US: Federal Reserve Chair Janet Yellen Speech

Tue Feb 24 09:00:00 CST 2015

Federal Reserve Chair Janet Yellen semi-annual monetary policy testimony to Senate Banking Committee, in Washington.

In prepared remarks Fed chair Janet Yellen, on policy she focused on still soft labor market conditions and below target inflation of 2 percent PCE inflation.

In light of the cumulative progress toward maximum employment and the substantial improvement in the outlook for labor market conditions--the stated objective of the Committee's recent asset purchase program--the FOMC concluded that program at the end of October.

Even so, the Committee judges that a high degree of policy accommodation remains appropriate to foster further improvement in labor market conditions and to promote a return of inflation toward 2 percent over the medium term.

Essentially, policy is retaining its expanded balance sheet, even though additions are not being made. She sees the Fed being patient regarding the timing of the first policy rate increase. Chair Yellen expects policy rates to remain below normal for some time. She does not anticipate the first rate increase for at least two policy meetings but the FOMC retains flexibility based on incoming data. Her comments imply that the first rate increase could be in June if data are good. The June FOMC announcement will be followed by the chair press conference and would allow Yellen to explain any policy changes.

It continues to be the FOMC's assessment that even after employment and inflation are near levels consistent with our dual mandate, economic conditions may, for some time, warrant keeping the federal funds rate below levels the Committee views as normal in the longer run.

The Fed chair stated that guidance will change before the first rate increase.

Normalization of the fed funds rate is going to be somewhat complex.

The FOMC intends to adjust the stance of monetary policy during normalization primarily by changing its target range for the federal funds rate and not by actively managing the Federal Reserve's balance sheet. The Committee is confident that it has the tools it needs to raise short-term interest rates when it becomes appropriate to do so and to maintain reasonable control of the level of short-term interest rates as policy continues to firm thereafter, even though the level of reserves held by depository institutions is likely to diminish only gradually. The primary means of raising the federal funds rate will be to increase the rate of interest paid on excess reserves. The Committee also will use an overnight reverse repurchase agreement facility and other supplementary tools as needed to help control the federal funds rate. As economic and financial conditions evolve, the Committee will phase out these supplementary tools when they are no longer needed.

For the U.S. economy, she sees the consumer sector as the bright spot, lifted by employment gains and increased discretionary income from lower gasoline prices. Foreign economic developments, however, could pose risks to the outlook for U.S. economic growth.

Regarding inflation, Yellen anticipates that headline inflation will continue to decline this quarter but this is believed to be transitory.

During Q&A, Yellen noted that the Fed's inflation goal is based on the headline PCE price index which includes food and energy.

She is opposed to chaining the FOMC to any policy rule such as the Taylor Rule.

When asked whether the Fed should be reorganized to give regional Feds more power, she stated that the current system has worked very well and that all participate in debate within the FOMC.

Yellen is opposed to the audit bill because it would bring short-term political pressure on the Fed. She noted that the Fed's finances are audited by an independent auditor.

She sees the labor market as not yet fully recovered. Yellen views the decline in the labor force participation rate as partially cyclical.

She called currency manipulation for trade benefit as inappropriate. But Yellen noted that monetary policy can have impact on currency rates.

Senator Corker stated that the audit bill is an attempt to put political pressure on the Fed and Yellen agreed. It was noted again that the Fed is audited financially by an outside auditor.

When asked if the Fed should wait to raise rates only after stronger wage growth, she said the FOMC does look at wage growth but there will be no single criterion for the first rate hike to occur.

She sees inflation as eventually heading back up as the impact of lower oil prices diminishes and as the labor continues to improve. While the labor market is not fully healed, she said the Fed must be forward looking. But she said the Fed should not take any actions that hamper the recovery in the labor market.

Yellen indicated that the Fed chose a 2 percent inflation objective to avoid damaging episodes of deflation.

She said the Fed's confidence in the economy has improved. The Fed chair said that a rate hike would signal confidence in economic fundamentals.

When the time comes to wind down the Fed's balance sheet, it should be in an orderly manner. The FOMC believes use of short-term rates is the best way to unwind.

She sees the recovery on solid ground.

Yellen stated that she is not sure that fiscal policy is able to respond to a shock.

When asked what long-term issues bother her, her answer focused on income inequality but briefly and in general terms.

Yellen expects large banks' living wills to be resubmitted by July. The Fed will declare living wills as not credible if the is no progress.

Overall, Fed chair Yellen's testimony indicates that Fed policy is not in a rush to begin raising rates. The first hike appears to be no sooner than June although it is still data dependent. She was a little upbeat about the improving economy but with housing being the exception and distressed.