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.
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.
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.
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.
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.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 2041.66 as this post is written