Fed Chair Janet Yellen Congressional Testimony February 2017

Still focusing on the “neutral rate”

“The Committee’s view that gradual increases in the federal funds rate will likely be appropriate reflects the expectation that the neutral federal funds rate–that is, the interest rate that is neither expansionary nor contractionary and that keeps the economy operating on an even keel–will rise somewhat over time. Current estimates of the neutral rate are well below pre-crisis levels–a phenomenon that may reflect slow productivity growth, subdued economic growth abroad, strong demand for safe longer-term assets, and other factors. The Committee anticipates that the depressing effect of these factors will diminish somewhat over time, raising the neutral funds rate, albeit to levels that are still low by historical standards.”

I’m not going to opine on fiscal policy, but here’s my opinion on fiscal policies

” While it is not my intention to opine on specific tax or spending proposals, I would point to the importance of improving the pace of longer-run economic growth and raising American living standards with policies aimed at improving productivity. I would also hope that fiscal policy changes will be consistent with putting U.S. fiscal accounts on a sustainable trajectory. ”

GSE reform needed

“I think it is very important that congress continue to deal with the gses and figure out what the government’s role in housing finance should look like going forward. The goal of bringing private capital back into the mortgage market, I think, is important and I would hope that congress would decide explicitly on what the government’s role is, and if there are guarantees that they would be recognized and priced appropriately and we look forward to continue working with you to help achieve these objectives.”

we want to shrink our balance sheet

“The fomc has enunciated it is longer run goal is to shrink our balance sheet, to levels consistent with the efficient and effective implementation of monetary policy. And while our system evolves and I can’t put a number on that, I would anticipate a balance sheet substantially smaller than at the current time. We would like to — in addition, we would like our balance sheet to, again, be primarily treasury securities, where as you pointed out, we have substantial holdings of mortgage backed securities. ”

going to let assets run off balance sheet when fed funds is higher

“What we would like to do is to find a time when we judge that our need to provide substantial accommodation to the economy in the coming years is minimal, when we have confidence that the economy is on a solid course, and that the federal funds rate has reached levels where we have some ability to address weakness by cutting it. And once we have that confidence, we will try to — we will begin to allow maturing principle from — from our investments to gradually and in an orderly way we will stop reinvestments or diminish them and allow our balance sheet to shrink in an orderly and predictable way. The committee has decided that it will not — some mortgage backed securities, but as principle matures we will begin to allow — allow those assets to run off our balance sheet.”

the taylor rule calls for a short term interest rate between 3.5 and 4%

“Right now, the taylor rule would call for a short-term interest rate somewhere between 3.5 and 4%. Which is obviously a much higher value of the federal funds rate than the fomc has deemed appropriate given the needs of the economy. I believe we would have a much weaker economy that in the last number of year, we would follow the number of dictates. The labor market would be weaker and instead of inflation, which is running below 2%, and we want to see it move up to our 2% objective, I believe inflation would be likely lower tharn it is now. >> so, jobs, higher mortgages, interest rate, a weaker economy, if we essentially just automatically following a formula.”

we don’t want to base current policy on speculation about what may come down the line

“So, we recognize there may be significant economic policy changes and that those changes could affect the outlook. We’re very well aware of that. Trz and we don’t yet have enough clarity on what changes will be p put in place to really clearly factor those policy changes into the economic outlook. So, we don’t want the base current policy on speculation about what may come down the line. We will wait to gain greater clarity on policy changes”

the fiscal policy is not sustainable

“Some of the policies that are being discussed might well raise deficits and in that context, they may also have impacts on economic growth. And the economy’s growth potential, so, not a simple matter to evaluate. But I do think it’s worth pointing out that fiscal sustainability has been b a long standing problem and that the u.S. Fiscal course as our population ages and health care costs increase, is already not sustainable.”

we want clarity before we incorporate fiscal policies in our forecasts

“Most of my colleagues decided they would not speculate on what economic policy changes would be put into effect and what their consequences would be. A few of my colleagues mentioned they assumed there would be a mild fiscal stimulus, but most of my colleagues have taken the view that we want greater clarity about the size, timing and composition of a changes to fiscal and other policies before trying to incorporate those into our forecasts.”

answer to will you raise in march

” I indicated that at our up coming meetings with will try to evaluate whether or not the economy is progressing, namely labor market conditions and inflation in line with our expectations. And if we find that they are, it probably will be appropriate to raise interest rates further. We’ve indicated that we think a gradual path of rate increases is likely to be appropriate if the economy continues on its current course”

the median expectation is for three interest rate increases this year

“We lasted that in september of course the economic out economicouteconomic economic outlook is uncertain, but a few increases would be appropriate. The median was three at that time, that means we have eight meetings a year and means at some meetings we would if things remain on course increase our target for the federal funds rate and not act at others. And precisely when we would take an action whether it’s march or may or june. >> right. >> I know people are focused on that. I can’t tell you exactly… It’s our expectation that there will be increased rates.”

I’m not going to comment on immigration policy but here’s my opinion

“I’m not going to comment in detail on immigration policy. I think that’s for congress and the administration to decide. But I would say that labor force growth has been slowing in the united states. It’s one of several reasons along with slow productivity growth for the fact that our economy has been growing at a slow pace and immigration has been an important source of labor force growth, so slowing the pace of immigration probably would slow the growth rate of the economy. ”