Fed Chair Janet L. Yellen at Jackson Hole, Wyoming

https://www.federalreserve.gov/newsevents/speech/yellen20160826a.htm

Current economic situation in the US

“U.S. economic activity continues to expand, led by solid growth in household spending. But business investment remains soft and subdued foreign demand and the appreciation of the dollar since mid-2014 continue to restrain exports. While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market…Although the unemployment rate has remained fairly steady this year, near 5 percent, broader measures of labor utilization have improved. Inflation has continued to run below the FOMC’s objective of 2 percent, reflecting in part the transitory effects of earlier declines in energy and import prices.”

Expect the federal funds rate to increase

“Looking ahead, the FOMC expects moderate growth in real gross domestic product (GDP), additional strengthening in the labor market, and inflation rising to 2 percent over the next few years. Based on this economic outlook, the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives…”

…Unless data to the contrary comes in.

“Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook.”

The expanded toolkit has been helpful

“In light of the slowness of the economic recovery, some have questioned the effectiveness of asset purchases and extended forward rate guidance…Studies have found that our asset purchases and extended forward rate guidance put appreciable downward pressure on long-term interest rates and, as a result, helped spur growth in demand for goods and services, lower the unemployment rate, and prevent inflation from falling further below our 2 percent objective.”

Interest on reserves seems to be here to stay

“…at some point after the process of raising the federal funds rate is well under way, we will cease or phase out reinvesting repayments of principal from our securities holdings. Once we stop reinvestment, it should take several years for our asset holdings–and the bank reserves used to finance them–to passively decline to a more normal level. But even after the volume of reserves falls substantially, IOER (Interest on Excess Reserves) will still be important as a contingency tool, because we may need to purchase assets during future recessions to supplement conventional interest rate reductions.”

Real neutral interest rate is close to zero presently

“By some calculations, the real neutral rate is currently close to zero, and it could remain at this low level if we were to continue to see slow productivity growth and high global saving. If so, then the average level of the nominal federal funds rate down the road might turn out to be only 2 percent, implying that asset purchases and forward guidance might have to be pushed to extremes to compensate.”

New tools to be considered

“Looking ahead, we will likely need to retain many of the monetary policy tools that were developed to promote recovery from the crisis. In addition, policymakers inside and outside the Fed may wish at some point to consider additional options to secure a strong and resilient economy.”

In sum

“Although fiscal policies and structural reforms can play an important role in strengthening the U.S. economy, my primary message today is that I expect monetary policy will continue to play a vital part in promoting a stable and healthy economy. New policy tools, which helped the Federal Reserve respond to the financial crisis and Great Recession, are likely to remain useful in dealing with future downturns. Additional tools may be needed and will be the subject of research and debate. But even if average interest rates remain lower than in the past, I believe that monetary policy will, under most conditions, be able to respond effectively.”