FOMC December 2015 Press Conference Notes

This marks the end of an extraordinary period

“This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression. It also recognizes the considerable progress that has been made toward restoring jobs, raising incomes, and easing the economic hardship of millions of Americans. And it reflects the Committee’s confidence that the economy will continue to strengthen. ”

The process of normalizing is likely to proceed gradually

“As I will explain, the process of normalizing interest rates is likely to proceed gradually, although future policy actions will obviously depend on how the economy evolves relative to our objectives of maximum employment and 2 percent inflation. ”

Why is the Fed raising rates with low inflation? Transitory factors and time lag of decisions

“With inflation currently still low, why is the Committee raising the federal funds rate target? As I have already noted, much of the recent softness in inflation is due to transitory factors that we expect to abate over time, and diminishing slack in labor and product markets should put upward pressure on inflation as well. In addition, we recognize that it takes time for monetary policy actions to affect future economic outcomes. Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly at some point to keep the economy from overheating and inflation from significantly overshooting our objective. Such an abrupt tightening could increase the risk of pushing the economy into recession.”

Policy remains accommodative even after today’s increase

“As I have often noted, the importance of our initial increase in the target range for the federal funds rate should not be overstated: Even after today’s increase, the stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation”

How we’re implementing the policy:

“in conjunction with our policy statement, we also released an implementation note that provides details on the tools that we are using to raise the federal funds rate into the new target range. Specifically, the Board of Governors raised the interest rate paid on required and excess reserves to 1/2 percent, and the FOMC authorized overnight reverse repurchase operations at an offering rate of 1/4 percent. Both of these changes will be effective tomorrow. To ensure sufficient monetary control at the onset of the normalization process, we have for the time being suspended the aggregate cap on overnight reverse repurchase transactions that has been in place during the testing phase of this facility. Recall that the Committee intends to phase out this facility when it is no longer needed to help control the federal funds rate. ”

Global risks persist but the US economy has shown considerable strength

We decided to move at this time because we feel the conditions that we set out for a move, namely further improvement in the labor market and reasonable confidence that inflation would move back to 2 percent over the medium term, we felt that these conditions had been satisfied. We have been concerned, as you know, about the risks from the global economy. And those risks persist, but the U.S. economy has shown considerable strength. Domestic spending that accounts for 85 percent of aggregate spending in the U.S. economy has continued to hold up. It’s grown at a solid pace. ”

We also recognize that monetary policy operates with lags

“And we recognize that monetary policy operates with lags. We would like to be able to move in a prudent, and as we’ve emphasized, gradual manner. It’s been a long time since the Federal Reserve has raised interest rates, and I think it’s prudent to be able to watch what the impact is on financial conditions and spending in the economy and moving in a timely fashion enables us to do this. ”

It’s important not to overblow the significance of this first move

“Again, I think it’s important not to overblow the significance of this first move. It’s only 25 basis points. It–monetary policy remains accommodative. ”

Neutral is not a policy goal, it’s an assessment

“Neutral is not a policy goal. It is an assessment. It’s a benchmark that I think is useful for assessing the stance of policy. Neutral is essentially a stance of policy, a level of short-term rates, which if the economy were operating near its potential–and we’re reasonably, not quite at that, but reasonably close to it–it would be a level that would maintain or sustain those conditions. So if this point, policy, we judge to be accommodative. ”

We would like to avoid a situation where we are forced to tighten abruptly

“we recognize that policy is accommodative, and if we do not begin to slightly reduce the amount of accommodation, the odds are good that the economy would end up overshooting both our employment and inflation objectives. What we would like to avoid is a situation where we have waited so long that we’re forced to tighten policy abruptly, which risks aborting what I would like to see as a very long-running and sustainable expansion. ”

We recognize that inflation is well below our 2% goal

“we recognize that inflation is well below our 2 percent goal. The entire Committee is committed to achieving our 2 percent inflation objective over the medium term. Just as we want to make sure that inflation doesn’t persist at levels above our 2 percent objective, the Committee is equally committed–this is a symmetric goal–and the Committee is equally committed to not allowing inflation to persist below our 2 percent objective’

I’m not going to give you a simple formula for what we need to see to raise rates again

“I’m not going to give you a simple formula for what we need to see on the inflation front in order to raise rates again. We’ll also be looking at the path of employment as well as the path for inflation. But if incoming data were, led us to call into question the inflation forecast that we have set out–and that could be a variety of different kinds of evidence–that would certainly give the Committee pause”

All oil prices need to do is stabilize to stop being a headwind to inflation

“First, let me say with respect to oil prices, I have been surprised by the further downward movement in oil prices, but we do not need to see oil prices rebound to higher levels in order for the impact on inflation to wash out. So all they need to do is stabilize. I believe there is some limit below which oil prices are unlikely to rise. ”

If the economy were disappointing, we would pursue a more accommodative policy

Well, you know, if the economy were disappointing, we– you know, our actions wouldn’t purely be based on inflation, we would also take employment into account. So I can’t give you a simple answer but we would pursue a more accommodative policy because we do certainly are committed to achieving 2 percent over the medium term”

We will watch financial developments, but we’ll need to see persistent changes in conditions, not short term volatility

“we will watch financial developments, but what we’re looking at here is the longer term economic outlook, are we seeing persistent changes in financial market conditions that would have a bearing, a significant bearing, on the outlook that we would need to take account in formulating appropriate policy. Yes we would, but it’s not short-term volatility in markets. ”

We will take into account if financial markets move in a way that is significantly out of line with our expectations

“we obviously will track carefully the behavior of both short and longer term interest rates, the dollar, and asset prices, and if they move in persistent and significant ways that are out of line with the expectations that we have, then of course we will take those in to account”

I feel confident about the fundamentals driving the US economy

“let me start by saying that I feel confident about the fundamentals driving the U.S. economy, the health of U.S. households and domestic spending. There are pressures on some sectors of the economy particularly manufacturing and the energy sector reflecting global developments and developments in commodity markets and energy markets, but the underlying health of the U.S. economy, I considered to be quite sound.”

*I think it’s a myth that expansions die of old age*

“I think it’s a myth that expansions die of old age. I do not think that they die of old age. So the fact that this has been quite a long expansion doesn’t lead me to believe that it’s one that has, that its days are numbered.”

The economy gets hit by shocks. There’s about a 10% chance one could happen in any given year

“But the economy does get hit by shocks, and they were both positive shocks and negative shocks. And so there is a significant odd, you know, probability in any year that the economy will suffer some shock that we don’t know about that will put it into recession. And so, I’m not sure exactly how high that probability is in any year but maybe at least on the order of 10 percent. So yes, there is some probability that that could happen and of course we’d appropriately respond, but it isn’t something that is fated to happen because we’ve had a long expansion”

We do eventually want to operate with a much smaller balance sheet

“in our normalization principles which are in effect, the Committee stated that we eventually want to operate with a much smaller balance sheet than we have at present. We would reduce the size of the balance sheet to essentially whatever size we needed to manage monetary policy effective– in an effective and efficient way. ‘

We don’t exactly know what size the balance sheet will be eventually

“I can’t tell you exactly what size of balance sheet we will determine is the best to operate in an efficient and effective manner. It might be somewhat larger than the very tiny quantity of reserves that we had in pre-crisis. We’ve not determined that. We’ve also said that we will– we expect to reduce the size of our balance sheet over time by ceased diminishing or ceasing entirely reinvestments”

We would like to be able to lower Fed funds in an adverse shock

“one factor that we’ve talked about is the desirability of having some scope to respond to an adverse shock to the economy by lowering the federal funds rate. And so, it would be nice to have a buffer in terms of having raised the federal funds rate to a certain extent to give us some meaningful scope to respond. ”

We don’t expect to cease reinvestment quickly

“it means that this is not something that we expect to be turning to, to cease reinvestment very quickly”

We think Third Avenue was an unusual case

“Third Avenue Focused Credit Fund was a rather unusual open-end mutual fund. It had very concentrated positions in especially risky and liquid bonds, and it had been facing very significant redemption pressures. My understanding is that the SEC is in touch with Third Avenue. And as you probably know, the SEC has proposed some reforms to address what’s a structural problem of liquidity mismatch in open-end mutual funds. ”

We are watching very carefully, but I think financial markets are much more resilient now

“So we continue to believe that financial conditions are supportive of economic growth. We will be–we have been and will continue to track developments in financial markets very carefully. I would say that I think we have a far more resilient financial system now than we had prior to the financial crisis and highly capital banks that are well situated to support corporate lending. ‘

Central banks kill expansions because they tighten too late. That’s exactly why we’re tightening early

“when you say that central banks often kill them, I think the usual reason that that has been true when that has been true is that central banks have begun too late to tighten policy, and they’ve allowed inflation to get out of control. And at that point, they have had to tighten policy very abruptly and very substantially, and it’s caused a downturn, and the downturn has served to lower inflation. So, if you don’t mind my flipping the question on you, I would point out that it is because we don’t want to cause a recession through that type of dynamic at some future date that it is prudent to begin early and gradually. ”

This move reflects our confidence in the economy

“the first thing that Americans should realize is that the Fed’s decision today reflects our confidence in the U.S. economy, that we believe we have seen substantial improvement in labor market conditions, and while things may be uneven across regions of the country and different industrial sectors, we see an economy that is on a path of sustainable improvement. ”

There are some upside risks in the economy too

“There are upside risks to the economy and I think, you know, we tend to focus on the downside risk, it’s right to do so. We want to be careful of that downside risks. But consumers are in much healthier financial condition. Their income prospects have improved. We see them buying a lot of cars. Housing has been recovering very slowly. But the demographics would point to considerable upside for residential investment. My mainline forecast is for gradual recovery but there is upside risk there.

While we’re not going to act mechanically, we will probably end up making evenly spaced hikes

“I do want to emphasize that while we have said gradual, gradual does not mean mechanical evenly timed, equally-sized interest rate changes. So, that is not what the Committee means by it. My guess is that the economy will progress in the manner that is not sufficiently even, that we will decide to make evenly spaced hikes.”