Fed Chair June 2017 Press Conference

Janet Yellen

Reduce reserve balances, but larger than crisis

“we anticipate reducing reserve balances and our overall balance sheet to levels appreciably below those seen in recent years but larger than before the financial crisis”

Policy not on a set course

“let me just say as I emphasized in my statement and always say monitory policy is not on a preset course. We indicated in our statement today that we’re closely monitoring inflation developments and certainly have taken note of the fact there have been several weak readings particular on core inflation. Our statement indicates that we expect inflation to remain low in the near term. But on the other hand, we continue to feel that with a strong labor market and labor market that’s continuing to strengthen, the conditions are in place for inflation to move up. Now, obviously we need to monitor that very carefully. ”

Nobody’s really changed their plans, just a wait and see attitude

” I would say that business and household sentiment remains quite strong, although many forecasters have pushed back somewhat the timing of the expected policy changes such as changes to tax policy or fiscal policy more generally. I would say that based on my observation of actual spending behavior and my discussions with our wide range of contacts that I haven’t seen very much evidence that thus far expectations of policy changes have driven substantial changes in either consumer spending or investment spending. So, I really wouldn’t expect any significant pullback, many of our business contacts I think their confidence remains high. They’ve not really changed their plans yet and they have a wait and see attitude. ”

We’re not targeting financial conditions

“We have certainly noticed the stock market is up considerably over the last year. That usually shows up in financial conditions indexes and is an important reason why some of them show easier financial conditions. There has been a modest decrease recently in the value of the dollar although it’s up substantially since mid-2014. So, we take those factors into account in deriving our forecasts and deciding the appropriate stance of policy. We have done that and– but other things also affect the stance of policy. So there really can’t be any simple relationship. We’re not targeting financial conditions. We’re trying to set a path of the federal funds rate, the taking into account of those factors and others that don’t show up in the financial conditions index. We’re trying to generate paths for employment and inflation that meet our mandated objectives.”

WE could start shrinking balance sheet fairly soon

” if the economy evolves in line with our expectations which, you know, we will be watching, always are, we could put this into effect relatively soon. You asked about whether or not we would do that and raise rates at the same meeting, and I would say, we’ve made no decision about that, and it really hinges on the outlook and our assessment of conditions. ”

I’m certainly open to looking at ways to reduce the burden of the Volcker Rule

” a number of my colleagues have spoken about the Volcker Rule. Implementation of it is frankly complex and I’m certainly open to looking at ways to reduce regulatory burden in that area. ”

Our use of QE isn’t as high as it’s been in some other countries

” I would say the use of QE in the United States relative to the size of our economy is not as high as it’s been in some other countries that have employed it. But that’s something we haven’t seriously even discussed.”

Federal Reserve FOMC statement 3.3.2017

Slowed economic activity this quarter

“Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen even as growth in economic activity slowed. Job gains were solid, on average, in recent months, and the unemployment rate declined. Household spending rose only modestly, but the fundamentals underpinning the continued growth of consumption remained solid. Business fixed investment firmed. Inflation measured on a 12-month basis recently has been running close to the Committee’s 2 percent longer-run objective.”

…one they view as transitory

“The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced.”

The status quo remains for now

“In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.”

Fed Governor Brainard March 2017 Speech Notes

THe economy is at a transition

“The economy appears to be at a transition. We are closing in on full employment, inflation is moving gradually toward our target, foreign growth is on more solid footing, and risks to the outlook are as close to balanced as they have been in some time. Assuming continued progress, it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path.1

The focus is turning to balance sheet

“As normalization of the federal funds rate gets further under way, monetary policy too is approaching a transition, prompting increased focus on the balance sheet. How the federal funds rate and the balance sheet should be adjusted individually and in combination depends on the degree to which they are substitutes, their relative precision, and the degree to which their effects on the economy are well understood.”

We are closing in on full employment

“Here at home, the economy is at a transition. The past few months have seen continued progress in the labor market. Monthly gains in payroll employment have maintained a pace sufficient to continue eroding labor market slack, and wage growth appears to be moving higher on balance. Compensation per hour in the business sector, the most comprehensive measure of wages, increased at a 3 percent pace the past two years, noticeably above the pace earlier in the recovery. We appear to be closing in on full employment. The unemployment rate–after remaining relatively flat from the third quarter of 2015 to the third quarter of 2016–fell 1/4 percentage point last quarter to 4-3/4 percent

There are upside risks to demand

“Recent months have seen an increase in the upside risks to domestic demand. Sentiment has increased along with equity prices, which are up around 10 percent since October. Increased optimism could lead to faster growth in consumption and business investment, although the spending data, thus far, do not suggest a noticeable acceleration. Some of the increase in sentiment and changes in asset prices could be tied to expectations of more expansive fiscal policy, another upside risk.”

Decision to rely on increases in fed funds serves an important purpose

‘In December 2015, the Committee indicated that it would continue to reinvest principal payments until normalization of the level of the federal funds rate is “well under way.”2 The decision to rely solely on the federal funds rate to remove accommodation initially until normalization is well under way serves an important purpose, in my view.3 With asymmetry in the scope for conventional monetary policy to respond to shocks, there is a benefit to enabling the federal funds rate to rise more quickly than would be possible with a shrinking balance sheet and sooner reach a level that allows for significant reductions if economic conditions deteriorate”

There are two policy options for the balance sheet use it as a tool or subordinate it

“Once the short-term rate is comfortably distant from its effective lower bound, there are broadly two types of policy strategies that could be contemplated. Many central banks around the world may contemplate similar choices in the coming years, while the Bank of Japan has already grappled with these issues in the past.5 One type of “complementarity” strategy might actively deploy the balance sheet as an independent second tool, complementary to the short-term rate. Under this strategy, both tools would be actively used to help achieve the Committee’s goals. This strategy would seek to take advantage of the ways in which the balance sheet might affect certain aspects of the economy or financial markets differently than the short-term rate. Any differences in effects might derive from the fact that the balance sheet more directly, though not necessarily more precisely, affects term premiums on longer-term securities, while the short-term rate more directly affects money-market rates. Although it may be tempting, in theory, to operate with the balance sheet as a complementary, additional tool to the federal funds rate, we have virtually no experience with how such an approach would work in practice away from the effective lower bound. For that reason, one might instead prefer a “subordination” strategy that would prioritize the federal funds rate as the sole active tool away from the effective lower bound, effectively subordinating the balance sheet. Once federal funds normalization meets the test of being well under way, triggering an end to the current reinvestment policy, the balance sheet would be set on autopilot, shrinking in a gradual, predictable way until a “new normal” has been reached, and then increasing in line with trend increases in the demand for currency thereafter.6 Under this strategy, the balance sheet might be used as an active tool only if adverse shocks push the economy back to the effective lower bound”

We should focus on the rate policy tool

“The case for the subordination strategy is straightforward and compelling. This strategy recognizes that the two policy tools are broadly similar in the ways they affect the economy by indirectly changing the level of interest rates used to finance purchases by households and businesses. These interest rate changes also have effects on asset prices, and thereby on household wealth, as well as on the exchange value of the dollar and, thereby, on net exports and core import prices.7 However, relative to balance sheet policies, the influence of the short-term rate is far better understood and extensively tested: There have been several decades and many business cycles over which to measure and analyze how the federal funds rate affects financial markets and real activity. In contrast, experience using the balance sheet as an active tool has been very limited and largely confined to a highly unusual period around the Global Financial Crisis, when short-term interest rates were constrained by the zero lower bound. Predictability, parsimony, precision, and clarity of communications all would seem to argue in favor of focusing policy on a single active tool that is most familiar. In short, it makes sense to focus policy on the tool whose effects are better understood by both policymakers and the public in circumstances where the tools are largely substitutes for one another.

The balance sheet will likely be considerably smaller than it is today

“Assuming that a subordination strategy is adopted, and the balance sheet is set to shrink passively and predictably once reinvestment ceases or is phased out, there is some uncertainty around the size of the balance sheet when it returns to normal, which the Committee has described as “no larger than necessary for the efficient and effective implementation of monetary policy.” There are good reasons to expect a normalized balance sheet to be considerably smaller than its current size but larger than its pre-crisis level. Most obviously, trend growth in the demand for currency gradually pushes up the size of the balance sheet over time, but there are also other reasons to expect the post-crisis new normal to be larger than pre-crisis levels. The structural demand for reserves may be considerably larger now than prior to the financial crisis because of a number of changes, including new regulations that favor safe liquid assets and changes in financial institutions’ attitudes toward risk”

Fed Chair Janet Yellen Congressional Testimony February 2017

Still focusing on the “neutral rate”

“The Committee’s view that gradual increases in the federal funds rate will likely be appropriate reflects the expectation that the neutral federal funds rate–that is, the interest rate that is neither expansionary nor contractionary and that keeps the economy operating on an even keel–will rise somewhat over time. Current estimates of the neutral rate are well below pre-crisis levels–a phenomenon that may reflect slow productivity growth, subdued economic growth abroad, strong demand for safe longer-term assets, and other factors. The Committee anticipates that the depressing effect of these factors will diminish somewhat over time, raising the neutral funds rate, albeit to levels that are still low by historical standards.”

I’m not going to opine on fiscal policy, but here’s my opinion on fiscal policies

” While it is not my intention to opine on specific tax or spending proposals, I would point to the importance of improving the pace of longer-run economic growth and raising American living standards with policies aimed at improving productivity. I would also hope that fiscal policy changes will be consistent with putting U.S. fiscal accounts on a sustainable trajectory. ”

GSE reform needed

“I think it is very important that congress continue to deal with the gses and figure out what the government’s role in housing finance should look like going forward. The goal of bringing private capital back into the mortgage market, I think, is important and I would hope that congress would decide explicitly on what the government’s role is, and if there are guarantees that they would be recognized and priced appropriately and we look forward to continue working with you to help achieve these objectives.”

we want to shrink our balance sheet

“The fomc has enunciated it is longer run goal is to shrink our balance sheet, to levels consistent with the efficient and effective implementation of monetary policy. And while our system evolves and I can’t put a number on that, I would anticipate a balance sheet substantially smaller than at the current time. We would like to — in addition, we would like our balance sheet to, again, be primarily treasury securities, where as you pointed out, we have substantial holdings of mortgage backed securities. ”

going to let assets run off balance sheet when fed funds is higher

“What we would like to do is to find a time when we judge that our need to provide substantial accommodation to the economy in the coming years is minimal, when we have confidence that the economy is on a solid course, and that the federal funds rate has reached levels where we have some ability to address weakness by cutting it. And once we have that confidence, we will try to — we will begin to allow maturing principle from — from our investments to gradually and in an orderly way we will stop reinvestments or diminish them and allow our balance sheet to shrink in an orderly and predictable way. The committee has decided that it will not — some mortgage backed securities, but as principle matures we will begin to allow — allow those assets to run off our balance sheet.”

the taylor rule calls for a short term interest rate between 3.5 and 4%

“Right now, the taylor rule would call for a short-term interest rate somewhere between 3.5 and 4%. Which is obviously a much higher value of the federal funds rate than the fomc has deemed appropriate given the needs of the economy. I believe we would have a much weaker economy that in the last number of year, we would follow the number of dictates. The labor market would be weaker and instead of inflation, which is running below 2%, and we want to see it move up to our 2% objective, I believe inflation would be likely lower tharn it is now. >> so, jobs, higher mortgages, interest rate, a weaker economy, if we essentially just automatically following a formula.”

we don’t want to base current policy on speculation about what may come down the line

“So, we recognize there may be significant economic policy changes and that those changes could affect the outlook. We’re very well aware of that. Trz and we don’t yet have enough clarity on what changes will be p put in place to really clearly factor those policy changes into the economic outlook. So, we don’t want the base current policy on speculation about what may come down the line. We will wait to gain greater clarity on policy changes”

the fiscal policy is not sustainable

“Some of the policies that are being discussed might well raise deficits and in that context, they may also have impacts on economic growth. And the economy’s growth potential, so, not a simple matter to evaluate. But I do think it’s worth pointing out that fiscal sustainability has been b a long standing problem and that the u.S. Fiscal course as our population ages and health care costs increase, is already not sustainable.”

we want clarity before we incorporate fiscal policies in our forecasts

“Most of my colleagues decided they would not speculate on what economic policy changes would be put into effect and what their consequences would be. A few of my colleagues mentioned they assumed there would be a mild fiscal stimulus, but most of my colleagues have taken the view that we want greater clarity about the size, timing and composition of a changes to fiscal and other policies before trying to incorporate those into our forecasts.”

answer to will you raise in march

” I indicated that at our up coming meetings with will try to evaluate whether or not the economy is progressing, namely labor market conditions and inflation in line with our expectations. And if we find that they are, it probably will be appropriate to raise interest rates further. We’ve indicated that we think a gradual path of rate increases is likely to be appropriate if the economy continues on its current course”

the median expectation is for three interest rate increases this year

“We lasted that in september of course the economic out economicouteconomic economic outlook is uncertain, but a few increases would be appropriate. The median was three at that time, that means we have eight meetings a year and means at some meetings we would if things remain on course increase our target for the federal funds rate and not act at others. And precisely when we would take an action whether it’s march or may or june. >> right. >> I know people are focused on that. I can’t tell you exactly… It’s our expectation that there will be increased rates.”

I’m not going to comment on immigration policy but here’s my opinion

“I’m not going to comment in detail on immigration policy. I think that’s for congress and the administration to decide. But I would say that labor force growth has been slowing in the united states. It’s one of several reasons along with slow productivity growth for the fact that our economy has been growing at a slow pace and immigration has been an important source of labor force growth, so slowing the pace of immigration probably would slow the growth rate of the economy. ”

FOMC December 2016 Press Conference Notes

Quarter point raise

“Today, the Federal Open Market Committee decided to raise the target range for the federal funds rate by 1/4 percentage point, bringing it to 1/2 to 3/4 percent. In doing so, my colleagues and I are recognizing the considerable progress the economy has made toward our dual objectives of maximum employment and price stability”

Growth has picked up

“Economic growth has picked up since the middle of the year. Household spending continues to rise at a moderate pace, supported by income gains and by relatively high levels of consumer sentiment and wealth. Business investment, however, remains soft, despite some stabilization in the energy sector. Overall, we expect the economy will expand at a moderate pace over the next few years.”

Market based measures of inflation have moved up but are still low

“Our inflation outlook rests importantly on our judgment that longer-run inflation expectations remain reasonably well anchored. Market-based measures of inflation compensation have moved up considerably but are still low. Survey-based measures of longerrun inflation expectations are, on balance, little changed”

Changes in fiscal policy could affect the outlook but too early to know

” As many observers have noted, changes in fiscal policy or other economic policies could potentially affect the economic outlook. Of course, it is far too early to know how these policies will unfold. Moreover, changes in fiscal policy are only one of the many factors that can influence the outlook and the appropriate course of monetary policy. ”

This is a modest adjustment in path

” Well, I would like to emphasize that this is a very modest adjustment in the path of the federal funds rate, and involves changes by only, you know, some of, you know, some of the participants. So, in thinking about the paths and the revisions, there are a number of factors that were taken into account by participants”

I really can’t tell what our response would be to policy changes

“I really can’t tell you what the Fed’s response would be to any policy changes that are put into effect. I wouldn’t want to speculate until I– we’re more certain of the details and how they would affect the likely course of the economy.”

Different policy could affect the neutral rate

“we’ve been saying we estimate that the value of the neutral federal fund’s rate is quite low has– And one of the reasons for that is slow productivity growth. And so it’s very hard to generalize about it because it could affect that neutral rate.”

This is a vote of confidence in the economy

” let me say that our decision to raise rates is– should certainly be understood as a reflection of the confidence we have in the progress the economy has made and our judgment that that progress will continue and the economy is proven to be remarkably resilient. So it is a vote of confidence in the economy.”

We still consider this to be an accommodative policy

“And this we said in our statement, policy remains accommodative. The degree of accommodation I would characterize as moderate. As I’ve emphasized and said in the statement, we currently judge the neutral level of the federal fund’s rate to be pretty low. So there is some accommodation. ”

We do not believe that we are behind the curve on inflation

” We’re not seeing evidence in labor markets of very substantial upward pressures on labor that could signify extreme shortages of labor that could propel inflation higher in a very rapid way, and inflation is still operating below our objective. So, I do not judge that we are behind the curve. I’ve– My judgment is that we’re in a good path to reaching our objectives. But of course the outlook is uncertain. ”

I’m not sure that fiscal stimulus is needed

“I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now. So, with a 4.6 percent unemployment and a solid labor market, there may be some additional slack in labor markets. But I would judge that the degree of slack has diminished. So, I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment. But nevertheless, let me be careful that I’m not trying to provide advice to the new administration or to Congress as to what is the appropriate stance of policy. ”

It’s also important for congress to take debt to gdp ratios into account

“it’s also important for Congress to take account of the fact that as our population ages that the debt to GDP ratio is projected to rise and that needs to continue to be taken into account. And so, there are many factors that I think should enter into such decisions”

I never said that I was in favor of running a high pressure economy

” So I want to be clear that what I said in that speech in Boston is that an important research question is whether or not in an economy with a very strong labor market, there might be changes that took place that permanently raised the labor force participation training and other things of the labor force that would be positives for the productive potential of our economy on a long lasting basis. I never said that I favor running a high pressure economy. ”

I’m not going to offer the incoming president any advice

“Well, I’m not going to offer the incoming president advice about how to conduct himself in policy. I’m a strong believer in the independence of the Fed. We have been given the independence by Congress to make decisions about monetary policy in pursuit of our dual mandate objectives of maximum employment and inflation and that is what I intend to stay focused on and that’s what the committee is focused on. ”

We did discuss the incoming administration but we are currently under a cloud of uncertainty

“we did discuss these topics in our meeting today. I would simply summarize by saying that all the FOMC participants recognize that there is considerable uncertainty about how economic policies may change and what effect they will have on the economy. And in so far is that will affect monetary policy, of course we will have to factor those policies along with many other things, including the global environment and oil prices and other matters. We will have to factor that into our outlook and figure out what is an appropriate response. But we’re operating under a cloud of uncertainty at the moment and we have time to wait to see what changes occur and to factor those into our decision-making as we gain greater clarity.”

Gobbledygook about stock prices

“You mentioned the market moves. So I see the market moves as implicit forecasts about what impact these policies are likely to have on the economy. The changes, the financial market changes that you described, particularly the increase in stock prices, the increase in longer term rates and the strengthening of the dollar suggests that many market participants anticipate expansionary fiscal policies that would raise interest rate somewhat in the United States relative to abroad and would cause strengthening in the dollar. But market participants were uncertain
too, and I would expect changes in our understanding of what is going to happen to also affect market prices in financial markets as we move forward. ”

I don’t want to comment on the level of stock prices

“So, you know, I really don’t want to comment on the level of stock prices. They may have been boosted by expectations about tax policy, possible cuts in corporate tax rates that have been much discussed, or by expectations about growth, possible reductions and downside risk to the economy. But, you know, these are things that market participants are trying to view along with the likely path of– paths of interest rates, and I think all of that factors into movements and stock valuations. But I don’t– I don’t want to offer a view as to whether
they’re appropriate”

They’re within the normal range relative to interest rates being low

” Well, I think rates of return in the stock market relative to– Remember that the level of interest rates is low and taking that into account, I believe it’s fair to say that they remain within normal ranges. ”

I’m not going to weigh in on trade policies

“So, I don’t want to weigh in. I don’t intend to weigh in. I haven’t weighed in on either fiscal policy specifics of evaluating policies. I’m not going to weigh in either on the details of particular trade policies. ”

We still intend to let our balance sheet decline

“So, we’ve indicated in our normalization principles that we expect to diminish the size of our portfolio over time largely by ceasing reinvestments of principal rather than by selling securities. We’ve indicated that once the process of normalization of the federal funds rate is well under way, we would probably begin to allow our portfolio to run off. We’ve not yet made any precise decisions about when that will occur. We want to feel that if the economy were to suffer an adverse shock, that we have some scope through traditional means of interest rate cuts to be able to respond to that. Now there’s no mechanical rule about what level of the federal funds rate we might deem appropriate to begin that process. It’s not something that only depends on the level of the federal funds rate, it also depends on our judgment of the amount of momentum in the economy and the possible concerns about downside risks of the economy. So, we’ve not yet made this decision, but it is something that we have long planned to begin to allow our balance sheet to run off. And then it would take several years. And we would end up if all goes well with the substantially smaller balance sheet than we have at present.”

Chair Janet L. Yellen Before the Joint Economic Committee 17th November

Relatively steady unemployment rate

“Job gains averaged 180,000 per month from January through October, a somewhat slower pace than last year but still well above estimates of the pace necessary to absorb new entrants to the labor force. The unemployment rate, which stood at 4.9 percent in October, has held relatively steady since the beginning of the year. The stability of the unemployment rate, combined with above-trend job growth, suggests that the U.S. economy has had a bit more “room to run” than anticipated earlier.”

Growth is picking up in the US

“…U.S. economic growth appears to have picked up from its subdued pace earlier this year. After rising at an annual rate of just 1 percent in the first half of this year, inflation-adjusted gross domestic product is estimated to have increased nearly 3 percent in the third quarter.”

On Inflation

“Turning to inflation, overall consumer prices, as measured by the price index for personal consumption expenditures, increased 1-1/4 percent over the 12 months ending in September, a somewhat higher pace than earlier this year but still below the FOMC’s 2 percent objective. Much of this shortfall continues to reflect earlier declines in energy prices and in prices of non-energy imports. Core inflation, which excludes the more volatile energy and food prices and tends to be a better indicator of future overall inflation, has been running closer to 1-3/4 percent.”

Looking ahead:

“…I expect economic growth to continue at a moderate pace sufficient to generate some further strengthening in labor market conditions and a return of inflation to the Committee’s 2 percent objective over the next couple of years. This judgment reflects my view that monetary policy remains moderately accommodative and that ongoing job gains, along with low oil prices, should continue to support household purchasing power and therefore consumer spending. In addition, global economic growth should firm, supported by accommodative monetary policies abroad. As the labor market strengthens further and the transitory influences holding down inflation fade, I expect inflation to rise to 2 percent.”

Gradual increases in fed rates expected

“The FOMC continues to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time to achieve and maintain maximum employment and price stability. This assessment is based on the view that the neutral federal funds rate–meaning the rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel–appears to be currently quite low by historical standards…gradual increases in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years.”

On speculations that she may resign

“it is fully my intention to serve out my term.”

FOMC November 2016 Monetary Policy Decision

Inflation is up but low

“Inflation has increased somewhat since earlier this year but is still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up but remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.”

Rates are unchanged

“…the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives. ”

…but gradual increases expected

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

FOMC September 2016 Meeting Minutes Notes

Substantial majority viewed the risks as roughly balanced

” A substantial majority now viewed the near-term risks to the economic outlook as roughly balanced, with several of them indicating the risks from Brexit had receded. However, a few still judged that overall risks were weighted to the downside, citing various factors that included the possibility of weaker-than-expected growth in foreign economies, continued uncertainty associated with Brexit, the proximity of policy interest rates to the effective lower bound, or persistent headwinds to economic growth.”

Tightening episodes had typically been followed by a recession

” A few participants referred to historical episodes when the unemployment rate appeared to have fallen well below its estimated longer-run normal level. They observed that monetary tightening in those episodes typically had been followed by recession and a large increase in the unemployment rate. Several participants viewed this historical experience as relevant for the Committee’s current decisionmaking and saw it as providing evidence that waiting too long to resume the process of policy firming could pose risks to the economic expansion, or noted that a significant increase in unemployment would have disproportionate effects on low-skilled workers and minority groups. ”

Money market fund reforms have led to an increase in some short term interest rates

“With regard to recent financial developments, it was noted that regulatory changes and impending MMF reforms likely had led to an increase in certain short-term interest rates, but these developments were expected to have only a small effect on the borrowing costs of nonfinancial corporations and little adverse influence on overall financial market conditions. A few participants expressed concern that the protracted period of very low interest rates might be encouraging excessive borrowing and increased leverage in the nonfinancial corporate sector. Finally, one participant expressed the view that prolonged periods of low interest rates could encourage pension funds, endowments, and investors with fixed future payout obligations to save more, depressing economic growth and adding to downward pressure on the neutral real interest rate.”

Participants discussed reasons for the apparent fall in the neutral rate of interest

“Participants discussed reasons for the apparent fall over recent years in the neutral real rate of interest–or r*–including lower productivity growth, demographic shifts, and an excess of saving around the world. Al­though several participants indicated that there was uncertainty as to how long the low level of r* would persist, one pointed to a growing consensus that the long period of slow productivity growth and recent evidence that the neutral rate had fallen across countries suggested that r* was likely to remain low for some time. A number of participants noted that they had revised down their estimates of longer-run r* in their contributions to the Summary of Economic Projections for this meeting. Participants discussed the implications of a fall in longer-run r* for monetary policy, including the possibility that policy interest rates might be closer to the effective lower bound more frequently and for a long period, or that monetary policy was ill equipped to address structural factors such as the decline in productivity growth.”

Many participants expressed the view that some slack remained in labor markets

” Participants generally agreed that the case for increasing the target range for the federal funds rate had strengthened in recent months. Many of them, however, expressed the view that recent evidence suggested that some slack remained in the labor market. With inflation continuing to run below the Committee’s 2 percent objective and few signs of increased pressure on wages and prices, most of these participants thought it would be appropriate to await further evidence of continued progress toward the Committee’s statutory objectives. In contrast, some other participants believed that the economy was at or near full employment and inflation was moving toward 2 percent. They maintained that a further delay in raising the target range would unduly increase the risk of the unemployment rate falling markedly below its longer-run normal level, necessitating a more rapid removal of monetary policy accommodation that could shorten the economic expansion. In addition, several participants expressed concern that continuing to delay an increase in the target range implied a further divergence from policy benchmarks based on the Committee’s past behavior or risked eroding its credibility,”

Fed Chair Janet L. Yellen at Jackson Hole, Wyoming


Current economic situation in the US

“U.S. economic activity continues to expand, led by solid growth in household spending. But business investment remains soft and subdued foreign demand and the appreciation of the dollar since mid-2014 continue to restrain exports. While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market…Although the unemployment rate has remained fairly steady this year, near 5 percent, broader measures of labor utilization have improved. Inflation has continued to run below the FOMC’s objective of 2 percent, reflecting in part the transitory effects of earlier declines in energy and import prices.”

Expect the federal funds rate to increase

“Looking ahead, the FOMC expects moderate growth in real gross domestic product (GDP), additional strengthening in the labor market, and inflation rising to 2 percent over the next few years. Based on this economic outlook, the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives…”

…Unless data to the contrary comes in.

“Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook.”

The expanded toolkit has been helpful

“In light of the slowness of the economic recovery, some have questioned the effectiveness of asset purchases and extended forward rate guidance…Studies have found that our asset purchases and extended forward rate guidance put appreciable downward pressure on long-term interest rates and, as a result, helped spur growth in demand for goods and services, lower the unemployment rate, and prevent inflation from falling further below our 2 percent objective.”

Interest on reserves seems to be here to stay

“…at some point after the process of raising the federal funds rate is well under way, we will cease or phase out reinvesting repayments of principal from our securities holdings. Once we stop reinvestment, it should take several years for our asset holdings–and the bank reserves used to finance them–to passively decline to a more normal level. But even after the volume of reserves falls substantially, IOER (Interest on Excess Reserves) will still be important as a contingency tool, because we may need to purchase assets during future recessions to supplement conventional interest rate reductions.”

Real neutral interest rate is close to zero presently

“By some calculations, the real neutral rate is currently close to zero, and it could remain at this low level if we were to continue to see slow productivity growth and high global saving. If so, then the average level of the nominal federal funds rate down the road might turn out to be only 2 percent, implying that asset purchases and forward guidance might have to be pushed to extremes to compensate.”

New tools to be considered

“Looking ahead, we will likely need to retain many of the monetary policy tools that were developed to promote recovery from the crisis. In addition, policymakers inside and outside the Fed may wish at some point to consider additional options to secure a strong and resilient economy.”

In sum

“Although fiscal policies and structural reforms can play an important role in strengthening the U.S. economy, my primary message today is that I expect monetary policy will continue to play a vital part in promoting a stable and healthy economy. New policy tools, which helped the Federal Reserve respond to the financial crisis and Great Recession, are likely to remain useful in dealing with future downturns. Additional tools may be needed and will be the subject of research and debate. But even if average interest rates remain lower than in the past, I believe that monetary policy will, under most conditions, be able to respond effectively.”

Atlanta Fed President Dennis Lockhart Interview with WSJ


The US economy is doing better

“I think the U.S. economy is expanding at a modest pace. The second quarter (gross domestic product) number—which was 1.1 (percent annual rate of growth), just revised slightly yesterday—I think overstates the slowdown or a slowdown. We have been looking through that number to an account in the GDP accounts called real final sales, which is GDP less inventory and what we see there is a better picture and a more consistent picture over the last few quarters. So I think the economy is chugging along, and I’m not one who is interpreting the headline GDP number as somehow suggesting that we have slowed from what was already a slow expansion.”

A more settled global risk environment

“…when you go all the way back to the beginning of the year, you had a lot of things related to China—the Chinese equity markets, the Chinese slowdown spilling over to emerging markets—and then later there was the buildup to Brexit. I think we’re past those things, and the overall global risk environment is a bit more settled in my opinion. So I think really, for me, the focus is on the domestic economy.”

On raising interest rates

“I’m ready to talk about it… knowing what I know today, if the economy in the next few weeks performs consistent with my sense of the economy, then I think we ought to have a serious discussion at the September meeting. So I, in no way, rule out September and look to December or look to even the November meeting. ”

They are watching from a distance the phenomenon that is negative interest rates

“I don’t want to encourage the view that the (Federal Open Market Committee) or the Fed is in any serious way considering negative interest rates for this economy. I view it as an interesting experiment that’s going on elsewhere—fortunately, I think. We’ll see what the consequences of negative interest rates and the results that they produce…there could be institutional damage over time with negative interest rates, and it bears watching in Europe and Japan. ”

On the long term impact on negative interest rates

“One is real damage to the financial system through banks and other intermediaries like life insurance companies or insurance companies in general that depend upon fixed-income investments or lending that is priced off of short-term interest rates. Even in our low-rate environment in the United States, we are seeing some of those institutions really express a lot of stress…When you go to negative interest rates, you can—in theory, at least, you can really do some damage to some important industries…Do I see any direct evidence of that yet? I think it’s probably too early.”