Yellen’s Press Conference

March 15, 2017

Over the hour and twenty minutes between the released FOMC statement with accompanying projections and the end of Chair Janet Yellen’s press conference, the ten-year Treasury yield fell seven basis points and the dollar dropped 0.9% against the yen and 0.6% relative to the euro. On the other hand, the prices of both Comex gold and West Texas Intermediate crude oil advanced 1.2%, and the Dow Jones Industrials Average climbed over 100 points or 0.3%. The reactions suggest that investors are relieved, perceiving that the Fed will not hike more than three times in 2017 even if inflation rises above 2.0% temporarily.

Yellen’s message was upbeat. The U.S. economy is doing well and as FOMC members were expecting. The economy has shown resilience, and global growth is better, too. To be sure, important problems remain like slow productivity, a rate of wage growth that is slower than hoped, insufficient workers with the right skills and education, and demographics that suggest a falling rate of labor participation in the medium term. But progress has been made toward the dual monetary policy mandates of sustainable inflation around 2% and full employment of labor. With a ceiling federal funds target of 1.0%, monetary policy is still accommodative, since the neutral level that neither promotes nor depresses intrinsic growth is believed to be about 3.0%.

A return to such a level is not envisaged until the end of 2019. A point not made explicitly by Yellen is that the closer the funds rate is to neutrality at the onset of the next recession, the better equipped monetary policy will be to respond. For now, the federal funds rate remains the cutting edge of shifting monetary policy. Using the balance sheet as a complementary policy tool is not under consideration as of now. The projections released by the FOMC imply around three interest rate hike in both 2017 and 2018, but no exact path is decided. Each meeting’s outcome will be decided on the merits of economic information available at the time. The path will be gradual, but Yellen noted that even the 25-basis point increase per meeting undertaken between mid-2004 and mid-2006 was considered “gradual.” The term covers a lot of ground. A doubling of the funds rate to 6% from 3% in the year to end-January 1995 clearly was not gradual.

There was a question about how the FOMC would react to a rapid appreciation of the dollar. I thought Yellen would give the standard response that while the dollar is not an explicit goal of Fed policy, changes in its value enter the policy guidance dynamic to the extent that effects and expected effects on the mandates of monetary policy are impacted. Rather, she demurred that the answer is complicated and would depend on the full context of the dollar’s rise, implying the reasons behind the appreciation, how quickly the dollar rose, and how appreciation modified projected U.S. economic trends.

No questions addressed the fact that there are two vacancies on the Board of Governors for President Trump to fill or that Yellen’s term as Chair but not a Board member expires ten and a half months from now. Likewise, she was not asked about Brexit.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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