Janet Yellen is holding her final press conference of the year following the Fed’s last policy announcement this afternoon.
Yellen emphasised right at the top that the language does not represent a change in the Fed’s intentions.
On Wednesday, the Federal Reserve made its last monetary policy announcement of the year, removing the phrase “considerable time” and replacing this with “patient.”
Regarding the labour market, Yellen said that overall the labour market has improved, and noted that underutilization of labour resources continuing to diminish.
On the broader economy, Yellen said that real GDP expanded 2.5% over the four quarters ending in the third quarter, with indications showing the economy continues to grow at that pace.
Yellen noted that the decline in oil prices “will likely hold down overall inflation in the near term.” Yellen added that “as oil price declines and other transitory factors dissipate” the Fed expects inflation to move back towards its 2% target.
The Fed has noted the decline in the “market based” measures of inflation — i.e. breakevens — and said these too look transitory, though these do bear close watching.
Yellen said that the Committee expects it will be appropriate to maintain its current policy stance “for at least the next couple of meetings.”
Yellen said that most FOMC members, however, believe that it will be appropriate to begin raising rates at some time in 2015, but that the time of year depends on the economic situation.
At the time of lift off, FOMC members expect to see a further decline in the unemployment rate, with “core” inflation running near current levels, but remain confident that inflation will run back to target levels.
Yellen is still stressing that the path of interest rate hikes will continue to depend on incoming data.
Here’s the key passage:
“Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.”
Yellen said that most FOMC members expect interest rates to get closer to its “normal longer-run level” by the end of 2017, particularly as impacts from the Financial Crisis continue to dissipate.
Yellen said “no meeting is completely off the table” for raising interest rates. Of course, Yellen added that this depends on incoming data, but if data are stronger than expected than normalization could happen sooner than expected, and the opposite would also remain true.
Yellen added that “a number” of FOMC members indicated that conditions could be appropriate by the middle of next year, but emphasised that there is “no preset” time for when the Fed would begin raising rates.
On inflation, Yellen expects headline inflation to be under pressure “for a while,” adding that most FOMC members expect it will be appropriate during 2015 to being normalizing policy.
Yellen said that she would like to “strongly discourage” the expectation that policy moves, meaning interest rate increases, can only occur at meetings that are scheduled to be accompanied by press conferences. “Every meeting is a live meeting,” Yellen said.
Yellen added that if the Fed felt it needed to hold a press conference to explain a decision, it would do so.
With regard to the Fed’s observation on oil prices, Yellen said it is “one of the most important developments shaping the global outlook.” Yellen added that the FOMC expects that for the US, the decline in oil prices will be, on net, a positive for the economy.
Yellen again noted that the decline in oil prices and the pressure put on inflation is likely to be “transitory.”
In response to a question about the market misinterpreting the Fed’s intentions, Yellen said, “That’s difficult to me to say.”
Yellen said that the Fed recognises that there are differences between the Fed’s rate outlook on the market’s. The FT’s Robin Harding asked if this disconnect makes Yellen uncomfortable. Yellen said, “I can’t tell you exactly what is driving market developments, but I can say we’re trying to communicate our thoughts as clearly as we can.”
Yellen emphasised that in the past, when inflation expectations were “well-anchored” big moves in commodities like oil had transitory impacts on inflation, and the Fed expects that will be the case this time as well.
When asked on if “a couple” of meetings means two, Yellen said that yes, a couple means two. Yellen earlier said that indicating it will be “patient” in raising rates meant that it expects to wait “at least a couple meetings.”
Yellen said that as the Fed begins to normalize policy, it expects to be accommodative for a long time.
On inflation running below the Fed’s target, Yellen said that though inflation is running below its target, a “small undershoot” of the Fed’s employment target should facilitate inflation moving back towards that target. The Fed is not, however, expecting an overshoot of its 2% inflation target.
On the decline in breakevens, Yellen said it could reflect inflation expectations, but also reflect a reassessment of risk and term premia. Yellen said it can also reflect “liquidity effects” in markets. “When there is a flight to safety, that tends to be a flight to Treasuries,” Yellen said, which she added could be pressuring those measures.
With regard to having three dissents at the Fed’s latest meeting, Yellen said the policy statement does a good job of “reflecting what a majority of the Committee thinks is appropriate policy.” Yellen said it is “reasonable” to see divergences of opinion.
On how quickly the Fed plans to move when it begins raising rates, Yellen doesn’t see the need to repeat rate hikes at a “measured pace” as the Fed has done in the past, when it raised interest rates 25 basis over more than a dozen straight meetings.
Yellen again emphasised that until some of the economic conditions that were after effects of the Financial Crisis dissipate, it will likely be appropriate for the Fed to remain accommodative even after it begins normalizing rates.
On a question regarding the recent controversies at the New York Fed, Yellen said that she feels a “good sense of confidence” on how it has overhauled its supervision processes since the Financial Crisis.
Yellen added that it’s important there are “channels” through which people at various Fed banks can express their disagreements with other members on their team. Yellen noted that the Fed board has undertaken a review of procedures at each regional bank.
On Russia, Yellen said that the linkages between Russian and the US economy are “really quite small.” Yellen said she expects the spillover from Russia’s financial situation to the US would be quite small as a result. The effects could be larger in Europe, and Yellen added that, “we are obviously watching [Russia] closely.”
When asked about contagion effects from the decline in oil prices, Yellen said that “leverage in the financial system in general is way down” from levels before the crisis, and said it isn’t a “major” concern that some entities would be effected by the decline in oil prices.
On the housing market, Yellen said she is “surprised” the market hasn’t recovered more, attributing some of this to continued tight credit conditions. Yellen added that household formation has been depressed, but expects that an improving labour market will see this pick up and bolster the housing market.
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