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.


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.


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