FOMC September 2016 Press Conference Notes

Waiting for the time being

“We judged that the case for an increase has strengthened, but decided for the time being to wait for further evidence of continued progress toward our objectives”

Household spending driving growth

“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. ”

More people have been looking for work

“The fact that unemployment measures have been holding steady while the number of jobs has grown solidly shows that more people, presumably in response to better employment opportunities and higher wages, have started actively seeking and finding jobs. This is a very welcome development, both for the individuals involved and the nation as a whole. ”

Why didn’t we wait? Because we can deal with inflation more easily than weakness

“Returning to monetary policy, the recent pickup in economic growth and continued progress in the labor market have strengthened the case for an increase in the federal funds rate. Moreover, the Committee judges the risks to the outlook to be roughly balanced. So why didn’t we raise the federal funds rate at today’s meeting? Our decision does not reflect a lack of confidence in the economy. Conditions in the labor market are strengthening, and we expect that to continue. And while inflation remains low, we expect it to rise to our 2 percent objective over time. But with labor market slack being taken up at a somewhat slower pace than in previous years, scope for some further improvement in the labor market remaining, and inflation continuing to run below our 2 percent target, we chose to wait for further evidence of continued progress toward our objectives. This cautious approach to paring back monetary policy support is all the more appropriate given that short-term interest rates are still near zero, which means that we can more effectively respond to surprisingly strong inflation pressures in the future by raising rates than to a weakening labor market and falling inflation by cutting rates.”

Neutral rate is very low currently

“We continue to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time to achieve and maintain our objectives. That’s based on our view that the neutral nominal federal funds rate–that is, the interest rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel–is currently quite low by historical standard”

So we don’t have to raise rates much to get to it

“since monetary policy is only modestly accommodative, there appears little risk of falling behind the curve in the near future, and gradual increases in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years”

This economy has a little more room to run that previously thought

“my assessment would be based on this evidence that the economy has a little more room to run than might have been previously thought, that’s good news. Remember that inflation continues below 2 percent, although we expect it to move up overtime. So, the Committee agrees that risks to the outlook have become roughly balanced. We expect labor market conditions to continue strengthening. And we are generally agreed that gradual increases in the federal funds rate to remove what is a modest degree of accommodation will be appropriate. But, we don’t see the economy is overheating now.”

The economy has a bit more running room

“I would characterize it as we found the economy has a bit more running room, nevertheless, we don’t want the economy to overheat. And if things continue on the current course, I think that some gradual increases will be appropriate. And mainly, what we discussed today were issues affecting the timing of such increases. ”

We’re struggling with a set of issues about what is the new normal in this economy

” we’re struggling with difficult set of issues about what is the new normal in this economy and in the global economy more generally which explains why we keep revising down the rate path. And, you know, it’s very important that in a body like ours that a whole range of views are expressed that we have independent-minded people who gather together and discuss these issues”

We don’t suffer from group think

“I think it’s a very good thing that the FOMC is not a body that suffers from group think. And you see that, you see that’s one of the, you know, real worries in an organization that everybody thinks identically”

We are an independent agency, and we don’t take politics into account

” I think Congress very wisely established the Federal Reserve is an independent agency in order to insulate monetary policy from short term political pressures. And I can say, emphatically, that partisan politics plays no role in our decisions about the appropriate stance of monetary policy. We are trying to decide what the best policy is to foster price stability and maximum employment and to manage the variety of risks that we see is affecting the outlook. We do not discuss politics at our meetings and we do not take politics into account in our decisions”

We are not seeing evidence that the economy is overheating

“we’re not seeing evidence that the economy is overheating.”

Every meeting is a live meeting

” And November, you asked about as well. Well, every meeting is live and we will again assess as we always do incoming evidence in November and decide whether or not a move is warranted.”

Factors that could contribute to evaluating a change in the neutral funds rate

” I think if you saw us revising up our growth forecast revising down, our estimates well, with an unchanged path for policy, you know. If you saw this, you would see revisions in the funds rate path. But, if unemployment were moving down faster than we had anticipated if we saw a faster growth or upward pressure on inflation that would be suggestive of the appropriateness of reevaluating whether or not the neutral funds rate had increased”

In general we do no see asset valuations as out of line with historical norms although we are a little concerned about commercial real estate

“interest rates both here and in advanced countries around the globe appeared to be very low. And that is an environment that, if we do have to live with that for a long time, we have to be aware that it does give rise to a reach for yield as individuals and investors seek to, perhaps, take on risk or lengthen maturities to seek higher yields. And I think we should be concerned about that to the extent it creates financial stability risks. And we are very aware that those are possible. We engage in regular assessments of financial stability factors that bear on financial stability. Overall, I would say that the threats to financial stability I would characterize, at this point, as moderate. Not– I mean– so, I would characterize it as moderate. In general, I would not say that asset valuations are out of line with historical norms, but there are areas my colleague President Rosengren is focused on commercial real estate where price to rent ratios are very higher, or cap rates are very low. And that’s something that has caught our attention.”

Issued supervisory guidance that is leading to tightening of lending standards in CRE

” We have a variety of tools other than monetary policy to address such risks. We’ve recently issued new supervisory guidance pertaining to commercial real estate. I would say in the area of commercial real estate while valuations are high, we are seeing some tightening of lending standards and less debt growth associated with that rise in commercial real estate prices. ”

Consumer sentiment certainly seems to be solid

” Consumer sentiment is perfectly solid. We’re seeing a lot of strength in consumer spending, and consumer sentiment certainly seems to be solid. ”

Dodging Brexit/POTUS election question

“we are very focused on evaluating, given the way economy is operating, what is the right policy to foster our goals, and I’m not going to get into politics. I’m just– those are factors that we don’t consider and I don’t–I’m not going to get involved in commenting on the election. ”

I agree that there are risks to waiting too long

“I certainly agree and I’ve said myself that there are risks in waiting too long to remove accommodation, and we need to take forward-looking approach. I’ve always advocated making policy based on forecasts of where the economy is heading and taking account of risks. And there are two particular risks that we need to think about in balance. ”

There are risks to inflation running below our 2 percent objective

“On the other hand, inflation is running below our 2 percent objective, and it’s also important that we make sure we get back to 2 percent, and I have routinely indicated a number measures of inflation expectations that are running at the low ends of their historical range, and we’re watching that as well. And there would also be risks from not seeing inflation move back to our 2 percent objective. And exactly how to balance these two risks, which is more serious– which is a more serious risk, can affect one’s judgment about the appropriate timing, and we’re all struggling to understand the magnitude and nature of those two risks. ”

The Federal Reserve is not politically compromised

” The Federal Reserve is not politically compromised. We do not discuss politics in our meetings. I can’t recall any meeting that I have ever attended where politics has been a matter of discussion. I think the public, if they had been watching our meeting on TV today, would have felt that we had a rich, deep, serious, intellectual debate about the risks and the forecast for the economy, and we struggled mightily with trying understand one another’s points of view and to come out at a balance place and to act responsibly”

You will not find any signs of political motivation when transcripts are released in five years

” I have no concern that the Fed is politically motivated, and I will assure that you will not find any signs of political motivation when the transcripts are released in five years. We– I–It is important that we maintain the confidence of the public, and I do believe that we deserve it.”

Of course we’re worried about bubbles, but no one can tell what a bubble valuation is except in hindsight

“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 have further written down our estimate of longer run normal growth

“We have further written down or estimate of the longer run normal growth rate. And with that reflects is in assessment that productivity growth is likely to remain low for an extended time although, it doesn’t bother and expectation that it will pick up from the miserable half percent pace per year that we have seen over the last five years. ”

Tightness in the labor market is what ultimately drives inflation and pressure on resource utilization

” I think what ultimately drives inflation, both wage and price growth is that tightness in the labor market and pressure on resource utilization. And, the sad fact is that we are getting that healthy pace of job market growth with very slow growth in output.”

I’m not in favor of a whites of their eyes sort of approach because monetary policy operates with lags

” 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. ”

History doesn’t always replay itself. Inflation not acting like it did in the 70s

” 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. ”