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WSJ Your Money Briefing
Special Fed Coverage: Yellen Press Conference
00:16:14
The Federal Reserve announced Wednesday it will increase interest rates to a range of 1.25%-1.5%. Fed Chairwoman Janet Yellen, in her final news conference, answered questions on topics such as low inflation, the strength of the stock market and whether the central bank would consider launching its own version of bitcoin.
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- [00:00]
Small Business Owner
Access to affordable credit helps me pay my employees, but I don't really need it.
- [00:05]
Advocate for Durbin Marshall Credit Card Bill
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]
Advocate for Durbin Marshall Credit Card Bill
they need while increasing megastore profits. They deserve it, don't they?
- [00:26]
Wall Street Journal Announcer
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, focused on the Federal Reserve and Chairwoman Janet Yellen's final news conference. I'm J.R. whalen in New York. As expected, the Federal Reserve raised interest rates on Wednesday to a range of 1.25% to 1.5%. It was the third rate increase by the Fed this year, and the Federal Reserve anticipates three rate increases next year and then two more in both 2019 and 2020. At a news conference on Wednesday, Yellen said the Fed expects the country's economic strength to continue and the unemployment rate to fall below the current level of 4.1%. But she warned against the jobless rate falling too much further.
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Janet Yellen
You may have noticed that we altered the statement language about the labor market outlook. This change highlights that the committee expects the labor market to remain strong with sustained job creation, ample opportunities for workers and rising wages. We anticipate some further strengthening in labor market conditions in the months ahead. However, we expect the pace of job gains to moderate over time as we gradually reduce the degree of monetary policy accommodation. Allowing the labor market to overheat would raise the risk that monetary policy would need to tighten abruptly at a later stage, jeopardizing the economic expansion. Even with affirming of economic growth and a stronger labor market, inflation has continued to run below the FOMC's 2% longer run objective.
- [02:21]
J.R. Whalen
Yellen has previously said the biggest surprise about the US Economy is the rate of inflation remaining below the central Bank's target of 2% as a guide toward raising rates, she told reporters on Wednesday. The Fed still believes inflation will tick higher, but it could take some time.
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Janet Yellen
Core inflation, which excludes the volatile food and energy categories, has followed a similar pattern and was 1.4% in October. We continue to believe that this year's surprising softness in inflation primarily reflects transitory developments that are largely unrelated to broader economic conditions. As a result, we still expect inflation will move up and stabilize around 2% over the next couple of years. Nonetheless, as as I've noted previously, our understanding of the forces driving inflation is imperfect.
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J.R. Whalen
Janet Yellen then took questions from reporters, one of whom asked if the Fed governors had discussed the tax overhaul package that the House and Senate approved on Wednesday.
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Janet Yellen
I think my colleagues and I mainly see the likely tax package as boosting aggregate demand but also having some potential to boost aggregate supply. So changes on the corporate tax side, the reduction in the corporate tax rate expensing will lower the cost of capital. And while there are a range of estimates and uncertainty about how much stimulus that will provide to investment in general, I would see some stimulus to investment in in terms of aggregate supply effects, a stronger pace of investment could boost capital formation and thereby raise productivity growth and potential GDP or output to some extent.
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J.R. Whalen
During Yellen's news conference, President Trump predicted that the tax overhaul could generate economic growth approaching 4%. Yellen told reporters that could be a difficult level of economic growth to achieve.
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Janet Yellen
My assessment, and I think most participants assessments, as I said, of the impact of the tax policy on growth has been informed by work by the Joint Committee on Taxation. And everyone recognizes that there's uncertainty about what the economic effects would be and I wouldn't want to rule anything out. It is challenging, however, to achieve growth of the levels that you mentioned. Look, if the package were to stimulate growth of that magnitude, let me just say again, the Federal Reserve would welcome that. If it's a supply favorable supply side developments that would be compatible with the attainment of our employment and inflation objectives, that's something that would be very, very welcome. But it would be challenging to achieve numbers like that.
- [05:26]
J.R. Whalen
When we come back, more from Janet Yellen, including her thoughts on Bitcoin and whether the Federal Reserve is considering its own version of digital currency. Plus, as she prepares to leave her post as Fed chairwoman, what are her thoughts on gender diversity at the Federal Reserve? And what does Wall street think about the Fed's move on Wednesday? That's coming up next. You're listening to your Money Matters from the Wall Street Journal. Welcome back, everybody. Now, while the unemployment rate continues to fall, hourly wages have struggled to rise at a that economists would like. That was the topic of a question from Harriet Tory of Dow Jones Newswires in the Wall Street Journal.
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Harriet Tory
You and others at the Fed have said that soft inflation should be transitory. Are you confident that that will still be the case, particularly regarding wage gains? They've been pretty moderate in recent months, yet the economy is growing and confidence is high. Is there something going on in the economy that's making it difficult for businesses to raise wages.
- [06:21]
Janet Yellen
So it is true that incoming wage data suggests only modest upward pressure on wages. That leads me. That's one factor, along with the fact that inflation remains low with feeling that even though we have a 4.1% unemployment rate, that the labor market is not overheated at this point. Remember, the modest pace of wage gains also probably reflects slow productivity growth.
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J.R. Whalen
And with the stock market posting numerous record closes throughout 2017, Yellen was asked if that poses a concern to the Federal Reserve.
- [06:59]
Janet Yellen
Of course, the stock market has gone up a great deal this year, and we have in recent months characterized the general level of asset valuations as elevated. What that reflects is simply the assessment that looking at price, earnings ratios and comparable metrics for other assets other than equities, and we see ratios that are in the high end of historical ranges. And so that's worth pointing out, but economists are not great at knowing what appropriate valuations are. We don't have a terrific record. And the fact that those valuations are high doesn't mean that they are necessarily overvalued. We are in a low interest rate environment, lower than we've had in past decades. And if that turns out to be the case, that's a factor that supports higher valuations. We're enjoying solid economic growth with low inflation, and the risks in the global economy look more balanced than they have in many years. So I think what we need to and are trying to think through is if there were an adjustment in asset valuations, the stock market, what impact would that have on the economy? And would it provoke financial stability concerns? And I think when we look at other indicators of financial stability risks, there's nothing flashing red there or possibly even orange. We have a much more resilient, stronger banking system, and we're not seeing some worrisome buildup in leverage or credit growth at successive levels.
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J.R. Whalen
We'll get back to Janet Yellen in just a moment. But what does Wall street think about the Fed's moves on Wednesday? Bill Stone is global chief investment strategist for pnc, and he says that the Fed's slow, steady, methodical moves over the past several years are just what the Wall street doctor ordered. But in terms of investors who want to get into the market to capitalize, well, that leaves more of a question mark.
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Bill Stone
Yeah, well, you give the hard question, which is, you know, when are we going to get the pullback? Essentially? And I think our thought is you don't get a very large pullback if things continue on in this pace because as you note, it's hard to get too negative, I think when it doesn't look like the Fed wants to move away from that measured pace. And I would say today's releases, and I'm saying releases as a whole because I'll combine the statement with the projections really kind of go to that point. So what am I saying? Well, they raised their size expectations for US GDP growth rate to 2.5% from 2.1 in 2018, but they still said there would only be three hikes. I think that's telling you they are on the net or that's why I think the market even interpreted as a net dovish kind of meeting, which is why bonds really rallied. Stocks had at least they're up. You saw the financials, at least so far have sold off because they have benefited from expectations of hikes. And maybe people are thinking there won't be quite as many.
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J.R. Whalen
And PNC's Bill Stone agrees with Yellen's thoughts regarding President Trump's claim that the tax overhaul package will generate economic growth of 4%.
- [10:28]
Bill Stone
I think 4 might be a bridge too far. It's hard for us. I mean, obviously we don't all know all the details in the plan yet. I would say PNC anyway even estimating and maybe you call it a guesstimating some benefit to the tax reform. We're at 2.7% for 2018.
- [10:47]
J.R. Whalen
As far as the markets go, the markets have been very pleased with Janet Yellen's performance in terms of implementation of policy over her four year term. It would seem that the markets are enjoying the prospects of having Jay Powell in there after Janet Yellen's term expires in February.
- [11:05]
Bill Stone
I think you're right. I think most of the markets are on the whole thinking that Powell is going to be a continuity type of chair. So you're not going to see a major divergence from what we've had, which as you mentioned has been really good in terms of the financial market as of right now. I think that's the way the market's reading it. Obviously it'll be more interesting once he's in there and running it, whether we see some more distinct differences. But at the moment I think the financial markets are saying, yeah, it's close enough for government work, as they say.
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J.R. Whalen
That's PNC's Bill Stone. Jay Powell, by the way, is scheduled to assume the top post of the Federal Reserve when Janet Yellen's term expires in February. And the Fed is expected to announce its next move on interest rates in the middle of March. Now back to the Janet Yellen news conference. After all the talk about inflation and wages and monetary policy, the spotlight turned to another form of money, about as bright as a spotlight, and that was Bitcoin. Janet Yellen says that the Fed has its eye on the cyber currency.
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Janet Yellen
Bitcoin at this time plays a very small role in the payment system. It is not a stable source of store of value and it doesn't constitute legal tender. It is a highly speculative asset. And the Fed doesn't really play any role, any regulatory role with respect to Bitcoin other than assuring that banking organizations that we do supervise are attentive, that they're appropriately managing any interactions they have with participants in that market and appropriately monitoring anti money laundering bank secrecy act, you know, responsibilities that they have.
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J.R. Whalen
But Yellen said she does not currently see Bitcoin as a threat to the financial system.
- [12:56]
Janet Yellen
Often risks threatening financial stability arise when there's exposure of the banking system to fluctuating asset valuations. And I really don't see any significant exposure of our core financial institutions to threats from Bitcoin if its value were to fluctuate. I don't see a threat to our core financial institutions. So undoubtedly there are individuals who could lose a lot of money if Bitcoin were to fall in price. But I really don't see that as creating a full blown financial stability risk. There is a discussion going on among central bankers about the potential merits of adopting a central bank itself, adopting a digital currency, and, and there might even be a central bank or two around the globe that might go in that direction. But I really want to caution that this is not something the Federal Reserve is seriously considering at this stage. While we're looking at research on this topic, there are, I think to my mind, limited benefits from introducing it, a limited need for it, and, and some substantial concerns. And so I would really doubt that the Federal Reserve would soon go in that direction.
- [14:30]
J.R. Whalen
Janet Yellen assumed the Fed chairwoman post in February of 2014, and she'll step down when her term expires in February of next year. She was asked as she prepares to leave her thoughts on the progress of diversity at the Federal Reserve.
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Janet Yellen
We would love to, if we could increase our hiring ourselves of women and minorities. And we see that both women and minorities are studying economics in disproportionately and disturbingly low numbers. Although the women in STEM fields generally are about even with men represent about 50% in economics. Women majors constitute something like 30% of undergraduate majors. And there is disproportionate low enrollment of minorities. I will just say from my own experience, I think economics is a terrific field. I've thoroughly enjoyed my career in economics and think there are many different paths that people can follow that lead to satisfying careers, just in terms of the kinds of research that's done in the field. I think also a greater diversity, more women and minorities may change the focus to some extent of the questions that people choose to look at and the analysis that they bring and range of thinking that bears on research and all of that would be a healthy development.
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J.R. Whalen
And finally, Yellen was asked what her plans are when she steps down from her chairwoman post in February of 2018 and leaves the Federal Reserve. She says even though she and her husband have a home in Berkeley, California, she plans to stay in the Washington, D.C. area where he is a professor at Georgetown. And when asked if she's disappointed that she was not renewed as chairwoman by President Trump, she said her career in the financial industry has been immensely rewarding and she felt that it was the right time to step down. 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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Wall Street Journal Announcer
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- [16:44]
Small Business Owner
Listen ambitiously Access to affordable credit helps me pay my employees, but I don't really need it.
- [16:51]
Advocate for Durbin Marshall Credit Card Bill
Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.
- [17:01]
Small Business Owner
See banks and credit unions help small businesses make payroll. This bill would cut the vital resources
- [17:06]
Advocate for Durbin Marshall Credit Card Bill
they need while increasing megastore profits. They deserve it, don't they?
- [17:12]
Wall Street Journal Announcer
Tell Congress stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.