Janet Yellen June 2016 Speech

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Further increases in fed funds are likely to be appropriate if conditions continue to strengthen

” If incoming data are consistent with labor market conditions strengthening and inflation making progress toward our 2 percent objective, as I expect, further gradual increases in the federal funds rate are likely to be appropriate and most conducive to meeting and maintaining those objectives. However, I will emphasize that monetary policy is not on a preset course and significant shifts in the outlook for the economy would necessitate corresponding shifts in the appropriate path of policy.”

Last Friday’s labor report was disappointing

” the overall labor market situation has been quite positive. In that context, this past Friday’s labor market report was disappointing.”

Shouldn’t attach too much significance to any single labor report

“Although this recent labor market report was, on balance, concerning, let me emphasize that one should never attach too much significance to any single monthly report. Other timely indicators from the labor market have been more positive. For example, the number of people filing new claims for unemployment insurance–which can be a good early indicator of changes in labor market conditions–remains quite low, and the public’s perceptions of the health of the labor market, as reported in various consumer surveys, remain positive. That said, the monthly labor market report is an important economic indicator, and so we will need to watch labor market developments carefully.”

Cautiously optimistic that factors restraining growth have faded

” in keeping with that tradition, I’ll now turn to the less-positive. Economic developments abroad have significantly restrained growth in the United States over the past year, although I am cautiously optimistic that these headwinds are now fading. Concerns about slowing growth in China and falling commodity prices, which afflicted global financial markets early this year and thus likely weighed on demand, appear to have eased somewhat. ”

There is some evidence that deep recession had a long lasting effect in depressing investment

“There is some evidence that the deep recession had a long-lasting effect in depressing investment, research and development spending, and the start-up of new firms, and that these factors have, in turn, lowered productivity growth. With time, I expect this effect to ease in a stronger economy.11 I also see no obvious slowdown in the pace or the potential benefits of innovation in America, which likewise may bear fruit more readily in a stronger economy. In the meantime, it would be helpful to adopt public policies designed to boost productivity”

Current stance of policy is appropriate but fed funds should rise gradually

“My overall assessment is that the current stance of monetary policy is generally appropriate, in that it is providing support to the economy by encouraging further labor market improvement that will help return inflation to 2 percent. At the same time, I continue to think that the federal funds rate will probably need to rise gradually over time to ensure price stability and maximum sustainable employment in the longer run.”

The current monetary policy is stimulative because the real fed funds rate is negative

” the current stance of monetary policy is stimulative, although perhaps not as stimulative as might appear at first glance. One useful measure of the stance of policy is the deviation of the federal funds rate from a “neutral” value, defined as the level of the federal funds rate that would be neither expansionary nor contractionary if the economy was operating near potential. This neutral rate changes over time, and, at any given date, it depends on a constellation of underlying forces affecting the economy. At present, many estimates show the neutral rate to be quite low by historical standards–indeed, close to zero when measured in real, or inflation-adjusted, terms.13 The current actual value of the federal funds rate, also measured in real terms, is even lower, somewhere around minus 1 percent. With the actual real federal funds rate modestly below the relatively low neutral real rate, the stance of monetary policy at present should be viewed as modestly accommodative”

Modestly accommodative stance of policy is appropriate. Overshooting wouldn’t be bad

“Although the economy is now fairly close to the FOMC’s goal of maximum employment, I view our modestly accommodative stance of policy as appropriate for several reasons. First, with inflation continuing to run below our objective, a mild undershooting of the unemployment rate considered to be normal in the longer run could help move inflation back up to 2 percent more quickly. Second, a stronger job market could also support labor market improvement along other dimensions, including greater labor force participation”

Monetary policy affects the economy with a lag so removal of accommodation should begin before goals are fully reached

“These motivations notwithstanding, I continue to believe that it will be appropriate to gradually reduce the degree of monetary policy accommodation, provided that labor market conditions strengthen further and inflation continues to make progress toward our 2 percent objective. Because monetary policy affects the economy with a lag, steps to withdraw this monetary accommodation ought to be initiated before the FOMC’s goals are fully reached. And if the headwinds that have lingered since the crisis slowly abate as I anticipate, this would mean that the neutral rate of interest itself will move up, providing further impetus to gradually increase the federal funds rate.”

Financial conditions have recovered but my colleagues and I have so many questions!

“Over the past few months, financial conditions have recovered significantly and many of the risks from abroad have diminished, although some risks remain. In addition, consumer spending appears to have rebounded, providing some reassurance that overall growth has indeed picked up as expected. Unfortunately, as I noted earlier, new questions about the economic outlook have been raised by the recent labor market data. Is the markedly reduced pace of hiring in April and May a harbinger of a persistent slowdown in the broader economy? Or will monthly payroll gains move up toward the solid pace they maintained earlier this year and in 2015? Does the latest reading on the unemployment rate indicate that we are essentially back to full employment, or does relatively subdued wage growth signal that more slack remains? My colleagues and I will be wrestling with these and other related questions going forward.”

The only thing we know for sure is that monetary policy is not on a preset course

“What is certain is that monetary policy is not on a preset course, and that the Committee will respond to new data and reassess risks so as to best achieve our goals.”