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.


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.


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.


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.



The Special Note summarizes my overall thoughts about our economic situation

SPX at 2503.97 as this post is written