Federal Reserve chair Janet Yellen is speaking live in Washington following the release of the Fed’s monetary policy decision.
The Fed did not raise interest rates at its meeting, but the latest “dot plot” suggests that the Fed will raise rates at some point this year.
The Fed’s latest statement kept more or less the same language with respect to interest rate increases, while the Fed’s economic outlook downgraded GDP expectations for this year and indicated a slightly higher range for the unemployment rate in 2015.
Yellen started the press conference by reading the FOMC statement. She discussed the weakness in the economic data in the first quarter of 2015, and said there is still some cyclical weakness in the labour market.
Although policy will be data-dependent, she said, economic conditions might warrant “only gradual increases in the Federal funds rate.”
Yellen hit hard on the data-dependency of policy. If the data is stronger than expected, not only will the Fed hike sooner, it will also likely hike faster. The reverse will be true if the economic data is weaker than expected. She emphasised that there are lots of indicators pointing to continued labour market slack (participation, part time employment for economic reasons, etc.) that don’t show up in the unemployment rate.
With regards to waiting until 2016 for the first rate hike, Yellen pointed to the dot plot. “The participants’ views will evolve with the evolving data,” she said. Waiting too long could risks overshooting the inflation target, and raising too early risks hampering the recovery, she said. Most participants, she emphasised, think there will be a rate hike this year (based on the Fed “dot plot” released with the statement). That said, that doesn’t mean those people’s opinions won’t change based on the data.
But, she also said that too much emphasis is being placed on the first rate hike. More people should be concerned with the full trajectory of rate hikes. There is also “no plan to follow any type of mechanical approach” in terms of how the Fed will raise rates once the hikes begin.
When asked about comments from New York Fed president William Dudley about how the Fed should have raised rates higher in the 2004-2006 period, Yellen said perhaps, with the benefit of hindsight.
She also noted that inflation is likely to run on the low side for a long period of time.
On a question about Federal Reserve accountability, Yellen emphasised that the Fed is one of the most transparent central banks in the world. “I’m not certain what the problem is that needs to be addressed,” she said.
Asked about international spillovers from a rate hike, she said that the FOMC “cannot promise there will not be volatility… but we can promise to communicate clearly about our policy and our expectations.”
And with regard to how the markets generally will react to rate hikes, Yellen said, “It is hard to have great confidence in predicting what market reactions to Fed decisions will be.”
After a question about the housing market, Yellen said that the increase in housing prices “is restoring wealth to many households” who have that as their main asset. But, she said, “at the same time, it’s making housing more affordable for those looking to buy.” It’s at a reasonably low level, still, though.
Regarding how interest rates are affecting savers, Yellen said, “When the time comes to raise rates, I do think there will be some benefits that flow through to savers.” However, she also said that she “can’t give an ironclad promise” about when rate hikes are coming.
Asked aobut how reverse repurchase agreements will be affected but an interest rate hike, Yellen said that, “fairly quickly after liftoff we will reduce the level of the overnight RRP facility.”
Asked about Greece, she said that if the country and its creditors don’t strike a deal, she thinks the US has limited exposure, however there is “the potential for disruptions that could affect international financial markets,” and there “undoubtedly would be spillovers.”
Asked by the AIG case, in which a judge found that the government acted improperly in its bailout of the insurance giant, Yellen seemed to be teed up for a statement on the issue. She said that the Fed believes its actions were legal and proper.
Asked if AIG ruling limits Fed in future, Yellen (correctly) notes Dodd-Frank gave govt new tools to use should another AIG hit.
— David Wessel (@davidmwessel) June 17, 2015
As an aside, this meta-indicator probably means good things for the economy:
Indicator of improving economy: Back row of Fed press conference, formerly full, now empty. Good for the world when Fed isn’t newsworthy!
— Neil Irwin (@Neil_Irwin) June 17, 2015