FOMC March 2017 Press Conference Notes

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Janet Yellen

No change in our outlook

“Today’s decision is in line with that view and does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy”

Still accommodative

” Even after this increase, monetary policy remains accommodative, thus supporting some further strengthening in the job market and a sustained return to 2 percent inflation. Today’s decision also reflects our view that waiting too long to scale back some accommodation could potentially require us to raise rates rapidly sometime down the road, which, in turn, could risk disrupting financial markets and pushing the economy into recession”

The long run neutral fed funds rate is likely to remain below levels that prevailed in previous decades

“We also expect the neutral level of the federal funds rate to rise somewhat over time, meaning that additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion. Even so, the Committee continues to anticipate that the longer-run neutral level of the federal funds rate is still likely to remain below levels that prevailed in previous decades.”

We want to emphasize rates as a policy setting tool

“t. We’ve emphasized, for quite some time, that the Committee wishes to use variations in the Fed Funds Rate target, our short-term interest rate target as our key active tool of policy. We think it’s much easier in using that tool to communicate the stance of policy. We have much more experience with it, and have a better idea of its impact on the economy. So, while the balance sheet asset purchases are a tool that we could conceivably resort to if we found ourselves in a serious downturn where we were, again, up against the zero bound, and faced with substantial weakness in the economy. It’s not a tool that we would want to use as a routine tool of policy”

Can’t say for sure when we’ll shrink the balance sheet

“You asked what well under way means. I can’t give you a specific answer to that. And I think the right, the right way to look at it is in qualitative, and not quantitative, terms. It doesn’t mean some particular cutoff level for the federal funds rate that, when we’ve reached that level, we would consider ourselves well under way. I think what we want to have is confidence in the economy’s trajectory. A sense that the economy will make progress, that we’re not overly worried about downside risks, and adverse shocks that could hit the economy, that could quickly after setting it off on the path to shrinking the balance sheet gradually over time cause us to want to begin to add monetary policy accommodation. ”

Our current trajectory certainly qualifies as gradual

” I think the trajectory that you see is the median in our projections which, this year, looks to a total of three increases. That certainly qualifies as gradual. My comfort in using the term gradual comes back, in part, to my judgment that the neutral level of the federal funds rate, namely the level of the federal funds rate, that we keep the economy operating on an even keel. That it’s a rate where we neither are pressing on the brake, nor pushing down on the accelerator. That level of interest rates is quite low. So, at present, I see monetary policy as accommodative, namely, the current level of the federal funds rate is below that neutral rate, but not very far below the neutral rate. ”

We did remove the word “only” but don’t read too much into that

“We did remove the word only, in the statement today, from gradual. I think this is something that shouldn’t be overinterpreted. I regard it as a relatively small change, and think it’s appropriate for you to consider it in the context, for example, of the fact that our economic projections are virtually identical to those that we issued in December.”

2% is the neutral interest rate

“Three percent is the longer run, normal federal funds rate that participants estimate in real terms with a two percent inflation objective that’s one percent in real terms. And I’ve indicate — why is it so low? Well, I think, there’s very strong evidence that’s accumulated that this rate has been falling, not just in the United States, but in many advanced nations. And the decline probably predates the financial crisis. I think, in part, it reflects slowing population growth, and also slow productivity growth here and in many other advanced nations. But some recent work suggests that, at the present time, the neutral real rate is yet lower than that. And some estimates place it around zero in real terms.”

Financial conditions do formulate into our outlook

” we do look at financial conditions in formulating our view of the outlook. And stock prices do figure into financial conditions. So, I think, the higher level of stock prices is one factor that looks like it’s likely to somewhat boost consumption spending. We also notice that, in the last several months, that risk spreads particularly for lower grade corporate issuers have narrowed, which is another signal that financial conditions have become somewhat easier. Now, on the other side, longer term interest rates are up some in recent months,
and the dollar is a little stronger How does that net out? There are private sector analysts that produce financial conditions, indices that attempt to aggregate all these different factors affecting financial conditions. And, for some of the more prominent analysts and indices, I think the conclusion they’ve reached is that financial conditions on balance have eased. And that’s partly driven by the stock market. So, that is a factor that affects the outlook.”

The shift in sentiment is obvious, but not seeing follow through yet

“We exchange around the table what we learned from our many business contacts, and I think it’s fair to say that many of my colleagues and I note a much more optimistic frame of mind among many, many businesses in recent months. But I’d say most of the business people that we’ve talked to also have a wait and see attitude, and are very hopeful that they will be able to expand investment and are looking forward to doing that, but are waiting to see what will happen. So, we will watch that. And, of course, if we were to see a major shift in spending reflecting those expectations, that could very well affect the outlook. I’m not seeing it — I’m not seeing that at this point. But the shift in sentiment is obvious and notable.”

We haven’t changed our view on the outlook

” look, our policy is not set in stone. It is data dependent and we’re, we’re not locked into any particular policy path. Our, you know, as you said, the data have not notably strengthened. I, there’s noise always in the data from quarter to quarter. But we haven’t changed our view of the outlook. We think we’re on the same path; not, we haven’t boosted the outlook projected faster growth. We think we’re moving along the same course we’ve been on, but it is one that involves gradual tightening in the labor market”