written

Janet Yellen’s September 17, 2015 Press Conference – Notable Aspects

On Thursday, September 17, 2015 Janet Yellen gave her scheduled September 2015 FOMC Press Conference. (link of video and related materials)

Below are Janet Yellen’s comments I found most notable – although I don’t necessarily agree with them – in the order they appear in the transcript.  These comments are excerpted from the “Transcript of Chairman Yellen’s Press Conference“(preliminary)(pdf) of September 17, 2015, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, September 2015“ (pdf).

From Janet Yellen’s opening comments:

CHAIR YELLEN.  Good afternoon.  As you know from our policy statement released a short time ago, the Federal Open Market Committee reaffirmed the current 0 to 1/4 percent target range for the federal funds rate.  Since the Committee met in July, the pace of job gains has been solid, the unemployment rate has declined, and overall labor market conditions have continued to improve.  Inflation, however, has continued to run below our longer-run objective, partly reflecting declines in energy and import prices.  While we still expect that the downward pressure on inflation from these factors will fade over time, recent global economic and financial developments are likely to put further downward pressure on inflation in the near term.  These developments may also restrain U.S. activity somewhat but have not led at this point to a significant change in the Committee’s outlook for the U.S. economy.

also:

The labor market has shown further progress so far this year toward our objective of maximum employment.  Over the past three months, job gains averaged 220,000 per month.  The unemployment rate, at 5.1 percent in August, was down four-tenths of a percent from the latest reading available at the time of our June meeting, although that decline was accompanied by some reduction in the labor force participation rate over the same period.  A broader measure of unemployment that includes individuals who want and are available to work but have not actively searched recently and people who are working part time but would rather work full time has continued to improve.  That said, some cyclical weakness likely remains:  While the unemployment rate is close to most FOMC participants’ estimates of the longer-run normal level, the participation rate is still below estimates of its underlying trend, involuntary part-time employment remains elevated, and wage growth remains subdued.

Inflation has continued to run below our 2 percent objective, partly reflecting declines in energy and import prices.  My colleagues and I continue to expect that the effects of these factors on inflation will be transitory.  However, the recent additional decline in oil prices and further appreciation of the dollar mean that it will take a bit more time for these effects to fully dissipate.  Accordingly, the Committee anticipates that inflation will remain quite low in the coming months.  As these temporary effects fade and, importantly, as the labor market improves further, we expect inflation to move gradually back toward our 2 percent objective.  Survey-based measures of longer-term inflation expectations have remained stable.  However, the Committee has taken note of recent declines in market-based measures of inflation compensation and will continue to monitor inflation developments carefully.

Janet Yellen’s responses as indicated to the various questions:

STEVE LIESMAN. Steve Liesman, CNBC. Madam Chair, this notion of uncertainty and economic and global developments, is it fair to say that it could be many months before those global developments worked their way to 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?

CHAIR YELLEN. 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 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 the 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.

also:

BINYAMIN APPELBAUM. Binyam 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 are expecting 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 pass without the Fed reaching its inflation target? Does it indicate that you have failed to do enough to revive this economy in recent years?

CHAIR YELLEN. Well, we have been very focused, Binyam, 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 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 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 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.

also:

PETER BARNES. Hi, Chairman Yellen. Peter Barnes, FOX Business. Could you talk about a little bit more specifically about what foreign developments you discussed in the meeting today, what you’re concerned about? We all assume it might be China. That was in the July minutes. Are you concerned about the Chinese economy slowing and the markets there? Do you have any concerns about the European economy? And then related to stock markets, could I ask you how you feel about US equity markets right now because you did talk about your concerns about them back in May. You saw they were generally quite high and we’re worried about potential dangers in US equity market evaluations but now equity prices have pulled back. Thank you.

CHAIR YELLEN. So, with respect to global developments, we reviewed developments in all important areas of the world but we’re focused particularly on China and emerging markets. Now, we’ve long expected, as most analysts have, uh, to see some slowing in Chinese growth over time as they rebalance their economy. And they have planned that I think there are no surprises there. The question is whether or not there might be a risk of a more abrupt slowdown than most analysts expect. And I think developments that we saw in financial markets in August, in part reflected concerns that uh, Chinese– there was downside risk to Chinese economic performance and perhaps concerns about the deafness with which policymakers were addressing those concerns.

In addition, we saw a very substantial downward pressure on oil prices and commodity markets and those developments have had a significant impact on many emerging market economies that are important producers of commodities, as well as more advanced countries including Canada, which is an important trading partner of ours that has been negatively affected by declining commodity prices, declining energy prices.

Now, there are a lot of countries that are net importers of energy, that are positively affected by those developments but emerging markets, important emerging markets have been negatively affected by those developments. And we’ve seen significant outflows of capital from those countries, pressures on their exchange rates and concerns about their performance going forward. So, a lot of our focus has been on risks around China but not just China, emerging markets, more generally in how they may spill over to the United States. In terms of thinking about financial developments and our reaction to them, I think a lot of the financial developments were really– so we don’t want to respond to market turbulence. The Fed should not be responding to the ups and downs of the markets and it is certainly not our policy to do so. But when there are significant financial developments, it’s incumbent on us to ask ourselves what is causing them. And of course what we can’t know for sure, it seem to us as though concerns about the global economic outlook were drivers of those financial developments. And so, they have concerned us in part because they take us to the global outlook and how that will affect us. And to some extent, look, we have seen a tightening of financial conditions during, as I mentioned, during the inter-meeting period. So, the stock market adjustment combined with a somewhat stronger dollar and higher risk spreads thus represent some tightening of financial conditions.

Now, in and of itself, it’s not the end of story in terms of our policy because we have to put a lot of different pieces together. We are looking at, as I emphasized, a US economy that has been performing well and impressing us by the pace at which it’s creating jobs and the strength of domestic demand. So, we have that. We have some concerns about negative impacts from global developments and some tightening of financial conditions. We’re trying to put all of that together in the picture. I think, importantly we see in our statement that in spite of all of this, we continue to view the risks to economic activity and labor markets as balanced. So, it’s a lot of different pieces, different cross currents, some strengthening the outlook, some creating concerns, but overall, no significant change in the economic outlook.

also:

MICHAEL MCKEE. Michael McKee from Bloomberg Radio on television. If the economy develops as the summary of economic projection 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.

CHAIR YELLEN. 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 risk 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 like. And instead of having slow steady growth improvement in the labor market and continued improvement in 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.

also:

NANCY MARSHALL-GENZER. Nancy Marshall-Genzer with Marketplace. You mentioned you’ve gotten a lot of unsolicited advice, the folks outside. But there is another side that says the Fed should raise interest rates because keeping rates so long– so low for so long has actually exacerbated the wealth gap. Do you think the Fed has widened the wealth gap with its low interest rate policy? These people say low interest rates mainly benefit the wealthy.

CHAIR YELLEN. Well, I guess I really don’t see it that way. It is true that interest rates affect asset prices but they have complex effect through balance sheets, through liabilities and assets. To me the main thing that an accommodative monetary policy does is put people back to work. And since income and equality is surely exacerbated by a high– having high unemployment and a weak job market that has the most profound negative effects on the most vulnerable individuals, to me, putting people back to work and seeing a strengthening of the labor market that has a disproportionately favorable effect on vulnerable portions of our population, that’s not something that increases income and equality.

There have been a number of studies that have done– been done recently that have tried to take account of many different ways in which monetary policy acting through different parts of the transmission mechanism affect inequality. And there’s a lot of guesswork involved and different analyses can come up with different things. But a pretty recent paper that’s quite comprehensive concludes that policy has not exacerbated income and equality.

 

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1967.64 as this post is written

Janet Yellen’s June 17, 2015 Press Conference – Notable Aspects

On Wednesday, June 17, 2015 Janet Yellen gave her scheduled June 2015 FOMC Press Conference. (link of video and related materials)

Below are Janet Yellen’s comments I found most notable – although I don’t necessarily agree with them – in the order they appear in the transcript.  These comments are excerpted from the “Transcript of Chairman Yellen’s Press Conference“(preliminary)(pdf) of June 17, 2015, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, June 2015“ (pdf).

From Janet Yellen’s opening comments:

The U.S. economy hit a soft patch earlier this year; real gross domestic product (GDP) looks to have changed little in the first quarter. Growth in household spending slowed, business fixed investment edged down, and net exports were a substantial drag on growth. Part of this weakness was likely the result of transitory factors. Despite the soft first quarter, the fundamentals underlying household spending appear favorable and consumer sentiment remains solid. Looking ahead, the Committee still expects a moderate pace of GDP growth, with continuing job gains and lower energy prices supporting household spending.

Janet Yellen’s responses as indicated to the various questions:

STEVE LIESMAN. Madam Chair, I wonder if you might characterize the progress made towards fulfilling the Fed’s two criteria. Are you somewhat more confident, not confident at all that you’re moving towards 2%? Has there been a lot of improvement in the labor market, some improvement? And how should we judge when those two criteria have been fulfilled?

CHAIR YELLEN. Well, it’s a judgment that the Committee is–will have to make and as I’ve said previously as we’ve said in this statement, it will depend on a wide range of data and not on any simple indicators. So I can’t provide you–it would be wrong for me to provide you a roadmap that said something as simple as if the unemployment rate declines to X that then the labor market will have improved enough for us to begin to raise policy.

Obviously, we have to look at the pace of job creation. We have to look at what’s happening to labor force participation, to part-time employment for economic reasons, to job openings, to the pace of quits, to wage inflation, and other indicators of the state of the labor market. I did say when we agreed that labor market slack has diminished to some extent in the intermitting period. And clearly, over a longer span of time over the last several years, obviously we’ve made considerable progress in moving toward our goal of maximum employment. So in spite of the fact that there is some progress on that front, the Committee wants to see some further progress before feeling that it will be appropriate to raise rates on inflation.

Again, there has been some progress in the sense energy prices appear to have stabilized. Now, inflation is going to–Overall inflation is likely to run at a low level for a substantial period of time. The big declines in energy prices came toward the end of last year and the beginning of this year and you’re not going to wash out of the inflation data until late in this year. But the fact that energy prices have stabilized means that the pressure from that source is diminishing.

In addition, the dollar appears to have largely stabilized and with respect to core inflation, it has been running under our 2% objective but declining import prices have been reducing that pressure. I believe that as the labor market continues to improve and as our confidence in that forecast rises, at least for me my confidence will also rise that inflation will move back up toward 2%. I expect that to over time put up with pressure on core inflation.

also:

BINYAMIN APPELBAUM. Your latest economic projections show that you expect the unemployment rate, or many officials expect, an employment rate to fall more slowly this year, and then to fall, by implication, more quickly next year. Could you talk about what has changed in your assessment of the labor market and how that influences the path of policy?

CHAIR YELLEN. So we are–productivity growth has been–is a factor that affects the pace of improvement in the labor market. Productivity growth has been extremely slow for the last couple of years, and I think in part the pace of improvement in the labor market that we’re projecting reflects the notion that there’s likely to be some pickup in the pace of productivity growth. Obviously, that’s something that’s quite uncertain, and it’s conceivable that if productivity growth disappoints–something I hope that we won’t see because that has very negative implications for living standards–we could conceivably see faster improvement in the labor market.

But in addition, there are other margins of slack that don’t show up in the unemployment rate. Labor force participation that has at least is–appears to be depressed at least to some extent because of cyclical weakness, and the fact that labor force participation rate has remained roughly stable for the last year or so when there’s an underlying downward trend suggests that some slack is being taken up by, in a sense, improved or diminished cyclical impact on labor force participation. I expect that to continue, and I would expect also to see some improvement in the degree of part-time employment that’s for economic reasons.

also:

CHRISTOPHER CONDON. Thank you. Chris Condon from Bloomberg News. Madam Chair, I’d like to come back to the topic of consumer spending. Consumer spending has been very disappointing for many months in the U.S. economy. I’m wondering, do you think there has been a meaningful shift and one that will persist in the behavior of households with respect to spending and savings? Or would you be more inclined to look at the recent more encouraging retail sales figures and see perhaps a return of the American consumer there?

CHAIR YELLEN. So I think in recent weeks we have received data that suggest that can consumer spending is growing at a moderate pace. I’d say, you know, car sales for example were very strong. Part of it probably represents payback for weak sales during the winter months, but nevertheless, the pace of car sales has been strong, and recent readings on retail sales and on spending on services have suggested an improvement in the pace of consumer spending.

There are questions at this point about just how much impact we’ve seen of lower energy prices on consumer spending. The decline in oil prices translates into an improvement in household income on average of something like $700 per household, and I’m not convinced yet by the data that we have seen the kind of response to that that I would ultimately expect. And I think it’s hard to know at this point whether or not that reflects a very cautious consumer that is eager to add to savings and to work down borrowing, or in part some survey evidence suggests the consumers are not yet confident that the improvement they’ve seen a decline in their need to spend for energy for gasoline that that’s going to be something that will be permanent. They may think it’s a transitory change and not yet be responding. So I think the jury is out there, but I think we have seen some pickup in household spending.

also:

MARK HAMRICK. Madam Chair, Mark Hamrick with Bankrate.com. So much discussion about rising rates seems to focus on the potential negatives, and I’m wondering if you could talk a little bit if you envision some possible unintended benefits of higher rates. And one of the things I’m thinking about is the fact that savers have suffered through so many years of miserly returns, and many may be actually anticipating in a positive way saying a better return on their investment. Thank you.

CHAIR YELLEN. So let me say to my mind the most important positive is that it–I believe a decision to raise rates would signify very clearly that the U.S. economy has made great progress in recovering from the trauma of the financial crisis and that we’re in a different place. I think, hopefully, that would be something would be confidence-inducing for many households and businesses.

From the point of view of savers, of course this has been a very difficult period. Many retirees, and I hear from some almost every day, are really suffering from low rates that they had anticipated would bolster their retirement income. This, you know, obviously has been one of the adverse consequences of a period of low rates.

The–you know, we have a good reason for having kept rates at the levels that we have. We–our charge from Congress is to pursue the goals of maximum employment and price stability. That’s what we’ve been doing, and obviously there are benefits from a strong economy to every household in the economy, including savers, from having a better job market and a more secure economy. But, yes, when the time comes for us to raise rates, I think there will be some benefits that flow through to savers.

 

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2120.80 as this post is written