Category Archives: Janet Yellen

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.


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.


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.


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.


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.


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.


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

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.


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.


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.


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?


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.


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.


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

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.


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.


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.


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.


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.


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.


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.


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.


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.


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.


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.


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.


MARK HAMRICK. Madam Chair, Mark Hamrick with 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.



The Special Note summarizes my overall thoughts about our economic situation

SPX at 2120.80 as this post is written

Janet Yellen’s March 18, 2015 Press Conference – Notable Aspects

On Wednesday, March 18, 2015 Janet Yellen gave her scheduled March 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 March 18, 2015, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, March 2015“ (pdf).

From Janet Yellen’s opening comments:

We have seen continued progress toward our objective of maximum employment.  The pace of employment growth has remained strong, with job gains averaging nearly 290,000 per month over the past three months.  The unemployment rate was 5.5 percent in February; that’s three-tenths lower than the latest reading available at the time of our December meeting.  Broader measures of job market conditions—such as those counting 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—have shown similar improvement.  As we noted in our statement, slack in the labor market continues to diminish.  Meanwhile, the labor force participation rate—the percentage of working-age Americans either working or seeking work—is lower than most estimates of its trend and wage growth remains sluggish, suggesting that some cyclical weakness persists.  So considerable progress clearly has been achieved, but room for further improvement in the labor market continues.


Inflation has declined further below our longer-run objective, largely reflecting the lower energy prices I just mentioned.  Declining import prices have also restrained inflation and, in light of the recent appreciation of the dollar, will likely continue to do so in the months ahead.  My colleagues and I continue to expect that as the effects of these transitory factors dissipate and as the labor market improves further, inflation will move gradually back toward our 2 percent objective over the medium term.  In making this forecast, we are attentive to the low levels of market-based measures of inflation compensation.  In contrast, survey-based measures of longer term inflation expectations have remained stable.  The Committee will continue to monitor inflation developments carefully.

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

HOWARD SCHNEIDER. Howard Schneider with the Reuters. Hi. Thank you. So there’s been this pretty consistent reference to expectations of above-trend growth over the last few months. Now, we’re seeing growth downgraded in the context of very explicit references to international and external conditions, weak export growth, oil dragging down inflation, and your own comments now on the dollar. So my question is, doesn’t this indicate that the Fed’s facing a tougher time, you know, kind of going it along to coupling form the rest of the world then perhaps you expected last fall when this first started to be an issue?

CHAIR YELLEN. Well, it looks like from incoming data pertaining to the first quarter that real GDP growth has declined somewhat below where it was for the last several quarters of last year. And that’s really why the Committee indicated that growth has moderated somewhat. There has been a slight downgrading of estimates of growth for this year. You mentioned the dollar. We noted that export growth has weakened, probably the strong dollar is one reason for that.

On the other hand, the strength of the dollar also in part reflects the strength of the US economy. The strength of the dollar is also one factor that is–as I noted is holding down import prices and at least on a transitory basis at this point pushing inflation down. So we are taking account of international developments, including prospects for growth in our trade partners in making the forecast we have here.

Nevertheless, it is important to recognize that this is not a weak forecast. Taking everything into account, we continue to project above trend growth. We continue to project improvement in the labor market by the end of 2015. The central tendency of the participants is they are looking for an unemployment rate that will be down to 5.0 to 5.2 which is consistent with their estimates of its longer-run normal value. So, we do see considerable underlying strength in the US economy. And in spite of what looks like a weaker first quarter, we are projecting good performance for the economy.


MARTIN CRUTSINGER. Marty Crutsinger, Associated Press. The policy statement today talks about one of the prerequisites you’ll need to start raising rates is to be reasonably confident that inflation–your inflation target–will be met at 2 percent but that is coming out at a time when you have lowered your forecast on inflation. What–which I would think would make you less confident about it. What is it going to take to make you reasonably confident about inflation?

CHAIR YELLEN. So I don’t have a mechanical answer for you. There is no single thing where I would say we must see such-and-such in order to achieve that level of confidence. We will be looking at a wide array of data.

Now, we have said that we also want to see continued improvement in the labor market. And a stronger labor market with less labor market slack is one factor that would tend to certainly for me increase my confidence that as slack diminishes, that inflation will move up over time. Other things I will be looking at, of course, the inflation data. But as we said, we expect inflation to remain quite low because of the depressing influence of energy price declines and the dollar. But we will be looking at the inflation data carefully to see if we can interpret for example low levels of inflation if we see that which we expect, as reflecting those influences.

We will be looking at wage growth. We have not seen wage growth pick up. We may not see wage growth pick up. I wouldn’t say either that that is a precondition to raising rates. But if we did see wage growth pick up, that would be at least a symptom that inflation would likely move up over time. We’ll be watching inflation expectations. Survey measures have been stable. I expect that to continue. But we will be watching it carefully. And market-based measures of inflation compensation have fallen. They are low. If they were to move up over time, that would probably serve to increase my confidence.

But there are a wide range of things that we will be looking at, including further improvement in the labor market. So there’s no simple answer. This is a judgment that the Committee will have to make.


PETER BARNES. Peter Barnes, Fox Business. Chair Yellen, I wanted to check in again with you on whether or not you see or have any concerns about bubbles out there in the economy, particularly the financial markets, debt and equity markets and I want to refer to your most recent Monetary Policy Report to Congress last month in which you said overall equity valuations by some conventional measures are somewhat higher than their historical levels, valuation metrics in some sectors continued to appear stretched relative to historical norms. In the same report last year, in July, the reports specifically mentioned biotech and social media stocks as being substantially. Let’s see here, substantially stretched. Do you still feel that way and can you comment on bubbles and particularly these sectors?

CHAIR YELLEN. Well, I don’t want to comment on those particular sectors. You know, as we said in the report, overall measures of equity valuations are on the high side, but not outside of historical ranges. In some corporate debt markets, we do see evidence of unusually low spreads. And that’s what we referred to in the report.

More broadly, we do try to assess potential threats to financial stability. And in addition to looking at asset valuations, we also look at measures of credit growth of the extent of leverage being used in the economy and in the financial sector, and the extent of maturity transformation.

And taking into account a broad range of metrics that bear on financial stability, our overall assessment at this point is the threats are moderate.


JEN LIBERTO. Jen Liberto, Politico. So, I want to switch gears a little bit and ask about some of the tension between the Fed and Congress lately with some lawmakers calling for more transparency and accountability measures. I wanted to ask to what degree that there might be room for the Fed to consider some of these measures, like maybe a rules-based approach, like the

Taylor rule, or some of these measures, that would change up who has a voting seat on the FOMC. To what degree does that make it more difficult to accomplish your mission?

CHAIR YELLEN. So, I believe the Federal Reserve is already one of the most transparent central banks of any around the globe. We provide an immense amount of information both financial about our balance sheet and our monetary policy operations. We have audited financial statements. We published our balance sheet every week. If you want to know exactly what’s in the SOMA portfolio, it’s listed on the New York Fed Web site on a CUSIP by CUSIP basis. I have press conferences; we issue minutes. We have, you know, statements that we release right after meetings and transcripts within five years. So, if you put all of that together, we are a transparent central bank.

With respect to Congressional changes that are under consideration that would politicize monetary policy by bringing Congress in to make policy judgments about in real-time on our monetary policy decisions. Congress itself decided in 1978 that that was a bad thing to do. That it would lead to poor economic performance. And they carved out this one area of policy reviews of monetary policy decision making from GAO audits. The GAO looks at everything else that goes on within the Fed. And I think that that is a central bank best practice.

The global experience shows that giving central banks independence to make monetary policy decisions that they think are in the best interest of the country and consistent with their mandates leads to lower inflation and more stable macroeconomic outcomes. So, I feel very strongly about that. But we are accountable to Congress. Of course, we are ready to provide information that Congress needs to evaluate the Fed’s decision making in monetary policy and elsewhere.

With respect to monetary policy rules, they can be useful and I find them useful and long have as a kind of benchmark for thinking about what might be the appropriate stance of policy. But to chain a central bank to follow a simple mathematical rule that fails to take account of many things that are very important in making monetary policy. For example, I was earlier asked about being against zero lower bound which is an important special consideration, that would be a very foolish thing to do and I oppose it.

With respect to proposals having to do with voting and the structure of the Fed that you mentioned, a lot of ideas have been mentioned. I would say for my part, I think the Federal Reserve works well. The system we have was put into place by Congress decades ago. I don’t think it’s a system that’s broken. Of course, Congress can revisit the decisions it’s made about the structure of the Fed. There were good reasons for making the decisions that were about how the structure voting and other things. And I don’t think the system is broken. I think it’s working well. So I don’t see a need for changes. But of course, it’s up to Congress to review that.


GREG ROBB. Greg Robb from MarketWatch. We hear that productivity takes a long time before you can understand it, but it’s been very low in this cycle. What that does mean for Fed policy?

CHAIR YELLEN. Well, I agree. It has been very low. It’s been disappointingly low. A positive aspect of what is fundamentally a disappointment is that the labor market has improved more rapidly than might have been expected given the pace of economic growth. So the unemployment rate has come down more rapidly than I would have expected, and the labor market has improved more rapidly than I would have expected. We have written down our estimates of potential output. In the long run, it is a disappointing factor about the ultimate prospects for the U.S. economy. If it continues, I would expect it to pick up. And as you can see from the longer-run growth projections, most FOMC participants believe it will pick up above current levels. But it means it’s something that would, if it persists, retard living standards and would likely retard real wage growth and improvement in living standards for ordinary households.



The Special Note summarizes my overall thoughts about our economic situation

SPX at 2090.19 as this post is written

Janet Yellen’s December 17, 2014 Press Conference – Notable Aspects

On Wednesday, December 17, 2014 Janet Yellen gave her scheduled December press conference. (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 17, 2014, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2014“ (pdf).

From Janet Yellen’s opening comments:

The Committee continues to see sufficient underlying strength in the economy to support ongoing improvement in the labor market.  Real GDP looks to have increased robustly in the third quarter, reflecting solid consumption and investment spending.  Smoothing through the quarterly ups and downs earlier this year, real GDP expanded around 2½ percent over the four quarters ending in the third quarter, and the available indicators suggest that economic growth is running at roughly that pace in the current quarter.  The Committee continues to expect a moderate pace of growth going forward.

Inflation has continued to run below the Committee’s 2 percent objective, and the recent sizable declines in oil prices will likely hold down overall inflation in the near term.  But as the effects of these oil price declines and other transitory factors dissipate, and as resource utilization continues to rise, the Committee expects inflation to move gradually back toward its objective.  In making this forecast, the Committee is mindful of the recent declines in market-based measures of inflation compensation.  At this point, the Committee views these movements as likely to prove transitory, and survey-based measures of longer-term inflation expectations have remained stable.  That said, developments in this area obviously bear close watching.

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

STEVE LIESMAN. Was there concern — Steve Liesman, CNBC — was there concern expressed at the meeting that the signal coming from markets — and a variety of markets — lower oil prices? Lower yields around the world, was one of deflation, and that that risk was one that should perhaps over shadow the concern about inflation on the other side?

CHAIR YELLEN. Well thanks Steve. We’re very attentive to global developments. And certainly discuss them in the meeting. The very substantial decline we have seen in oil prices is one of the most important developments shaping the global outlook. It will have different effects in different regions, and could well have effects on financial markets, as we are seeing. I think the judgment of the committee is that from the standpoint of the United States and the U.S. outlook, that the decline we have seen in oil prices is likely to be on net; a positive. It’s something that’s certainly good for families, for households. It’s putting more money in their pockets. Having to spend less on gas and energy, and so in that sense, it’s like a tax cut that boosts their spending power. The United States remains — although our production of oil has increased dramatically — we still remain a net importer of oil. Of course there may be some offset in the form of reduced drilling activity, and possibly some change, some reduction in CAPEX plans in the drilling area. But on balance, I would see these developments as a positive for the standpoint of the U.S. economy. With respect to deflation, we see downward pressure on headline inflation from declining energy prices. We certainly recognize that that is going to be pushing down headline inflation. And may even spill over to some extent to core inflation. But at this point, although we indicated we’re monitoring inflation developments carefully, we see these developments as transitory. And the committee continues to believe — especially with the improvement we’re seeing in the labor market — which we expect to continue — that inflation will move back up to our 2 percent objective over time. As I indicated, we will want to feel, I believe, that people will expect to feel reasonably confident about that when they — when the process of normalization begins. But we do expect them to be transitory.


STEVEN MUFSON. Hi. Steve Mufson from The Washington Post. I was just hoping you could go into a little more detail about the oil effect. Even though you see it as transitory, does that give you a little more room to keep rates low in the next few months? And if — alternately, if prices bounce back, what’s that going to do to your ability to changes rates, and how might you react to that?

CHAIR YELLEN. Well I — I’d say, you know, that I think what we have seen since the mid-80s is that in an environment where inflation expectations are well-anchored, that movements in oil, and commodity prices, and import prices tend to have transitory effects on the inflation outlook. There were many years in which we had unanticipated increases in oil prices. Really, beginning in 2004 and 2005 that put upward pressure on headline inflation and sometimes even spilled through into core, and typically, the committee looked through those impacts on inflation with the view that they would be transitory. And I think, experience bears out that they were transitory. And I think that’s the committee’s expectation here. Inflation, even core inflation, has been running below our inflation objective. Movements in oil, you know, are now down and perhaps later up, will move inflation around, certainly headline inflation. But the committee at this point anticipates those impacts to be transitory. So as long as participants feel reasonably confident that the inflation projection is one where we expect to meet our 2 percent objective over time. That’s what I think they’ll be looking at things as we decide on the path for the funds rate.


PEDRO DA COSTA. Pedro Da Costa with Dow Jones Newswires. Enough about rates. I want to ask you about the New York Fed. The New York Fed’s been in the news a lot lately. President Dudley was invited to Congress to testify about conflicts of interest there. You had things like the Segarra tapes, the Beim report, and most recently the revelation that a former New York Fed official was exchanging information with someone at Goldman Sachs who was also-had New York Fed connections. I just wonder–and also there was scandals during the crisis related to Stephen Freidman regarding the New York Fed, and his purchase of Goldman Sachs stock. Do you see the New York Fed as a black mark on the Fed system because of these recurring scandals? Have you talked to Bill Dudley about reforming the image of that particular regional Fed? And do you think a person that has–that spent 21 years of his career at Goldman Sachs is in a position to regain public credibility about conflicts of interest?

CHAIR YELLEN. Well, let me say that I think it’s very important for the Federal Reserve System to have confidence in the quality of its supervision. And I do have–I have a good deal of confidence in the quality of our supervision program, for the banking organizations, we supervise in general, and that also applies to the largest banking organizations. We rely on examiners who are in the field and at the Reserve banks to be providing information about what’s happening in those organizations. But that information feeds into a process in which it is not individuals at any single Reserve bank. But at the Board, it’s a Board-led process, and it involves senior officials at a number of different Reserve banks. It’s also a multi-disciplinary process that involves not only people from supervision, but those from markets, from economic research, experts who focus on financial stability all come together to evaluate the information that they have, and to assign supervisory ratings and decide on the appropriate program for all of those large institutions. We’ve strengthened the process of supervision enormously since the crisis, and I feel a very good sense of confidence in how we’re carrying that out.

Now it is important to make sure that we have fed into the–this process. All the information that’s relevant to making the right decisions. And when there are individuals who are examiners, who may disagree with others in their team about how to interpret what’s going on at a particular institution, it’s important that there be channels by which they can make sure that disagreements are fed up to the highest levels. This is true throughout the work we do. We do economic forecasting, and our–the FOMC receives information to help us make decisions. But obviously there are disagreements about–among economists about how to interpret developments. It’s also important for us there to make sure we understand alternative views. So this is important in supervision. We’ve announced that the Board has undertaken a review of whether or not there are appropriate mechanisms in place in all of the Reserve banks that individuals who disagree with decisions can make those–make their own views known, and feed into the process, and we’ve also asked our inspector general to look into.


GREG ROBB. There’s a contagion risk to the–from low oil prices that people are talking about in the markets. What does it mean to the banks that have lent, you know, into the oil patch with the low oil prices? And I guess, you know, your warnings about leverage loans. You have made warnings over the past year about leveraged lending. Are you worried that they haven’t been heeded? Thank you.

CHAIR YELLEN. So I mean there is some–you’re talking about in the United States exposure? I mean we have seen some impacts of lower oil prices on the spreads for high-yield bonds, where there’s exposure to oil companies that may see distress or a decline in their earnings, and we have seen some increase in spreads on high-yield bonds more generally. I think for the banking system as a whole the exposure to oil, I’m not aware of significant issues there.

This is the kind of thing that is part of risk management for banking organizations and the kind of thing they look at in stress tests. But the movements in oil prices have been very large, and undoubtedly unexpected.

We–in terms of leverage, and whether or not levered entities could be badly effected by movements in oil prices, leverage in the financial system in general is way down from the levels before the crisis. So it’s not a major concern that there are levered entities that would be badly affected by this, but we’ll have to watch carefully. There have been large and unexpected movements in oil prices.


STEVE BECKNER. Good afternoon, Chair Yellen. Steve Beckner of MNI. I will go back to interest rates if you don’t mind. Actually it’s a question about balance sheet effects on the overall appropriate level of monetary policy. In reaffirming the reinvestment policy, the FOMC says once again that this will help maintain accommodative financial conditions. In the past it’s said that the large portfolio securities will exert a downward effect on long-term interest rates. As you look forward to raising short-term rates, to what extent does the FOMC need to take into account this sort of residual, accommodative effect of maintaining a large balance sheet?

CHAIR YELLEN. So I agree, and that’s why we stated it that we typically think of the monetary policy impact of our asset purchases as depending on the stock of assets that we hold on our balance sheet, rather than the flow of purchases, and so we’re reminding the public that we continue to hold a large stock of assets, and that is tending to push down term premiums in longer-term yields. We made clear when we–or tried to make clear when we issued our normalization principals in September that we intend to use changes in our target for the federal funds rate as the main tool that we will actively use to adjust financial conditions. Rather than actively planning to sell the assets that we’ve put onto our balance sheet, some time after we begin raising our targets for short-term interest rates, depending on economic and financial conditions, we’re likely to reduce or cease reinvestment and gradually run down the stock of our assets. But our active tool for adjusting monetary–the stance of monetary policy so that it is appropriate for the economic needs for the country, that will be done through adjusting our shortterm target range for the federal funds rate.


KEVIN HALL. Kevin Hall with McClatchy Newspapers. I can’t believe no one’s asked you the most important question about what’s going on with your San Francisco 49ers, since everybody’s already wished you a happy holiday.

Can you talk a little bit about housing? Few things are more important to Americans in their wealth creation than housing. You’ve, in your statement, noted that it continues to be a drag. Mr. Dudley has–was actually relatively upbeat in his forecast. I don’t know if that’s a view shared on the Committee. What do you think is holding housing back? What can Congress do? What will you tell Congress in the coming year? And more–and a clarification on the Dudley question from earlier. You didn’t mention him by name in your being pleased by quality of supervision. Are you pleased with Mr. Dudley’s handling of the events?

CHAIR YELLEN. So let me start with that. I have great confidence in President Dudley. He’s done a fine job in running the New York Fed, and I want to be very clear that I have great confidence in him. He’s a distinguished public servant, and he has worked very hard in the aftermath of the crisis to make sure that the New York Fed is doing all that it needs to do to contribute to the work that we do both in the financial stability and in supervision.  And let’s see, the other question that you asked about was about–

KEVIN HALL. Housing.

CHAIR YELLEN. –about housing. So, you know, I’ve been surprised that housing hasn’t recovered more robustly than it has. In part I think it reflects very tight credit — continuing tight credit conditions for any borrower that doesn’t have really pristine credit, you know, credit ratings, and my hope is that that situation will ease over time. In addition, household formation has been very depressed, and my expectation is that as the labor market continues to improve and households feel better about their financial condition that we will see household formation pick up and a somewhat stronger recovery than we’ve seen thus far in housing.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 2052.47 as this post is written

Janet Yellen Speech Regarding Wealth Inequality – Notable Excerpts

In past posts I have discussed various disconcerting aspects regarding the financial condition faced by large numbers of Americans, as well as the worrisome levels (and economic ramifications) of income and wealth disparity.

On October 17, 2014 Federal Reserve Chair Janet Yellen gave a speech titled “Perspectives on Inequality and Opportunity from the Survey of Consumer Finances.”  This speech references various statistics and charts, many of which I find disconcerting.

While I don’t necessarily agree with various aspects discussed in the speech, below are a few excerpts from the speech that I find notable, in the order they appear:

The extent of and continuing increase in inequality in the United States greatly concern me. The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression. By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then.2  It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity.


Since the survey began in its current form in 1989, the SCF has shown a rise in the concentration of income in the top few percent of households, as shown in figure 1.6 By definition, of course, the share of all income held by the rest, the vast majority of households, has fallen by the same amount.7 This concentration was the result of income and living standards rising much more quickly for those at the top. After adjusting for inflation, the average income of the top 5 percent of households grew by 38 percent from 1989 to 2013, as we can see in figure 2. By comparison, the average real income of the other 95 percent of households grew less than 10 percent. Income inequality narrowed slightly during the Great Recession, as income fell more for the top than for others, but resumed widening in the recovery, and by 2013 it had nearly returned to the pre-recession peak.8

The distribution of wealth is even more unequal than that of income, and the SCF shows that wealth inequality has increased more than income inequality since 1989. As shown in figure 3, the wealthiest 5 percent of American households held 54 percent of all wealth reported in the 1989 survey. Their share rose to 61 percent in 2010 and reached 63 percent in 2013. By contrast, the rest of those in the top half of the wealth distribution–families that in 2013 had a net worth between $81,000 and $1.9 million–held 43 percent of wealth in 1989 and only 36 percent in 2013.

The lower half of households by wealth held just 3 percent of wealth in 1989 and only 1 percent in 2013. To put that in perspective, figure 4 shows that the average net worth of the lower half of the distribution, representing 62 million households, was $11,000 in 2013.9 About one-fourth of these families reported zero wealth or negative net worth, and a significant fraction of those said they were “underwater” on their home mortgages, owing more than the value of the home.10 This $11,000 average is 50 percent lower than the average wealth of the lower half of families in 1989, adjusted for inflation. Average real wealth rose gradually for these families for most of those years, then dropped sharply after 2007. Figure 5 shows that average wealth also grew steadily for the “next 45” percent of households before the crisis but didn’t fall nearly as much afterward. Those next 45 households saw their wealth, measured in 2013 dollars, grow from an average of $323,000 in 1989 to $516,000 in 2007 and then fall to $424,000 in 2013, a net gain of about one-third over 24 years. Meanwhile, the average real wealth of families in the top 5 percent has nearly doubled, on net–from $3.6 million in 1989 to $6.8 million in 2013.

Housing wealth–the net equity held by households, consisting of the value of their homes minus their mortgage debt–is the most important source of wealth for all but those at the very top.11 It accounted for three-fifths of wealth in 2013 for the lower half of families and two-fifths of wealth for the next 45. But housing wealth was only one-fifth of total wealth for the top 5 percent of families. The share of housing in total net worth for all three groups has not changed much since 1989.


Another major source of wealth for many families is financial assets, including stocks, bonds, mutual funds, and private pensions.14 Figure 7 shows that the wealthiest 5 percent of households held nearly two-thirds of all such assets in 2013, the next 45 percent of families held about one-third, and the bottom half of households, just 2 percent. This figure may look familiar, since the distribution of financial wealth has concentrated at the top since 1989 at rates similar to those for overall wealth, which we saw in figure 3.15

The speech also contains a variety of charts.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1941.28 as this post is written