It’s all about inflation.
In her post-announcement press conference, Fed chair Janet Yellen said the FOMC did discuss a potential rate hike at its most recent meeting but said that inflation is still not close where the Fed needs to see it before rates can rise.
On Thursday, the Federal Reserve announced that it kept interest rates unchanged, pegged at 0%-0.25% which is where they have been since December 2008.
The Fed’s statement was little changed from its July statement, and more or less said the Fed sees continued slack in the labour market and isn’t yet ready to move interest rates based on its inflation outlook.
The Fed’s statement did, however, say it is “monitoring developments abroad,” a new wrinkle that we expect Yellen will be asked to elaborate on. This inclusion followed the late-August stock market chaos we saw, which was largely attributed to concerns out of China.
Yellen added, however, that this doesn’t alter the Fed’s broader outlook and said the Fed’s ultimate decision to raise rates will not turn on any one economic data report or day-to-day financial market movements.
Yellen again stressed that the first rate hike isn’t as important as the Fed’s general policy stance, which she expects will remain accommodative for some time after that first increase. Yellen added that the Fed raising rates wouldn’t really be “tightening” policy at first, given the current situation.
Yellen emphasised that the impacts on inflation from the decline in oil prices and the strengthening of the US dollar are “transitory,” meaning that they will pass. Yellen added, however, that the recent decline and corresponding increase in the dollar will likely mean it takes longer for these impacts to run through the system.
In response to a question about how close the Fed is to its goals of full employment and price stability, or 2% inflation, Yellen said the Fed is “way below” its inflation target, but again emphasised that much of this is related to the decline oil prices and the strength of dollar, which she expects will be “transitory.”
When asked about whether the Fed thought it would ever hit its targets, Yellen said that it’s important for the Fed’s credibility to “defend” its 2% target. Yellen said the Fed would expect that as the unemployment rate undershoots its expected longer-run average — which, at 5.1%, is more or less where the unemployment rate currently stands — it would move more quickly back towards its target and perhaps overshoot.
And this overshooting, in Yellen’s view, could be needed after a long period of inflation running below target.
Yellen added that 2% is not a ceiling on its inflation target, and so overall, Yellen seems more comfortable with letting inflation run “too hot” than moving interest rates higher before it really picks up.
In response to a question about whether the Fed might act at its October meeting, Yellen said reiterated that every meeting is a “live” meeting, and said the Fed could still act and call a press briefing, the capacity for which the Fed has tested in recent months.
Yellen added that the Fed will be watching both economic and financial developments.
When asked if perhaps the Fed would never get off the zero-lower-bound, Yellen said she would be surprised if this were the case but could not rule it.
The Fed’s dot plot indicated that one FOMC member — thought to be Minnesota Fed president Narayana Kocherlakota — wanted negative rates and proposed additional stimulus. Yellen said that this was not seriously considered at the meeting, but Kocerlakota, who during his time during on the FOMC has turned from a hawk, pushing for higher rates, to an extreme dove, seems to be making his point before he retires later this year.
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