Monetary policy at the National Economists club dinner in washington, d. C. She provided an assessment of the economy labor market and discuss tools used by the Federal Reserve in response to the 2008 financial crisis. This is 40 minutes. Good evening ladies and john. I president of the National Congress club. Its my pleasure to introduce the speaker. I like to spend a few moments offering expressions of gratitude. First on behalf of the Congress Club i would offer my sincere thanks to the British Embassy for hosting us in this beautiful venue. Its an honor to be this evening and we very much appreciate your hospitality. I want to recognize the cornerstone and the group which help make this event possible. Not least of which by sponsoring a student table, how good it is joining us we have students from universities from across washington, d. C. Now delighted to reduce the speaker who will deliver this years lecture. She needs no introduction. Nonetheless, i feel providing one is obligatory. Cherry ellen took office as chair of the Federal Reserve system in february 2014 after previously served the Federal Reserve system is a member of the board of governors, president of the bank of San Francisco and vice chair of the board. Shes chair of the council of economic advisers. Among other association shes a member of the council of Foreign Relations at the academy of arts and sciences. She graduated from brown and received her phd from yale. Tonight she has agreed to take questions following her remarks, you will note the paper and pen playspace seats. Should a question arise that youd like to ask please write it on paper and someone will collect it and pass it along. Please welcome the honorable, janet yellen. [applause] thank you so much, michael. Im delighted to address the National Economists club and also honored to be associated with herb stein. His Public Service and scholarship characterized by careful analysis, clear and pragmatism, sharp whip, exemplified the best in our profession. Herb was willing to consider new ideas and approaches to government policy. That openness fits with the subject of my remarks today. Namely, i will discuss the unconventional Monetary Policy tools used by the Federal Reserve since the start of financial crisis pain Great Recession. And the roles these tools may play in addressing future economic challenges. Nearly ten years ago with our nation mirrored in its worst economic and financial crisis since the Great Depression the federal open Market Committee confronted a key challenge to the pursuit of its congressionally mandated goals of maximum employment price stability. How does support weakening u. S. Economy was the Main Convention and policy tool, the federal funds rate have been lowered to essentially zero. Addressing the problem eventually led to a second challenge. How to ensure we could scale back Monetary Policy in an orderly fashion once it was no longer needed. Failure to meet either challenge would have compromised our ability to foster maximum employment price stability, leaving serious consequences and livelihoods of millions of americans. We have met the first challenge and i made Good Progress today in meeting the second. Thanks in part to the mall Monetary Policy accommodation provided in the aftermath of the crisis, especially through enhanced rate guidance and largescale asset purchases. The u. S. Economy has made great strides. With the economy operating near maximum employment and inflation expected to rise to the 2 objective over the next two years we have been scaling back the cultivation provided in response to the Great Recession. In no small part because of our authority to pay interest on excess reserves. The process of removing policy accommodation is working well. After discussing issues related to a recent decision to start reducing the size of the Balance Sheet i will address the key question. What is the appropriate future role of the unconventional policy tools that we deploy to address the Great Depression. I believe that influencing shortterm Interest Rates should be a a primary policy lever. Our unconventional policy tools will likely be needed again, should future economic downturn tried Interest Rates. Empirical analysis suggest the neutral federal funds rate defined as the level of funds rates that is neither expansion or contraction or when the economy is operating near its potential is much lower than previous decades. Consequently, shortterm Interest Rates might need to be reduced its uncomfortably high even in the absence of major financial and economic crisis. Ill return to the question about the future of our various policy tools. First will review the experience this decade which ive used for addressing that question. A body of evidence suggests the u. S. Economy is much stronger today than it wouldve been without the unconventional Monetary Policy tools deployed by the Federal Reserve in response to the Great Recession. Two key tools were largescale asset purchases and Forward Guidance about our intention for the future path of shortterm Interest Rates. The rationale was straightforward. Given our inability to meaningfully lower shortterm Interest Rates after they reach near zero in late 2008, the fo 1c used for great guidance and asset purchases to apply downward pressure on lower Interest Rates which was still well above zero. Longerterm Interest Rates reflected participants expectations of the future path of shortterm Interest Rates. As a result, fo 1c communications that affect those such as the enhanced forward rate guidance provided under postmeeting statements in the aftermath of the Great Recession, can affect longerterm Interest Rates. In addition, one per term Interest Rate include the term premium. Its compensation demanded by investors for bearing the Interest Rate risk associated with longerterm securities. When the Federal Reserve buys longerterm securities in the open market, the remaining stock of securities available for purchase by the public declines. It pushes the price of the securities up and depresses their yields by lowering term premiums embedded in those fields. Several studies found are forward great guidance and asset purchases did appreciably reduce longerterm Interest Rates. The goal in lowering the Interest Rates was to help the u. S. Economy recover from the recession instead and the forces that emerged from it. Some suggested the slow pace of the economic recovery proves our unconventional policy tools were unaffected. Once you recognize it could read much lower in the absence of these tools, the evidence strongly suggests the forward rate guidance and security purchases by substantially lowering borrowing costs for millions of American Families and businesses, making over financial conditions more accommodating, did help spur consumption and business spending, lower the Unemployment Rate and stave off inflationary pleasures. Other banks deployed tools in the years that followed the financial crisis. Evidence accumulated also supports the notion that these tools have helped stimulate Economic Activity in their countries after shortterm Interest Rates were lowered to near zero in some cases even below zero. By 2014 where making notable progress toward the goals that maximum employment and price stability. Unemployment rate job by 6 by midyear. Well below its Great Recession peak of 10 . Other measures were showing significant improvement. Inflation, as measured by the change in the price index for personal consumption expenditures had reached one and three quarters by mid 2014, after hovering around 1 in the fall of 2013. The Federal Reserves focus was shifting from providing additional Monetary Policy accommodation to scaling it back. The key question for the fomc was how to reduce the degree of accommodation in the context of an expanded Balance Sheet. One possible approach was while shortterm Interest Rates remain at the lower bound. We could allow securities to roll off the Federal Reserves Balance Sheet and even self securities, putting upward pressure on longterm rates for calibrating the pace and configuration of the reduction in our holdings is warranted. Eventually once the Security Holdings has shrunk sufficient sufficiently, the fomc could start nudging up its shortterm Interest Rate target. One problem of this last in, first out approach was that the fomc does not have any experience in calibrating the pace and composition to actual and prospective economic conditions. Indeed even talk of perspective changes in our Securities Holdings can elicit unexpected, abrupt changes in conditions. Given the lack of experience and the need to carefully calibrate the removal of accommodation, the fomc opted to allow changes in the Federal Reserve Securities Holdings to play a secondary role in the normalization strategy. Rather than Balance Sheet shrinkage they decided its primary tool for scaling back policy accommodation would be influencing shortterm Interest Rates. As we explained in 2014, we decided to maintain the overall size of the Federal Reserve Security Holdings at an elevated level until sometime after they began to raise shortterm Interest Rates. Once normalization of the funds rate was underway and the committee judge the economic expansion was strong enough, further increases are likely to be warranted. The fomc would gradually and predictably reduce the size of the Balance Sheet by allowing the reserve Security Holdings to run off. That is, we would allow the Balance Sheet to shrink pensively by not reinvesting all the principal payments from our securities. One advantage of this approach to scaling back accommodations is both the fomc and public have decades of experience with adjustment shortterm Interest Rates in response to changes in economic conditions. Nonetheless the environment presented a new test to the ability to influence shortterm Interest Rates. Before the crisis, the fomc could raise the federal funds rate the rate at which banks went to with the reserve need. But removing a small amount of reserves in the Banking System would translate into higher federal funds rate because reserves were relatively scarce to begin with. They would tighten conditions in the reserve market and the cost of obtaining reserves in the market, the federal funds rate, would rise. Other market Interest Rates would increase accordingly. After the crisis however, reserves are plentiful because the Federal Reserve funded its largescale asset purchases by adding reserves to the system. Crediting the Bank Accounts of those who are selling assets to the feds. In light of the decision not to sell the longerterm securities reserves are likely to remain plentiful for the foreseeable future. Consequently when the time came to remove accommodations, key question was how to raise the federal funds rate in an environment of abundant reserves. An important part of the answer came in the Federal Reserves authority to pay interest on access reserves. Congress granted the Federal Reserve set authority in 2006 to become effective in 2011. In the fall of 2008, congress moved up the Effective Date until october 2008. Having authority to pay interest on excess reserves means the Federal Reserve can influence the federal funds rate and other shortterm Interest Rates regardless of the amount of excess reserves in the Banking System. The mechanics of the framework is straightforward. Banks will only provide shortterm funding at an Interest Rate around or above but they could earn at the fed. As a result, the Federal Reserve raise the rate of pay other shortterm lending rates would likely rise as well. The new approach for raising shortterm Interest Rates is working well. Since december 2015, we have raise the Interest Rate paid on excess reserves the target range by 100 basis points in the effective federal funds rate has risen accordingly. In light of the recent decision to reduce the Securities Holdings this month, i like to discuss a few aspects of our Balance Sheet strategy. The fomc anticipated its decision to maintain the size of the Federal Reserve Security Holdings at an elevated level until sometime after the beginning of rate hikes. It would keep downward pressure on Interest Rates well after the end of the purchase program. Although estimates of the effect of our Security Holdings on longerterm Interest Rates are subject to uncertainty, a recent study reported the Federal Reserve Security Holdings were reducing the term premium on the ten year treasury yield by roughly one percentage point at the end of 2016. The guidance they would eventually start a gradual unpredictable reduction of the Federal Reserve Security Holdings implied the downward pressure on downward yields will likely diminish over time as Financial Market participants came to expect the start of Balance Sheet normalization was nearing. With that process underway, its likelier Security Holdings are depressing the term premium on the tenure yields by less than the 1 estimate reported late last year. Several factors suggest the downward pressure exerted by our Securities Holdings is likely to diminish only gradually. For instance, as i have noted, our intention to reduce the Balance Sheet by reducing reinvestment of repayments of principles on the holdings other than selling assets has been well communicated for several years. As a result we dont anticipate a jump in term premiums is the Reduction Plan gets underway. In addition, the maturity of our Distribution Holdings is such that it will take some your for the size of our holdings to normalize by a runoff. The judgment that the downward pressure on term premiums will decline only gradually as we reduce the size of our Balance Sheet stands in contrast to evidence suggesting this pressure built up rather quickly when we were expanding the Balance Sheet. To understand this, remember that unlike our plan to shrink the Balance Sheet various spaces of the purchases had an element of surprise. With announcements occasionally leaving the distinct imprint on the path of longerterm yields. Each of our purchase programs resulted in a rapid increase in her Security Holdings during a short time. The normalization process would play out gradually were many years. I focused on the likely response to term premiums to the Balance Sheet Reduction Plan. Let me turn my attention to the likely response of longerterm yields which reflect both the term premium component and expectations of the future path of shortterm Interest Rates. The Available Evidence points to a strong reaction to our asset purchases, its conceivable those yields will react modestly to our Balance Sheet Reduction Plan. Consider for instance a hypothetical scenario in which the fomc has decided not to rely on Balance Sheet reduction to scale back accommodation. Choosing instead to continue to reinvest definitely all principal payments from the Federal Reserve Security Holdings. If Financial Market participants perceive no change in the Economic Outlook and no intention on the part of fomc to alter the overall stance, the fomcs inclination to leave the sides of the Balance Sheet unchanged would be taken as an indication that the fomc would rely more on increases in shortterm Interest Rates to scale back accommodation. Resulting in a faster pace of hikes. Longerterm yields may be little affected by this scenario. A decreased emphasis on Balance Sheet reduction would hold longerterm yields lower, the expected faster pace would push longterm yields higher. As the financial crisis went into the past the stance of Monetary Policy gradually returns to normal, the natural question concerns the possible future role of the unconventional policy tools deployed after the onset of the crisis. My colleagues on the fomc and i believe whenever possible, influencing shortterm Interest Rates by targeting the federal funds rate should be a primary tool. As ive already noted, we have a long track record using this tool to look at our statutory goals. We have much more limited experience in using our Securities Holdings for that purpose. I believe their deployment should be considered again if our conventional tool reaches its limit. That is, when the federal funds rate has recent effective lower bound and the economy still needs further Monetary Policy accommodation. Does this mean it will take another Great Recession for the unconventional tools to be used again . Not necessarily. Recent studies suggest the neutral level of the federal funds rate appears much lower than it was in previous decades. Most fomc participants look at the longer run value and the funds rate is only two and three quarters percent or so, compared to fort a quarter just a few years ago. With a low neutral federal funds rate there will typically be less scope for the fomc to reduce Interest Rates in response to an economic downturn, raising the possibility we may need to resort to enhanced rate guidance and asset purchases to provide needed accommodation. Substantial uncertainty surrounds in this regard, theres an important asymmetry to consider. If the neutral rate turns out to be significantly higher than we estimate its likely will have to deploy our own conventional tools. Again, in contrast it is less likely that will have to deploy her own conventional tools again. If the neutral rate is as close we estimate are lower we will be glad to have art unconventional tools in our toolkit. We must recognize our unconventional tools might have to be used again. Refer living in the low neutral rate world than the Great Recession might be sufficient to drive shortterm Interest Rates back to the effective lower bound. Let me conclude. As a result of the Great Recession, the Federal Reserve has confronted two key challenges over the past several years, one, the fomc had to provide additional policy accommodation after shortterm Interest Rates reach their effective bound. Unto as we make progress we had to start scaling back that accommodation in the vastly expanded Balance Sheet. Today i highlighted two points about the experience with those challenges. First the Monetary Policy tools they deployed in the aftermath of the crisis, explicit ford regarding largescale asset purchases and the payment on excess reserves helped us overcome these challenges. In light of evidence suggesting the neutral level of shortterm Interest Rates significantly lower than previous decades, the likelihood that future policymakers will have to confront those again is uncomfortably high. We must keep our unconventional tools ready to be deployed again should Interest Rates returned to their effective lower bound. Thank you. Stop there. Ill be glad to take questions. [applause] so many questions, where to begin. The first question from the audience have to do with inflation. Inflation has been lower than the feds, 2 lower for some time now. Remarks earlier this year you expressed the view that it might be a few years before inflation which is 2 . Is there concern that this departure from its target rate has or will affect the feds credibility . Yes, there is a concern. Its important for Central Banks like the Federal Reserve and others that have an explicit numerical inflation target to amass a good track record in achieving it. Obviously there will be deviations. It is of great concern we have had five or six years in which inflation has persistently undershot our objective. I continue to believe Inflation Expectation are well anchored and consistent with 2 inflation objective, that something that cannot should not be taken for granted. There is some evidence that Inflation Expectations could have slipped. That comes from surveys at the Michigan Survey and marketbased measures of inflation compensation which have come down notably. Marketbased measures are affected by things other than pure expectations about the likely path of inflation and liquidity premiums. It is of concern we definitely want to achieve our 2 inflation objective. Without earlier this year my colleagues i thought we were on our way to meeting that objective. As recently as february on a 12 month basis it was running just a speck above 2 and core inflation excluding food and energy was running at 1. 9 . Weve had a series of soft readings on inflation, core inflation beginning of march. The reasons for that are not immediately clear. Previous some large oneoff reductions in prices of things like cell phone plans may have played a role. I would not claim thats all of it. Weve had some undershoot. Until this year, 2017 although we mr. Inflation target to the low side, it was not a mystery why those undershirts had occurred. The story first was substantial slack, high unemployment and in later years it became centered on a huge reduction in oil prices and large appreciation of the dollar beginning amid 2014 that rest done import prices. There really wasnt in undershoot. Thats a concern whether you understand it or not. This year has been a surprise. Surprises shouldnt be surprising, but it is a surprise and something we are watching closely. I receive multiple versions of this question. You talked about the conventional and unconventional Monetary Policy and have emphasized the need to be ready to use both possibly in the future. There is another type of unconventional Monetary Policy tool that people have been asking about and that is negative Interest Rates. Theres been discussion of this in academic circle. What is your review and using negative Interest Rates in such a fashion . What if you found this to hopeful in previous years to try to help recover from the recent recession and whats your perspective on negative Interest Rates in the monetary policies of other countries. Early on after our target for the federal funds rate have been cut close to zero, were still paying 25 basis points interest on reserves, we considered cutting it further. Without really had a small amount of room to cut it. We had concerns about the potential negative impact that could have on the market functioning. That was one consideration in our decision not to cut it further. We then found what was necessary was the economy recovering the review sorted to other tools. I wash my colleagues and i with interest the use of this tool and other countries. Economists have suggested ways in which rates could go more negative. This is something that potentially have benefits but males have cost over the longerterm. It can have negative impacts on the function of Banking System and thats been a concern in some countries where its venues. Is something worth us studying in case we encounter future episodes where we hit the zero. It was something the feds decided not to use in this crisis. We are almost out of time. This will be our last question. Lets pivot to tax reform on the fiscal side of all things. How important is tax reform to Monetary Policy if it with double tax policy dividends. I try to stay in my lane. Im not going to get involved in comments on outstanding tax reform programs or the details. Normally when people asked me that question the focus is on how it affects the outlook and what is the feds likely response. I would say that fiscal policy is one of many factors affecting the outlook. There are many important factors. Fiscal policy, depending on we been uncertain about the size, timing, and composition of the fiscal policy changes might be. Fiscal policy can affect both aggregate demand and also affect aggregate supply if its designed to have incentive effects with technological change or laborforce participation. My personal hope given the productivity growth in this economy, my personal hope is that whatever Congress Passes will be a package rich on the supply side that would boost Capital Formation as per productivity growth which would be supply side effects. The appropriate response depends on the nature of the tax package put into effect. All in all, its one of many factors that affect the Economic Outlook. Thats all the time we have are questions. But, its not the last order business before we can start eating. On behalf of the National Congress club we would like to present the small token of appreciation for your time through the night. It is one of our highly coveted coffee mugs. Thank you. I think its within my ethic guidelines. We checked with michelle smith. [applause] thank you. We thought it might be useful for some of the early mornings and late evenings that were sure you enjoy on occasions. [applause] dinner is served and everybody please enjoy. Tonight on the communicators, russias involvement in the 2016 election with julia anglin. Facebook has said that they learned that it adds place during the election were placed by russian outfits under anonymous accounts. They were politically divisive and, not necessarily in that one candidate or another but aimed at showing divisiveness on charge topics. Question night at 8 00 p. M. Eastern
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