Janet Yellen Congressional Testimony February 2015 Notes

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Yellen’s first statement is positive about the economy

“Since my appearance before this Committee last July, the economy has made further progress toward the Federal Reserve’s objective of maximum employment. And while inflation is expected to remain low in the near term, in part because of the further declines in energy prices, the Federal Open Market Committee (FOMC) expects that inflation will rise to its 2 percent objective over the medium term.”

The second two paragraphs are positive assessments

“The strong gains in the job market last year were accompanied by a continued moderate expansion in economic activity.”

Financial conditions have recently become less supportive, but the committee expects that economic activity will continue to expand at a moderate pace

“Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar. These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer-term interest rates and oil prices provide some offset. Still, ongoing employment gains and faster wage growth should support the growth of real incomes and therefore consumer spending, and global economic growth should pick up over time, supported by highly accommodative monetary policies abroad. Against this backdrop, the Committee expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years and that labor market indicators will continue to strengthen.”

Low commodity prices could trigger stresses, but economic growth could also exceed our projections

“low commodity prices could trigger financial stresses in commodity-exporting economies, particularly in vulnerable emerging market economies, and for commodity-producing firms in many countries. Should any of these downside risks materialize, foreign activity and demand for U.S. exports could weaken and financial market conditions could tighten further. Of course, economic growth could also exceed our projections for a number of reasons, including the possibility that low oil prices will boost U.S. economic growth more than we expect. At present, the Committee is closely monitoring global economic and financial developments, as well as assessing their implications for the labor market and inflation and the balance of risks to the outlook.”

The FOMC anticipates gradual increases in the Fed funds rate

“The FOMC anticipates that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate. In addition, the Committee expects that the federal funds rate is likely to remain, for some time, below the levels that are expected to prevail in the longer run.”

If the economy were to disappoint a lower path would be appropriate

” if the economy were to disappoint, a lower path of the federal funds rate would be appropriate. We are committed to our dual objectives, and we will adjust policy as appropriate to foster financial conditions consistent with the attainment of our objectives over time.'”

Q&A

I do not expect that the FOMC will have to cut rates

“I do not expect that the FOMC will soon be in a position where it becomes necessary to cut rates…while there is always some risk of recession…I think we want to be careful not to jump to a premature conclusion about what is in store for the US economy.”

Yellen’s thoughts on the credit environment:

“I think the answer is maybe [there’s cause for concern] but the jury is out. We’ve continued to see progress in the labor markets…GDP growth clearly slowed a lot…my expectation is that it will pick up this quarter…but on the other hand financial conditions have tightened considerably and that can have implications for the outlook…We are evaluating and assessing the impact of these developments…that’s what we’re doing at this point.”

“Well not really [do we see credit tightening] at this stage, but what we do see is that spreads especially on lower graded bonds have widened, bank rates have widened…and it’s not just energy…in our recent survey of banks we’ve seen a tightening of lending standards…that is something that bears watching.”

“What we’re trying to do is forecast spending in the economy…and credit availability factors in to our forecast…they’re not the only factors that matter, but they are a factor that’s important…there’s a number of weeks before we meet in March, there’s more data that we’ll want to look at.”

Senate Testimony 2/11

We have considered negative rates previously

“The answer is that we had previously considered negative rates and they would not work well to foster accommodation back in 2010…We’re taking a look again so that we would be prepared in the event that we need to add additional accommodation”

We are watching financial developments, but a cut is not likely

“global economic and financial developments impinge on the outlook. We are in the process of evaluating how those developments should affect our outlook. We will meet in March and provide a new set of projections that will update markets on our thinking on the outlook and the risks. But I’ve not thought that a downturn sufficient to cause the next move to be a cut is a likely possibility. And we’ve not yet seen a shift in the economic outlook that is sufficient to make that highly likely.”

I don’t think the market’s movement was due to our policy

“The immediate market response for a number of weeks to the Fed decision was quite tranquil it was a decision that was well communicated and was expected and there was very little market reaction. Around the turn of the year we began to see more volatility in financial markets. Some of the precipitating factors seemed to be the movement in Chinese currency and the downward move in oil prices. I think those things have been the drivers and have been associated with a broader fears that have developed in the market about the for the potential for weaker global growth with spillovers to inflation, so I don’t think it’s mainly our policy”