On Wednesday, December 13, 2017 Janet Yellen gave her scheduled December 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 December 13, 2017, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2017“ (pdf).
From Janet Yellen’s opening comments:
You may have noticed that we altered the statement language about the labor market outlook. This change highlights that the Committee expects the labor market to remain strong, with sustained job creation, ample opportunities for workers, and rising wages. We anticipate some further strengthening in labor market conditions in the months ahead; however, we expect the pace of job gains to moderate over time as we gradually reduce the degree of monetary policy accommodation. Allowing the labor market to overheat would raise the risk that monetary policy would need to tighten abruptly at a later stage, jeopardizing the economic expansion.
Even with a firming of economic growth and a stronger labor market, inflation has continued to run below the FOMC’s 2 percent longer-run objective. The 12-month change in the price index for personal consumption expenditures was 1.6 percent in October, up a bit from the summer but still below rates seen earlier in the year. Core inflation–which excludes the volatile food and energy categories–has followed a similar pattern and was 1.4 percent in October. We continue to believe that this year’s surprising softness in inflation primarily reflects transitory developments that are largely unrelated to broader economic conditions. As a result, we still expect inflation will move up and stabilize around 2 percent over the next couple of years. Nonetheless, as I’ve noted previously, our understanding of the forces driving inflation is imperfect. As emphasized in our statement, we will carefully monitor actual and expected inflation developments relative to our symmetric inflation goal. And, as I’ve noted before, we are prepared to adjust monetary policy as needed to achieve our inflation and employment objectives over the medium term.
Janet Yellen’s responses as indicated to the various questions:
STEVE LIESMAN. Steve Liesman, CNBC. Every day it seems we look at the stock market, it goes up triple digits in the Dow Jones. To what extent are there concerns at the Federal Reserve about current market valuations, and do they now or should they, do you think, if with keep going on this trajectory, should that animate monetary policy. Finally, maybe as a sign of what’s been going on with valuations, this cryptocurrency called bitcoin keeps going up every day. What is the policy of the Central Bank of the United States of the introduction, use, and incredible rise in popularity of bitcoin?
CHAIR YELLEN. Okay. So let me start, Steve, with the stock market generally. I mean of course the stock market has gone up a great deal this year, and we have in recent months characterized the general level of asset valuations as elevated. What that reflects is simply the assessment that looking at price earnings, ratios, and comparable metrics for other assets other than equities, we see ratios that are in the high end of historical ranges. And so that’s worth pointing out. But economists are not great at knowing what appropriate valuations are. We don’t have a terrific record, and the fact that those valuations are high doesn’t mean that they are necessarily overvalued. We are in a, I’ve mentioned this in my opening statement, and we’ve talked about this repeatedly, likely, a low interest rate environment lower than we’ve had in past decades, and if that turns out to be the case, that’s a factor that supports higher valuations. We’re enjoying solid economic growth with low inflation, and the risks in the global economy look more balanced than they have in many years. So I think what we need to and are trying to think through is if there were an adjustment in asset valuations with the stock market, what impact would that have on the economy and would it provoke financial stability concerns. And I think when we look at other indicators of financial stability risks, there’s nothing flashing red there or possibly even orange. We have a much more resilient, stronger banking system, and we’re not seeing some worrisome buildup in leverage or credit growth at successive levels. So, you know, this is something that the FOMC pays attention to, but if you ask me is this a significant factor shaping monetary policy now, well, it’s on the list of risks. It’s not a major, it’s not a major factor. And then you asked about bitcoin, and there I would simply say that bitcoin at this time plays a very small role in the payment system. It is not a stable source of store value, and it doesn’t constitute legal tender. It is a highly speculative asset, and the Fed doesn’t really play any role, any regulatory role, with respect to bitcoin other than assuring that banking organizations that we do supervise are attentive, that they’re appropriately managing any interactions they have with participants in that market and appropriately monitoring anti-money laundering bank secrecy act, you know, responsibilities that they have.
also:
VICTORIA GUIDA. Are there any banks that are too big to fail right now?
CHAIR YELLEN. So, you know, we continue to work seriously on resolution and the resolution plans, the living wills, and the structure of systemic firms, to ensure that it would be possible to resolve a firm under the bankruptcy code would be the top choice of methods, or alternatively under the orderly liquidation authority, and I think it’s fair to say that over time we have learned more ourselves and more clearly detailed our expectations for the firms that file living wills, and the firms themselves have made considerable progress in, you know, changing what they do, whether it’s adopting financial contracts that would facilitate a resolution rather than a disorderly unwinding of contracts, making sure that they’re appropriately dealing with shared services so that key services would be able to continue governance arrangements, legal entity structures, the firms have all made progress in adapting to our expectations of what would enable a successful resolution. So I think it’s an ongoing process, and I believe we have made substantial progress.
also:
HOWARD SCHNEIDER. Hi, Howard Schneider with Reuters. So you mentioned in response to Steve’s question that asset valuations you didn’t thing were on the sort of high priority risk list right now. So I’m wondering what do you think is on that risk list, and more broadly, what have you left undone? You’ve gotten high marks for bringing the economy back towards its goals, but are there things that are going to nag you when you walk out of here in February and say really I wish I’d seen this to completion. I mean we’re not doing negative interest rates. We’re not doing inflation framework. What’s at your top of, what’s at the top of the to-do list that you are not getting to see to bring to ground here?
CHAIR YELLEN. So you asked about the risk list. There are always risks that affect the outlook. We tend to focus in our own evaluation on economic risks, and we’ve characterized them as balanced. And I think they are balanced. You know, I can always give you a list of, you know, potential troubles, international developments that could result in downside economic risks. But, look, at the moment the U.S. economy is performing well. The growth that we’re seeing, it’s not based on, for example, an unsustainable, build-up of debt as we had in the run-up to the financial crisis. The global economy is doing well. We’re in a synchronized expansion. This is the first time in many years that we’ve seen this. Inflation around the world is generally low. So I think the risks are balanced, and there’s less to lose sleep about now than has been true for quite some time, so I feel good about the economic outlook. I feel, you know, good that the labor market is in a very much stronger place than it was eight years ago. We have created 17 million jobs. We’ve got a good strong labor market and a very low unemployment rate, and I think that’s been tremendously important to the well-being of American households and workers, and I feel very pleased when I hear anecdotes from firms that tell me they’re having a hard time finding workers, and they talk about given that they’re taking on people with skills that don’t quite match what they want, but they’re training them, and, you know, giving them the training that they need in order to be able to fill jobs. I think that’s a development that is a natural one that occurs in a strong labor market that tends to build human capital and worker skills and that that’s a strong positive. As I mentioned, I think the financial system is on much sounder footing and that we have done a great deal to put in place greater capital, liquidity, and so forth that make it less crisis prone and that has been an important objective. What’s on my undone list, you ask? We have a two percent symmetric inflation objective, and for a number of years now, inflation has been running under 2 percent, and I consider it an important priority to make sure that inflation doesn’t chronically undershoot our 2 percent objective, and I want to see it move up to 2 percent. So most of my colleagues and I do believe that it’s being held down by transitory factors, but there’s work undone there in the sense we need to see it move up in line with our objective.
also:
GREG ROBB. Thank you. Chair Yellen, what do you think will be the drivers of inflation over the next couple of years, and how long will the committee go with low unemployment, low inflation, before you rethink monetary policy as gradual rate hikes? Thank you.
CHAIR YELLEN. So, you know, I think for a number of years we’ve had an undershoot of inflation for a number of years. We absolutely recognize that. I think until this year undershoot was understandable. First we had a good deal of slack in the labor market. Then we had plummeting oil prices, and beginning in mid-2014, there was a marked depreciation in the dollar. And those three factors held down inflation for a number of years. Now in 2016, core inflation came very close to 2 percent. We seemed to be on a path of inflation moving up, and this year, beginning in March, there seemed to be a sequence of negative surprises. Some reflect one-time factors that were easily identifiable like a marked decline in quality adjusted cell phone plans. There may be other factors that are not so easy to name, but we would judge, inflation doesn’t always follow exactly their errors, and many factors that affect it beyond the key influences of labor market slack, exchange rates, and import prices, and oil prices. Those are three big ones, but there are other factors that affect inflation too, and our judgment at this point is that transitory factors that are unrelated to the broader macroeconomic outlook are holding inflation down. But I have tried to be straightforward in saying that this could end up being something that is more engrained and turns out to be permanent. It’s very important to watch it and if necessary, rethink what’s determining inflation. A possibility is that the longer run sustainable rate of unemployment, it’s been coming down, estimates in the committee have come down. It’s conceivable that they need to come down even more. It’s not my judgment that inflation expectations have slipped but that also remains a possibility that needs to be monitored. So there are, you know, there could be a rethink of inflation. I think it’s important to watch inflation outcomes carefully, and if we don’t see inflation moving in the manner that the Committee anticipates to alter policy so that we do achieve our two percent objective, but at the moment, most of my colleagues and I believe we are on track to achieve it.
also:
MICHAEL MCKEE. Michael McKee from Bloomberg Television and Radio. I suppose I should be asking you a valedictory question since it’s the last question, but I don’t think you can top what you’ve already said, so let me just do a couple of cleanup questions here. President Trump, while you were speaking, just said that he thinks his tax plan will produce four percent growth. Do you think that is possible? Second, do you think that there is any Fed blame or complicity in the flattening of the yield curve, and are you worried that there might be some sort of policy mistake built into that that could slow the economy. And the last question, which is a bit of a valedictory, is one that everybody on Wall Street has wanted to ask you for four years.
Since this is your last press conference, can you tell us which dot is yours?
CHAIR YELLEN. Well, I can answer the last question first. The answer is no, I’ve never been willing to reveal which dot is mine, and I’m not going to change that now. So, you know, my assessment, and I think most participants’ assessments, as I said, of the impact of the tax policy on growth has been informed by work by the Joint Committee on Taxation and other analysts, and everyone recognizes that there’s uncertainty about what the economic effects would be, and I wouldn’t want to rule anything out. It is challenging, however, to achieve growth of the levels that you mentioned. Look, if the package were to stimulate growth of that magnitude, let me just say again, the Federal Reserve would welcome that. If it’s a favorable supply side developments that would be compatible with the attainment of our employment and inflation objectives, that’s something that would be very welcome, but it would be challenging to achieve numbers like that. Let’s see, I think you also then asked me about the yield curve, and I mean there is much discussion about yield curve inversions and whether or not a flattening yield curve could signal a recession. Is that the brunt of your question?
MICHAEL MCKEE. And whether the Fed has made, if there’s a policy mistake embedded in that.
CHAIR YELLEN. So this is something that we discussed and have looked at. The yield curve has flattened some as we have raised short rates. Mainly, the flattening yield curve mainly reflects higher short-term rates. The yield curve is not currently inverted, and I would say that the current slope is well within its historical range. Now there is a strong correlation historically between yield curve inversions and recessions, but let me emphasize that correlation is not causation, and I think that there are good reasons to think that the relationship between the slope of the yield curve and the business cycle may have changed. And one reason for that is that longterm interest rates generally embody two factors. One is the expected average value of short rates over say ten years, and the second piece of it is a so-called term premium that often reflects things like inflation risk. Typically, the term premium historically has been positive. So when the yield curve has inverted historically, it meant that short-term rates were well above average expected short rates over the longer run. So with the positive term premium, that’s what it means. And typically that means that monetary policy is restrictive, sometimes quite restrictive, and some of those recessions were situations in which the Fed was consciously tightening monetary policy because inflation was high and trying to slow the economy. Well, right now the term premium is estimated to be quite low, close to zero, and that means that structurally, and this can be true going forward, that the yield curve is likely to be flatter than it’s been in the past. And so it could more easily invert if the Fed were to even move to a slightly restrictive policy stance you could see an inversion with a zero term premium. So, I think the fact the term premium is so low and the yield curve is generally flatter is an important factor to consider. Now, I think it’s also important to realize that market participants are not expressing heightened concern about the decline of the term premium, and when asked directly about the odds of recession, they see it as low, and I would concur with that judgment.
_____
The Special Note summarizes my overall thoughts about our economic situation
SPX at 2660.24 as this post is written