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WSJ Your Money Briefing
Special Fed Coverage: Yellen Press Conference
00:21:45
The Federal Reserve announced Wednesday it will hold interest rates steady, and next month will begin unwinding its bond-buying program. Fed Chairwoman Janet Yellen spelled out details and answered reporters' questions.
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Small Business Owner
Access to affordable credit helps me pay my employees, but I don't really need it.
- [00:05]
Retail Industry Representative
Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.
- [00:15]
Small Business Owner
See banks and credit unions help small businesses make payroll. This bill would cut the vital resources
- [00:20]
Retail Industry Representative
they need while increasing megastore profits. They deserve it, don't they?
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Electronic Payments Coalition Spokesperson
Tell Congress stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition. This is yous Money Matters from the Wall Street Journal.
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J.R. Whalen
Welcome to this special edition of youf Money Matters here at the Wall street journal. I'm J.R. whelan in New York. On Wednesday, the Federal Reserve announced it would begin its long awaited plan to shrink its portfolio of bonds it acquired after the 2008 financial financial crisis. It said it would start doing that in October. It also kept alive the possibility of raising interest rates as early as December. In this special report, we will hear from Fed Chairwoman Janet Yellen as well as hear some of the questions reporters had for her on Wednesday afternoon. First, here's Fed Chairwoman Janet Yellen and her overview of the Fed's decision.
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Janet Yellen
Good afternoon. At our meeting that concluded earlier today, my colleagues and I on the Federal Open Market Committee decided to maintain the target range for the federal funds rate at one to one and a quarter percent. This accommodative policy should support some further strengthening in the job market and a return to 2% inflation consistent with our statutory objectives. We also decided that in October we we will begin the balance sheet normalization program that we outlined in June. This program will reduce our securities holdings in a gradual and predictable manner. I'll have more to say about these decisions shortly, but first I'll review recent economic developments in the outlook. As we expected, and smoothing through some variation from quarter to quarter, economic activity has been rising moderately so far this year. Household spending has been supported by ongoing strength in the job market. Business investment has picked up and exports have shown greater strength this year, in part reflecting improved economic conditions abroad. Overall, we expect that the economy will continue to expand at a moderate pace over the next few years. In the third quarter, however, economic growth will be held down by the severe disruptions caused by Hurricanes Harvey, Irma and Maria. As activity resumes and rebuilding gets underway, growth likely will bounce back. Based on past experience, these effects are unlikely to materially alter the course of the national economy and beyond the next couple of quarters. Of course, for the families and communities that have been devastated by the storms, recovery will take time and on behalf of the Federal Reserve, let me express our sympathy for all those who have suffered losses in the labor market. Job gains averaged 185,000 per month over the three months ending in August, a solid rate of growth that remained well above estimates of the pace necessary to absorb new entrants to the labor force. We know from some timely indicators, such as initial claims for unemployment insurance, that the hurricane severely disrupted the labor market in the affected areas and payroll employment may be substantially affected in September. However, such effects should unwind relatively quickly. Meanwhile, the unemployment rate has stayed low in recent months and at 4.4% in August was modestly below the median of FOMC participants estimates of its longer run normal level participation in the labor force has changed little both recently and over the past four years. Given the underlying downward trend in participation stemming largely from the aging of the US Population, a relatively steady participation rate is a further sign of improving conditions in the labor market. We expect that the job market will strengthen somewhat further. Turning to inflation, the 12 month change in the price index for personal consumption expenditures was 1.4% in July, down noticeably from earlier in the year. Core inflation, which excludes the volatile food and energy categories, has also moved lower. For quite some time, inflation has been running below the committee's 2% longer run objective. However, we believe this year's shortfall in inflation primarily reflects developments that are largely unrelated to broader economic conditions. For example, one off reductions earlier this year in certain categories of prices, such as wireless telephone services, are currently holding down inflation, but these effects should be transitory. Such developments are not uncommon and as long as inflation expectations remain reasonably well anchored, are not of great concern from a policy perspective because their effects fade away. Similarly, the recent hurricane related increases in gasoline prices will likely boost inflation, but only temporarily. More broadly, with employment near assessments of its maximum sustainable level and the labor market continuing to strengthen, the Committee continues to expect inflation to move up and stabilize around 2% over the next couple of years, in line with our longer run objective. Nonetheless, our understanding of the forces driving inflation is imperfect and in light of the unexpected lower inflation readings this year, the Committee is monitoring inflation developments closely. As always, the Committee is prepared to adjust monetary policy as needed to achieve its inflation and employment objectives over the medium term. Let me turn to the economic projections that Committee participants submitted for this meeting, which now extend through 2020. As always, participants condition their projections on their own individual views of appropriate monetary policy, which in turn depend on each participant's assessments of the many factors that shape the outlook. The median projection for growth of inflation, adjusted gross domestic product, or real GDP, is 2.4% this year and about 2% in 2018 and 2019. By 2020, the median growth projection moderates to 1.8% in line with its estimated longer run rate. The median projection for the unemployment rate stands at 4.3% in the fourth quarter of this year and runs a little above 4% over the next three years, modestly below the median estimate of its
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longer run normal rate.
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Finally, the median inflation projection is 1.6% this year, 1.9% next year, and 2% in 2019 and 2020. Compared with the projections made in June, real GDP growth is a touch stronger this year and inflation, particularly core inflation, is slightly softer this year and next. Otherwise, the projections are little changed from June. Returning to monetary policy, Although the Committee decided at this meeting to maintain its target for the federal funds rate, we continue to expect that the ongoing strength of the economy will warrant gradual increases in that rate to sustain a healthy labor market and stabilize inflation around our 2% longer run objective. That expectation is based on our view that the federal funds rate remains somewhat below its neutral level, that is the level that is neither expansionary nor contractionary and keeps the economy operating on an even keel. Because the neutral rate currently appears to be quite low by historical standards, the federal funds rate would not have to rise much further to get to a neutral policy stance. But because we also expect the neutral level of federal funds rate to rise somewhat over time, additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion. Even so, the Committee continues to anticipate that the longer run neutral level of the federal funds rate is likely to remain below levels that prevailed in previous decades. This view is consistent with participants projections of appropriate monetary policy. The median projection for the federal Funds rate is 1.4% at the end of this year, 2.1% at the end of next year, 2.7% at the end of 2019, and 2.9% in 2020. Compared with the projections made in June, the median path for the federal funds rate is essentially unchanged, although the median estimate of the longer run normal value edged down to 2.8%. As always, the economic outlook is highly uncertain and participants will adjust their assessments of the appropriate path for the federal funds rate in response to changes to their economic outlooks and views of the risks to their outlooks. Policy is not on a preset course. As I noted, the Committee announced today that it will begin its balance sheet normalization program in October this program, which was described in the June addendum to our policy normalization principles and plans, will gradually decrease our reinvestments of proceeds from maturing treasury securities and principal payments from agency securities. As a result, our balance sheet will decline gradually and predictably for October through December. The decline in our securities holdings will be capped at $6 billion per month for treasuries and and 4 billion per month for agencies. These caps will gradually rise over the course of the following year to maximums of 30 billion per month for treasuries and 20 billion per month for agency securities and will remain in place through the process of normalizing the size of our balance sheet. By limiting the volume of securities that private investors will have to absorb as we reduce our holdings, the cap should guard against outsized moves in interest rates and other potential market strains. Finally, as we have noted previously, changing the target range for the federal funds rate is our primary means of adjusting the stance of monetary policy. Our balance sheet is not intended to be an active tool for monetary policy in normal times. We therefore do not plan on making adjustments to our balance sheet normalization program. But of course, as we stated in June, the committee would be prepared to resume reinvestments if a material deterioration in the economic outlook were to warrant a sizable reduction in the federal funds rate.
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J.R. Whalen
That's Federal Reserve Chairwoman Janet Yellen. You're listening to a special edition of youf Money Matters. It's here at the Wall Street Journal. Coming up, we will hear selected questions from reporters for the Chairwoman. Thanks for listening, everybody. On Wednesday afternoon, Federal Reserve Chairwoman Janet Yellen took several questions from reporters. We'll listen to a few of those right here. Among those questions were how reactive the Fed will be in the face of changing economic conditions. Also, she was asked about inflation and whether she has met with President Trump.
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Reporter
Madam Chair, you just said in your opening remarks that reducing the balance sheet should not be an active tool for monetary policy in normal times and don't plan to make adjustments to the balance sheet. I wonder if we could explore if there's any sensitivity to the plan you just announced if there's a spike in interest rates, a plunge in the stock market, weakness in growth. In the June statement, you indicated that the only reason why you would change the suggested the only way you change the balance sheet is if it required first a change in the funds rate. Is that true? Or if there's some unexpected development in markets. Or, for example, given that we don't know what the plans are on the fiscal side for the deficit in terms of tax cuts, there could be a sudden spike in the deficit. Will the balance sheet reduction plan be immune to all of that? Why so much certainty about the plan you've just announced and apparent unwillingness to adjust it?
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Janet Yellen
So we have two policy tools that
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are available to us to use the balance sheet and adjustments in short term interest rates, our federal funds rate target. And historically the committee has operated to adjust monetary conditions to meet our economic goals when there are shocks to the economy by adjusting the federal funds rate, our short term interest rate target. And that's something a technique of monetary control that we've used for a very long time that we're familiar with. We believe we understand pretty well what the effects are on the economy. Market participants understand how that tool has been used and would likely be adjusted in response to shocks to the economy. And our preference is when we have two different tools that we could use to actively adjust the stance of policy, to prefer and to make a commitment that to the maximum extent possible the federal funds rate will be the active tool of policy. That's our go to tool. That is what we intend to use. Unless we think that the threat to the economy is sufficiently great that we
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might have to cut the federal funds
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rate after all, we've moved it up to one to one and a quarter percent and expect it to go up further. But a very significant negative shock to the economy could conceivably force us back to the so called zero lower bound. We have said if there were that type of material deterioration in the outlook where we would, we could face a situation where the federal funds rate isn't a sufficient tool for us to adjust monetary policy, we might stop, we might stop roll offs from our balance sheet and resume reinvestment. But as long as we believe that we can use the federal funds rate as a tool, that is what we intend to do. So if there are small changes in the outlook that require a recalibration of monetary policy, we will change our anticipated path in setting of the federal funds rate, but not for example change the caps on reinvestment or stop continue reinvestment for a few months and then change it. We think that provides greater clarity to market participants about how policy will be conducted and will be will be less confusing and more effective in terms of conducting policy.
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Reporter
Yes.
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Nick Timiraos
Nick Timiros of the Wall Street Journal chair Yellen Fed Governor Lael Brainard recently gave a speech in which she said trend inflation appeared to have moved lower by around half a percentage point. And I wanted to ask do you agree? And what would the Fed need to do, if anything, to boost trend inflation if it has fallen? And related to that, you've said you expect the inflation softness this year to prove transitory compared to three months ago. How firm is your current expectation that the slowdown will remain transitory and what implications would that have for monetary policy
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Janet Yellen
if it is not so the term trend inflation, usually there are a variety of statistical techniques that can be used to extract a trend from a series. Exactly what that means is in some sense a statistical thing. And there are methodologies that would show some modest decline in recent years. And the trend, after all, we've had a number of years in which inflation has been low. As I said in answer to an earlier question, I think if you go back to say 2013 and consider the until this year, the reasons why inflation was low are not hard to understand. It's a combination of slack in the labor market, declines in energy prices and a strong dollar that pulled down import price inflation. So what's important in determining inflation going forward is inflation expectations by some survey measures of professional forecasters. Those have been rock solid. We do also look at household expectations which have come down. Some market based measures of inflation compensation. As we mentioned in the statement, they have declined and they've been stable in recent months, but they've declined to levels that are low by historical standards. That might suggest that inflation expectations have come down, but one can't get a clear read. There are risk profiles, premia built in to inflation compensation that make it impossible to extract directly what inflation expectations are. So you know there is a miss this year. I can't say. I can easily point to a sufficient set of factors that explain this year why inflation has been as low. I've mentioned a few idiosyncratic things, but frankly the low inflation is more broad based than just idiosyncratic things. The fact that inflation is unusually low this year does not mean that that's going to continue. Remember that in January and February core inflation was running over a 12 month basis at around 1.9%. And we look to be very close to 20 to now.
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We've had several months of data that have meaningfully pulled that down.
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And what we need to do is figure out whether or not the factors that have lowered inflation are likely to prove persistent or they're likely to prove transitory. And that's what we're going to try to be determining on the basis of incoming data. And you asked me about the policy implications, of course, if it if we determined our view changed. And instead of thinking that the factors holding inflation down were transitory, we came to the view that they would be persistent. It would require an alteration in monetary policy to move inflation back up to 2%, and we would be committed to making that adjustment.
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Reporter
Thanks. Jim Puzingara with the LA Times. Chair Yellen, your term expires as chair in February. Have you had a chance to meet with or discuss your situation with President Trump yet? And if so, what were your impressions of him and what he's looking for from the Federal Reserve?
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Janet Yellen
So I have said that I intend to serve out my term as chair and that I'm really not going to comment on my intentions.
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Beyond that, I will say that I have not had a further meeting with President Trump.
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I met with him early in my term and I've not had a further meeting with him.
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J.R. Whalen
That's Federal Reserve Chairwoman Janet Yellen taking reporters questions on Wednesday afternoon. Thank you for listening to this special edition of youf Money Matters. I'm JR Whalen in New York for the Wall Street Journal.
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Small Business Owner
Access to affordable credit helps me pay my employees, but I don't really need it.
- [22:22]
Retail Industry Representative
Infliction is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.
- [22:32]
Small Business Owner
See banks and credit unions help small businesses make payroll. This bill would cut the vital resources
- [22:37]
Retail Industry Representative
they need while increasing megastore profits. They deserve it, don't they?
- [22:43]
Electronic Payments Coalition Spokesperson
Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.