WASHINGTON (Reuters) - The following are highlights from Federal Reserve Chair Janet Yellen’s press conference on Thursday following the end of a two-day meeting of the U.S. central bank’s policy-setting committee.
“If we waited until inflation is back to 2 (percent), and that will probably mean that unemployment had declined well below our estimates of the natural rate, and only then did we start to begin to ... diminish the extraordinary degree of accommodation for monetary policy, we would likely overshoot substantially our 2-percent objective and we might be faced with then having to tighten monetary policy in a way that could be disruptive to the real economy. And I don’t think that is a desirable way to conduct monetary policy.”
“The Fed should not be responding to the ups and downs of the markets and it is certainly not our policy to do so. But when there are significant financial developments, it’s incumbent on us to ask ourselves what is causing them. And of course while we can’t know for sure, it seemed to us as though concerns about the global economic outlook were drivers of those financial developments.
“And so they have concerned us in part because they take us to the global outlook and how that will affect us.
“And to some extent, look, we have seen a tightening of financial conditions during, as I mentioned, during the inter-meeting period. So the stock market adjustment, combined with a somewhat stronger dollar and higher risk spreads, does represent some tightening of financial conditions.
“Now, in and of itself, it’s not the end of story in terms of our policy, because we have to put a lot of different pieces together.”
“We are working very closely with the House Financial Services Committee that’s requested information to satisfy their request. We’re working very closely with them.”
“So we are envisioning further improvements in the housing market. It remains very depressed - housing starts below levels that seem consistent with underlying demographics, especially in an economy that’s creating jobs. And we had lots of people who are still doubled up, and demand for housing should be there and should materialize as the job market improves and income growth improves.
“So are we counting on it? Housing is now a very small sector of the economy. It is not the driver - it is not the key driver in my own forecast of ongoing improvements in the U.S. economy. It plays a supporting role, but consumer spending is the main driver, bolstered by a decent outlook for investment spending. But I would continue to expect housing to improve.
“And remember, we’re envisioning - if things go as we anticipate - a pretty gradual path of increases in short-term interest rates over time to some extent that’s already embodied in longer-term rates.”
“Our normalization principles indicated that we would not begin to either reduce or eliminate investments until after we have begun to raise the federal funds rate. Our principles said that the exact timing of that would depend on economic and financial conditions and our evaluation of them.
“And that guidance continues to be accurate. We don’t have anything further on it. But it is certainly true that we have committed to wait to begin running down our balance sheet until after we’ve begun the process of normalization.
“So yes, if we defer.. This is not a very large matter that we’re talking about from a stimulus point of view, but it is to some extent true that if we delay raising the rate it probably, maybe, delays the timing at which that process will begin. But there’s no fixed — we’ve not given some fixed amount of time and so many months after we start, and we’re continuing to discuss what the appropriate timing would be of that policy and haven’t made any further decisions on that just yet.
“Well it played absolutely no role in our decision. I believe it’s the responsibility of Congress to pass a budget to fund the government, to deal with the debt ceiling so that America pays its bills. We have a good recovery in place that’s really making progress and to see Congress take actions that would endanger that progress, I think that would be more than unfortunate. So to me that’s Congress’ job. Congress charged us with forming an economic outlook that is focused on the medium-term and taking appropriate policy actions based on that outlook and that’s what we have done in the past and will continue to do going forward.”
“The recovery from the Great Recession has advanced sufficiently far, and domestic spending is sufficiently robust, that an argument can be made for a rise in interest rates at this time. We discussed this possibility at our meeting. However, in light of the heightened uncertainty abroad, and the slightly softer expected path of inflation, the committee judged it appropriate to wait for more evidence including some further improvement in the labor market to bolster its confidence that inflation will rise to 2 percent in the medium term.”
“I continue and the committee continues to expect that inflation will move back to 2 percent... So that bolsters my confidence in inflation.”
“The recovery from the Great Recession has advanced sufficiently far, and domestic spending appears sufficiently robust, that an argument can be made for a rise in interest rates at this time.
“We discussed this possibility at our meeting. However, in light of the heightened uncertainties abroad and the slightly softer expected path for inflation, the committee judged it appropriate to wait for more evidence, including some further improvement in the labor market, to bolster its confidence that inflation will rise to 2 percent in the medium term.
“Now, I do not want to overplay the implications of these recent developments, which have not fundamentally altered our outlook.
“The economy has been performing well. And we expect it to continue to do so.
“As I noted earlier, it remains the case that the timing of the initial increase in the federal funds rate will depend on the committee’s assessment of the implications of incoming information for the economic outlook. To be clear, our decision will not hinge on any particular data release or on day-to-day movements in financial markets. Instead, the decision will depend on a wide range of economic and financial indicators and our assessment of their cumulative implications for actual and expected progress toward our objectives.”
“Of course there will always be uncertainty. We can’t expect that uncertainty to be fully resolved.
“But in light of the developments that we have seen and the impacts on financial markets, we want to take a little bit more time to evaluate the likely impacts on the United States. And as I mentioned, the inflation outlook has softened slightly. We’ve had some further developments, namely, lower oil prices and a further appreciation of the dollar that have put some downward pressure in the near term on inflation.
“Now, we fully expect those further effects, like the earlier moves in the dollar and in oil prices to be transitory. But there is a little bit of downward pressure on inflation. And we would like to see some further developments. And this importantly could include - is likely to include further improvements in the labor market that would bolster our confidence that inflation will move back to 2 percent over the medium term.”
“So as I’ve said before, every meeting is a live meeting where the committee can make a decision to move to change our target for the federal funds rate. That certainly includes October. As you know and I’ve stressed previously, were we to decide to do that, we would call a press briefing, and you’ve participated in an exercise to make sure that you would know how to participate in that press briefing, should it happen.
“So yes, October remains a possibility.”
“As I said, although we’re close to many participants and the median estimate of the longer-run normal rate of unemployment, at least my own judgment - and this has been true for a long time - is that there are additional margins of slack, particularly relating to very high levels of part-time involuntary employment, and labor force participation that suggests that at least to some extent the standard unemployment rate understates the degree of slack in the labor market.
“But we are getting closer. The labor market has improved. And as I’ve said in the past we don’t want to wait until we’ve fully met both of our objectives to begin the process of tightening policy given the lags in the operation of monetary policy.”
“Let me again emphasize that the specific timing of the initial increase in the target range for the federal funds rate is far less important for the economy than the entire expected path of interest rates. And once we begin to remove policy accommodation, we continue to expect that economic conditions will evolve in a manner that will warrant only gradual increases in the target federal funds rate.”
“You know, I want to emphasize, domestic developments have been strong. We see domestic demand growing at a solid pace, the labor market continuing to improve. Of course, we will watch incoming data to confirm our expectation that that will continue. And we of course will watch global financial and economic developments.”
“The outlook abroad appears to have become more uncertain of late and heightened concerns about growth in China and other emerging market economies have led to notable volatility in financial markets. Developments since our July meeting — including the drop in equity prices, the further appreciation of the dollar, and a widening in risk spreads — have tightened overall financial conditions to some extent.”
“Given the significant economic and financial inter-connections between the United States and the rest of the world, the situation abroad bears close watching.”
“Inflation has continued to run below our 2 percent objective, partly reflecting declines in energy and import prices.
“My colleagues and I continue to expect that the effects of these factors on inflation will be transitory.
“However, the recent additional decline in oil prices and further appreciation of the dollar mean that it will take a bit more time for these effects to fully dissipate.”
“Net exports were a substantial drag on net GDP growth during the first half of the year reflecting the earlier appreciation of the dollar and weaker foreign demand. The committee continues to expect the moderate pace of overall GDP growth even though restraint from net exports is likely to persist for a time.
“The labor market has shown further progress so far this year toward our objective of maximum employment. Over the past three months, job gains average 220,000 per month. The unemployment rate at 5.1 percent in August was down four-tenths of a percent from the latest reading available at the time of our June meeting, although that decline was accompanied by some reduction in the labor force participation rate over the same period.”
YELLEN ON GLOBAL DEVELOPMENTS’ EFFECT ON U.S. INFLATION
“Inflation however has continued to run below our longer-run objective, partly reflecting declines in energy and import prices. While we still expect the downward pressure on inflation from these factors will fade over time, recent global economic and financial developments are likely to put further downward pressure on inflation in the near term. These developments may also restrain U.S. activity somewhat, but have not led at this point to a significant change in the committee’s outlook for the U.S. economy.”
“The unemployment rate has declined and overall labor market conditions have continued to improve. Inflation, however, has continued to run below our longer-run objective, partly reflecting declines in energy and import prices.
“While we still expect that the downward pressure on inflation from these factors will fade over time, recent global economic and financial developments are likely to put further downward pressure on inflation in the near term. These developments may also restrain U.S. activities somewhat, but have not led at this point to a significant change in the committee’s outlook for the U.S. economy.”
Reporting by Washington economics team