Transcripts For BLOOMBERG Bloomberg Markets 20160615

Member wasonly one that dovish. Plus the committee now expects to raise rates at a slower pace to not only is the fed more dovish, but it has grown more dovish since the last meeting in april and remember from the minutes that most of voting members were ready to june as inflation continues to strengthen. Thef course we have disastrous jobs report and here is what the fed said. Andpace of improvement labor market has slowed. Inflation compensation declined. In other words, not enough to justify a rate hike the are notably, no mention in the policy statement of the grexit risk. The fed is on hold and giving no sign how soon it may move off of the quarterpoint p are we hope to in the press conference with janet yellen. That begins at 2 30. We have seen a major market move. Given me the data screens if you would. I want to show here at the moment on the screen. The market is up 84 and the vix plungers. That is a complacency that will support the fed. Michael mckee reversal. T goes right back bring on the second data screen as well. Moment. How it in the a strong end. Michael, very quickly. I know you have got an important, it. All you need to know is down we go. This is crushing. There is no other way to put it. Are you ready . It is already updated. You can see what. Is just talking about. A number of people have moved the forecasted down and now the consensus is basically, if you are looking at the median, one more move will take us to a range of 50 or 75 basis points. We are not expecting to more moves this year. There is a substantial number of people who think we should have att went all the way over the lefthand side. It looks like theyre pricing in four moves just over 1. 6 and then you go all the way out to the longerterm and you are 2. 95. G at line. N see the purple you can see the market expectation has moved up a little bit as well as they digest what the fed has seen. They want to move closer together and the market wants them to move down maybe not as much as they have. It was the fed that came down in that market went up. The markets went up a little bit in the out years of 2018, but not as much as the fed had. The function measures probability. Chance, july 27 meeting. Compare that with 15. 8 . Further,of going out the market does not really see the rate hike increase to more than 30 . It is versailles we have seen 40 increase. Your paper, all of those conversations did not exist. Elite economists know where they are trying to take this . Sure. Thebig change compared to crisis of understanding is that Central Banks need to take a stand or a folk us and get a sense of where natural is. It is also a Risk Management approach close to zero. I think this is a harder problem they are trying to solve. A question. His is not popular that is the traitor sitting on 46th street. Come on, this is not what they planned. Massive outliers. Has beenerik schatzker coming through and you noted a couple of changes in chair yellens stance, her language from december until now. I am looking more at the dots. Remember in december when the fed got off zero and raise rates , it anticipated raising rates four more times over the course of 2016. How much more dovish this fed has grown in that six months, in december, 14 of the 17 voting members sought rates at 1 or above by the end of 2016. In december, 12 of those are 2 or above by the end of 2017. It is truly incredible. I want to point out one other thing. The fed is sticking to a gradual rate increase over time. Getting the fomc and the economy back to a normalization. Janet yellenwhat says in the face of the fed sticking to the idea that gradual is even wanted at this point. That word needs to be in the statement and whether the fed can contemplate normalization at this time. They are gradual in the forecast to next year and only 1. 5 . Pretty bland about what is going on. Why they have coming down so much. On details. Y short gradual was the were using back in december. If you define gradual in december, it was more or less a one of every two meetings. We have had the fed on hold and it janet yellen and company are giving us no clue and we may get another clue when we get in the room, but giving us note lou when we expect the next rate hike to come. They are concerned about credibility. That word crept into the minutes. It has to be concerned of the use of the word gradual given where we are today relative to where we were in december when they were using the same line which. Scarlet that means the contrast is pretty dramatic. Rich is still with us. The Interest Rate was cut 3 . The Business Cycle we are in now is different overall. That is the case. 4. 25. That was at it is now at three. It has fallen substantially. That as well. This is what we call for Monetary Policy. It will not only be gradual, but it is to a much lower destination. This is an acknowledgment by the fed that this is the world they are navigating right now absolutely. Rate. Here is the terminal john published a note three days rate, which iinal find socially and politically unacceptable for the nation. In your estimation, where is the terminal rate, all the users in all of the people watching who would go hit them over the head, where are we going in three or five or even 10 years . There is a new neutral, which we have defined as a fed funds rate of two or 3 and given where the fed is now, it is probably the lower end of the range and with a 2 inflation, that means a real return on cash 20 compared with 200 basis points on that crisis. In five or 10 years, we will probably have a recession. If we do, the fed will be hiking. That is the other factor to take into account as well. We have talked about the feds economic forecast. They made significant changes this year. Down the forecast going out to 2018, they see the economy growing 1. 92 percent this year. In march, they had seen 2. 12. 3. So they see Slower Growth but at the same time, they see rich and faster inflation. Theyre calling for the price year. Of 1. 7 this in march, the only saw 1 to 1. 6 . I think this recognizes the potential growth rate in the economy has really slowed and i think in their view, they have got a slow rate of potential growth and micex are closing and their models are telling them they should get give a pickup in inflation, as i said. This is a fed that one tire inflation. A fed that is hiking rates and wants higher inflation. That is when the way the model instructs them. Will continue with us. Let me do a data check. A major move in the fixed income market now. The two year yield those roundtripper over the last 48 hours. We went from. 67 and we go right back down in the low end of a recenta major move in the fixede market now. Range. The 158 level, good morning. Earlier call of 1. 50 percent. Stated, the nfl on a 577, you really wonder how japan will wake up on thursday morning. Scarlet this is the weakest of the dollar against the ansys september 2014. I want to bring in the cohead of the global fixed Portfolio Management goal Asset Management. Are you changing how you are allocating your funds and are you changing how you are putting your money right now given what you have just learned . The statement will not cost will not cause us to change portfolios. We can think about where the news was. The news was in the jobs report in the news was in the lower Inflation Expectations in the marketplace and in slower corporate earnings. Fundamentals causing us to change our position in the portfolios. It is also in the way the fed interpreted and framed the data weve all been reacting to. As all of you and some of your speakers have said, the fed is just catching up with the market here with the fed is doing is reporting the news and following the market in our view. One more rate increase this forecast,ring growth at this point, you are going to be able to go on vacation in july and just forget that eating . There is a lot going on across the markets. You think about grexit and china risk and the Slower Economy in the u. S. Those keep us up at night more than a single fed meeting. The risk of rates, i would say the opposite is the risk. The risk is that the session risk is higher now. That gives us a little more concern. Your trade background, what will be the stability when you have a jump condition . 28 years old, they just took level two and level three, do they have all of the answers . They have not been tested like you have here when you get the jump condition, how will the markets react . Peopleave more and more with gray hair. We have a ton of bloomberg. Actually coaching them but they are students of history. Very much focused and much more concern about where things go in terms of the risk of a slowdown and the economy. We are trying to coach him people. What i want to know from you is the july meeting and the september meeting, it is not commercial paper. In the trenches at Goldman Sachs Asset Management . Of things. Number one, the thing the fed is watching most closely as financial conditions. We watched index very closely. Goldman sachs happened to have one as well. If you look at where the financial conditions are now, they are at about the same place they were in december when the fed tightened for the first time. That is number one. Number two, were looking for an increase in nation at dictations. We watching wage data very closely. What you have seen a number of surveys recently is Inflation Expectations. History has always been the best start in the best start in they go too much and too fast. With the way they brought it are, he finally willing you finally going to accept the gradually question absolutely. Gradually . Absolutely. You have to think about how the world will operate. The other thing was a presumption of all students of the Central Bank Policy was that an europe the u. S. Was economy. What happens in general does not matter. Sure anymore. Capital flows are significant and have a big impact on the market. Tom on the actual trading and doing of things in the market, i have got one question for you. Was talkingavid about four standard deviation moves and i was talking about ois for that. How close that is the wrong question. How deep is the market now to withstand standard deviation shock . Incrediblyy is challenged across the markets. Though that you would have more and more marketsrm blips in because of changes in liquidity. In the end, real Money Matters and economics matter. In the event we have a moderate level of growth and a moderate level of inflation, Something Like grexit and a credit concern in china will not blow up the financial system. In the long run, it will be the fundamentals that matter. Starlet volatility and liquidity and economics. That talks are millennialse to highs. How do you reach that . Is an indication investors are pricing in . I do not think it is necessarily a recession but it is prudent in markets where you have had some spread compression, two or three weeks at 13 and youas had 21 the other day. You have to have cash levels reflecting liquidity but you think pricing evaluation makes good sense to be running higher than average cash levels in these markets, absolutely. I would agree 100 purity if you look at what has happened in the credit markets, they are performed incredibly well because rates are negative everywhere else and rates in the u. S. Are positive. Our view is that there is risk in the economy. And you look at the perspective. The fed seems to be on a hold for quite some time here and i l ask you and i will at ask rich, are you getting to the point where caches unacceptable substitutes . Is the fed distorted the market so much that people do not need to buy assets . The debate around Generating Positive returns for investors will become a bigger and a bigger issue here at a big issue in europe and japan, and with rates so low in the u. S. , it has become big here. In the event the fed is more dovish and we will be in a Slower Growth environment but a low risk of recession, you will see more and more money come to the market to generate positive yields. You do not want to take too much direct economic risk but still try to find highquality ways to generate returns. Are we getting to a point now where markets are still distorted and you do not want to buy a negative rate instrument because you have got to pay to get it, is the safety not worth it . Exactly. Negative rates, we have thankfully avoided that in the u. S. Negative rates are a distortion this of thered to world of insecure stability. The world appears to be stable but that is deceptive. World, it makes sense to focus as much on preserving capital as it does to deserving on capital. To return under capital in this world, i think that should guide investing. As we go to asia, if i look at european banks, they are performing miserably. Do you see liquidity in the European Market off of this economic mumbojumbo that will allow these banks to try to shield themselves as Goldman Sachs and american banks shield themselves years ago . Is there a trading stability when you look out of new york and out of london . There is very limited credit creation going on in europe because of the capital challenges of the banks. Unless the banks in the countries that support a lot of these banks by the bullet and decide to recapitalize the banks, we are in a situation where we continue to see low levels of growth and potentially deflation in europe. Tom i go back to your skill set in the trenches here. That you have to compete with mario draghi for paper, am i right that that is what is going on right now . You are essentially pricing the banks out of a highquality market here when the banks generate earnings, they will rely on more risk here the problem is it is a vicious cycle going on in europe. With continued slow growth, theres too much concern about regulation and Political Risk in europe. Youre finding companies are not extending. Tom it is great to see mike in the trenches. Versus firstclass flying at 50,000 feet. Not a bad place to be. Lets look at dollar yen. Keeping a close eye on it. As 105 643 against the japanese yen. Down, down, down for the dollar versus the yen. Was at yen was wet 187 and before april, 11131. We are all friends here. Call an audible. That is tricky. Scenes, theynd the have learned in the past and are not intervening. Obviously, they will weaken the np or my gut tells me if we are at 100 or through it, that would be a magic number that would probably trigger some intervention. It would be the minister of finance. Something to keep in mind is the u. S. Treasury has been term in saying do not do that. How far will they let them go . In the past, we have cooperated. Does the rest of g7 let japan just go down the tubes . If you look at the diplomatic language, there is always volatility and unstable markets. Knows that. If you move at 122 not too long ago, it is a brutal move. Shock me. Would not understand we see that level but if we do, it will not check me if we saw some intervention. Identifying the yen to one of 561. It is remarkable. It is a two year yield. Standardside two deviations, is janet yellen losing control of her management of people like you . Not think so. If i had to look at a single piece of news and did not have the benefit of reading the report, the key point is six members of the fed decided to move their expectations of two increases in 2016 21. We think one of those people is chair yellen. We actually think the probability of two hikes, has gone down. It will impact the two year. The 10 year will be much more relevant to the future path for rates. Scarlet before we let you go, what is the number one thing you want to hear from janet yellen in her News Conference . Very much a glass is halfempty statement. I will look for janet yellen to indicate some positive. It is a very dovish statement. We will see if she tries to create a twoway read of her intentions or if she tries to reinforce the dovish statement . I figure you will see a little bit of clarifying ballots to offset a little bit of dovish. The market is really taking it as a dovish move. It will be reliant upon the data. We are spending a little bit too much time. Richard ofto thank pimco. Thank you for joining us. Lets get a data check. We need to be reminded to check the 10 year yield as well. Moving dramatically after this statement. The Michael Mckee now volatility here and what it would mean for the markets. I suggest the press conference would be the most interesting. I think you can say it. Michael this is not the fed funds. He can see the twoyear taking out. Two moves this year, 56 basis points, roundup to 57. Right now, we are trading around 37 basis points. You are not even in the midpoint of a move up. Tom cole and Bloomberg Radio as well, worldwide. Of course across our many channels. Interesting and surprising announcement. Theseggest that one of. Ovish janet yellen you think there is a shift in the forecast, and that is the news here. Is he going to have to markdown his view of gdp off of what we heard today . You would have to ask him that question. We did not have a dissent this time. George from the Kansas City Fed went along with everybody. She is probably higher on the list. Has been arguing the fed would race rate. Matter among it fed officials . Not at all. The fed is not the news here. What is the news . The news is the job number, is it real or not. We look at what has happened . Decades working in fixed income, is the news that we are in a great distortion, near negative Interest Rates, where nobody knows what to do, is it true . It is a risk that the issues occurringin japan and throughout the world are having a significant and disproportionate impact. That our economic model has ever full us. Tom can i ask you a dumb question . Trade make money when you negative Interest Rate paper . There is no question you can. You can make money in the event that rates will rise. Tom he lights up. That is amazing. We like to make money. Actually, we have that making german bonds. We actually own them. There have been negative rates and i think it will be a terrible event but in the near term, you see inflation. My question then, can you to knock aast enough killed . Or any of the other traits that are based on this . Of course we can. The question is price. Happen you hedge what it is on sterling . They are incredibly challenged and very rapid move over the course of the last few. Ays and changing expectations very difficult. You are in a situation where most of the direct wrist risk is priced. One of the reasons were at such low reasons we are at such low levels despite the news today is you have seen a lot of capital coming out because of the concern of brexit buying treasuries. In terms of the ability to move, people to some degree over state the challenges in the market. Scarlet janet yellen coming up to the podium. This is her News Conference following the fed rate decision. Lets go to washington, d. C. Were cherry yellen is beginning her prepared remarks. Chair yellen today, the federal open Market Committee maintain the federal range at 1. 25 to 1. 5 . Policy shouldtive support further progress toward our statutory objectives of maximum employment and price stability. Based on Economic Outlook, the committee continues to anticipate a gradual increases in the federal funds rate over time are likely to be consistent with the achieving and maintaining our objectives. However, recent Economic Indicators have been mixed, suggesting our cautious approach to adjusting Monetary Policy remains appropriate. As always, our policy is not on a preset course, and if the Economic Outlook ships, the appropriate path of policy will shift correspondingly. I will come back to our policy decision, but first, i will review recent economic developments in the outlook. Economic growth was relatively weak late last year and early this year. Some of the factors weighing on this were expected. For example, exports have been soft reflecting some dude foreign demand, and the earlier appreciation of the dollar. Activity in the Energy Sector has obviously been hit by this deep drop in Oil Prices Since mid2014. The slowdown in other parts of the economy was not expected. In particular, Business Investment outside of energy was particularly week during the winter, and appears to have remained so into the spring. In addition, growth in Household Spending slowed noticeably early in the year, despite solid ,ncreases in Household Income as well as relatively high levels of Consumer Sentiment and wealth. Fortunately, the First Quarter slowdown in Household Spending appears to be temporary, indicators that the Second Quarter have so far pointed to a sizable rebound. This recovery is a key factor supporting the committees that Overall Economic activity will expand at a moderate pace over the next few years. Despite lackluster Economic Growth, the job market continued to improve early in the year. The First Quarter, job gains averaged nearly 200,000 per month, just a bit slower than last years pace. And the Unemployment Rate held near 5 , even though notably more people were actively looking for work. More recently, the pace of improvement in the labor market appears to have slowed markedly. Job gains in april and they are estimated to have averaged only about 80,000 per month. While the Unemployment Rate fell to 4. 7 in may, that decline occurred because fewer people reported that they were actively seeking work. A broader measure of unemployment that includes individuals who want and are available to work but have not searched recently, as well as people who are working parttime but would rather work fulltime, has flattened out. On a more positive note, average Hourly Earnings increased 2. 5 over the past 12 months, a bit faster than in earlier years, and a welcome indication that wage growth may finally be picking up. Although recent labor market data have on balance been disappointing, it is important not to overreact to one or two monthly readings. The committee continues to expect that the labor market will strengthen further over the next few years. That said, we will be watching the job market carefully. Ongoing Economic Growth and an improving labor market underpin our inflation outlook. Overall, Consumer Price inflation, as measured by the price index for personal consumption expenditures, was about 1 of the 12 months ending in april, still short of our 2 objective. Much of this shortfall continues to reflect the effects of earlier declines in Energy Prices and lower prices for imports. Core inflation, which excludes energy and food prices, has been running close to 1. 5 . As the transitory influences holding down include inflation fade, and as the labor market strengthens further, the committee expects inflation to rise to 2 over the next two to three years. Our inflation outlook also rests importantly on our judgment that longer run Inflation Expectations remain reasonably well anchored. However, we cannot take this inflation longer rain expectations for granted. While most measures of Inflation Expectations show little change on balance in recent months, Financial Market measures of inflation compensation have declined. Movements in these indicators reflect many factors, and therefore, may not provide an accurate reading on changes in the Inflation Expectations that are most relevant for wages and prices. Nonetheless, in considering future policy decisions, we will continue to carefully monitor actual and expected progress toward our inflation goal. Let me now turn to the individual Economic Projections submitted to this meeting by fomc participants. As always, each participants projections are conditioned on his or her own view of appropriate Monetary Policy, which in turn, depends on each persons assessment of the multitude of factors that shape the outlook. Participants projections for growth of inflation adjusted Gross Domestic Product are slightly lower in the near term then in the projections made for the march fomc meeting. The median growth projection now remains at 2 through 2018, in line with its estimated longer run rate. The median projection for the on a plummet rate edges down from 4. 7 at the end of this year to 4. 6 in the next two years, somewhat below the median assessment of the longer run normal Unemployment Rate. The median path of the Unemployment Rate is little changed from march. Finally, the median inflation projection stands at 1. 4 this year, a bit firmer than in march, and then rises to 1. 9 2018. Ear, and 2 in returning to Monetary Policy, as i said, the committee maintains its target range for the federal funds rate. This decision reflects the committees careful approach in setting Monetary Policy, particularly in light of the mixed readings on the labor market and Economic Growth that i have discussed, as well as continuing below target inflation. Proceeding cautiously in raising our interestrate target will allow us to verify that Economic Growth will return to a moderate that the labor market will strengthen further, and inflation will continue to make progress toward our 2 objective. Caution is all the more appropriate given the shortterm Interest Rates are still near zero, which means Monetary Policy can more effectively respond to surprisingly strong inflation pressures in the an to a weakening labor market and falling inflation. Although the Financial Market abroads that emanated that started this year have eased, vulnerabilities in the Global Economy remain. In the current environment of sluggish global growth, low inflation, and already very accommodative Monetary Policy in many advanced economies, Investor Perceptions of and appetite for risk, can change abruptly. As our statement notes, we will monitor to closely economic and financial developments. We continue to expect the evolution of the economy will warrant only gradual increases in the federal funds rate. We expect the rate to remain for some time below levels that are anticipated to prevail in the longer run because headwinds weighing on the economy mean the Interest Rate needed to keep the economy operating near its potential is low by historical standards. These headwinds, which include developments abroad, subdued household formation, and meager productivity growth could persist for some time. But if they gradually fade over the next few years, as we expect , then the Interest Rate required to keep the economy operating at an even keel should move higher as well. Withview is consistent participants projections of appropriate Monetary Policy. The median projection for the federal funds rate rises only gradually to 1. 5 at the end of next year, and 2. 5 by the end of 2018, somewhat below its estimated longer run normal level. Although the median federal funds rate at the end of this year is unchanged from march, the number of participants revised down their projections. 42017 and 2018, the median 1. 25 to 1. 5 Percentage Points below march, roughly in line with the 1. 25 percentage point downward revision made to the estimated longer run level of the federal fundraiser. As i have noted on. Occasions, participants projections for the federal funds rate, including the median path, are not a fixed plan for future policy. Corey is not an a preset course. These forecasts represent participants individual assessments of appropriate policy, given their projections of Economic Growth, employment, inflation, and other factors. However, the Economic Outlook is inherently uncertain, so each assessment of appropriate policy is also necessarily uncertain, especially at longer time horizons, and will change in response to changes in the Economic Outlook and associated risks. Finally, the committee will continue its policy of reinvesting proceeds from maturing treasury securities and principal payments from agency debt and Mortgage Backed securities. As highlighted in our policy statement, we anticipate continuing this policy until normalization of the level of the federal funds rate is well underway. Maintaining our sizable holdings longerterm securities should help to maintain accommodative financial conditions and should reduce the risk that we may have to lower the federal fund rate 20, in the event of a future large, adverse shock. Thank you. I would be happy to take your questions. One of the big uncertainties hanging over markets is the vote in the United Kingdom next week. How much of a factor was that in todays decision, relative to you elucidated about the jobs and inflation data, and could you talk about the channels when you talk about the potential impact of a brexit on the u. S. Economy . Well, brexit, the upcoming decision on whether to leave the european union, is something we discussed. I think it is fair to say it is one of the factors that factored. Nto todays decisions clearly, this is a very important decision for the United Kingdom and for europe. It is a decision that could have consequences for economic and financial conditions in global Financial Markets. If it does so, it could have consequences in turn for the u. S. Economic outlook that would be a factor in deciding on the appropriate path of policy. It is certainly one of the uncertainties that we discussed and that factored into todays decision. The feds outlook for rates has been coming down sharply, but has been coming down over time, almost a full percentage point in some cases, compared to a year ago. Yet the gdp outlook remains the same. What has happed in the past quarter to the committees outlook to bring down rate so much, now just 2. 4 , and further from the long run than it was in the prior estimate that was out there. Has there been a dramatic change in the committees view on the relationship of gdp to rates, and maybe you could explain why the fed keeps having to lower the rate and getting the forecast wrong. Chair yellen as i mentioned in my opening remarks, there is really a great deal of uncertainty around each assessment of the appropriate level of rates, particularly as we go further out in the forecast horizon, and when we come to the longterm. I think what we can see, what , is thedies show mainly,d neutral rate, the level of the fed funds rate that is consistent with the economy growing roughly at trends and operating at full employment. That rate is quite depressed by historical standards. Many estimates would put it in real or inflationadjusted terms near zero. The path that you see in the dot plot for rates over time is importantly influenced. There is a accommodation. As we achieve our objectives, i think, most participants feel the accommodation in the current stance of policy needs to be gradually removed. But a very important influence in the out years is what will happen to that neutral rate that will just keep the economy operating on an even keel. I have often come in my statements and remarks, talked that reflect the lingering affects of the financial crisis. To the extent there are headwinds, i think, many of us expect these headwinds would gradually diminish over time. That is a reason why you see the upward path for rates. But there are also more longlasting or persistent factors that may be at work that runholding down the longer level of neutral rates. For example, slow productivity growth, which is not just a u. S. Phenomenon, but a global phenomenon. Obviously, there is a lot of uncertainty about what will happen to productivity growth, but productivity growth could stay along for some time. Society in many parts of the world that could depress this neutral rate. I think all of us are involved in a process of constantly reevaluating where is that neutral rate going. What you see is a downward shift in the assessment overtime in the sense that maybe more of what is causing this neutral rick to be low, are factors that will not be disappearing, but will be part of the new normal. An assessment that the neutral rate will move up somewhat, but it has been coming down, and i think it continues to be marked lower. And it is highly uncertain. The median participant forecast for the fed funds are for 2017, 2018 came down quite dramatically. This stands in contrast with the 2016 meeting forecast. As you mentioned, there were six participants who saw only one rate hike this year. Can you comment on what it would toe for two rate increases be the likely or appropriate policy path . About this disconnect between the median view and the view of, say, the voting members of the committee if there is one, i should add. Not going to i am comment on participants versus voters. Policy, thenetary Monetary Policy, but we are looking at several years, we should show the public of the views are of all the participants in the committee, especially given voting rotates every year. That is a decision we made. But you asked me what it would take to have two increases. The committee, as a whole, never discusses how many increases we should have this year or next year. That is not a decision we are making as a committee. We are making decisions on a meeting by meeting basis and trying to give a sense to the public of what we are looking for and what the basis of a decision will be. All,indicated, first of international uncertainties loom large here. , the u. K. Ed brexit decision, obviously, how that turns out is something that will factor into future decisions. We are also looking at the prospects for Economic Growth and continued progress in the labor market. The forecast that you see in the scp and statement indicates the committee expects to have moderate growth, 2 growth suggests healthy growth for the rest of the year and a pickup in growth for the Second Quarter. We expect to see continuing progress in the labor market. We had questions about the growth outlook, because we did see Slower Growth in the Fourth Quarter and in the First Quarter. Slowdown,ct to the that seemed to be out of line with fundamentals. Weexpected it to pick up and have seen good evidence that it has picked up. But now the labor market appears to have slowed down. Ourselves thatre the underlying momentum in the economy has not diminished. Said, we will be carefully assessing data on the labor to make sure job gains are going to continue with a pace sufficient to result in further improvement of the labor market. We will be watching the spending data to make sure growth is picking up in line with our expectations. Of course, with respect to inflation, we are constantly evaluating whether or not incoming information is roughly in line with our expectations. So we will be evaluating that at every meeting. Every meeting is live. We could make a decision at any meeting to adjust the funds rate. That is the kind of thing that we will want to see to make such decisions. The fed created a labor Market Conditions index for couple of years ago that was designed to bring together a lot of these factors. I am sure you know you know it has been falling since january. That suggest to some people that it was your decision to raise rates in december that has caused this weakening in the labor market. Could you address what role, if any, the fes decision to raise rates played in the snow and we are now seeing . Chair yellen let me say, the labor markets index is kind of an experimental product that is a summary measure of many different indicators. Essentially, that measure tries to assess the change in labor Market Conditions. As i look at it, as the index looks at things, the state of the labor market is still healthy, but there has been something of a loss of momentum. Saw200,000 jobs a month we in the First Quarter of the year , that slowed in recent months. Exactly what the reasons are for that slowing, it is difficult to say. Again, we should never pay too much attention, for example, to one job market report. We often see large revisions. We should not overload the point. Cance of one data especially when other indicators in the market are still flashing green. Initial claims for Unemployment Insurance remain low. Perceptions of the labor market remain fine. Job openings continues to reach new highs. There is a good deal of incoming data that does signal continued progress and strength in the labor market. But as i said, it does bear watching. The committee does not feel and does not expect, i do not expect that labor Market Progress has come to an end. We have tried to make clear to the public, and through our actions, and through the revisions you see over time in the dot plots, we do not have a fixed plan for raising rates over time. We look at incoming data and are prepared to adjust our views to keep the economy on track. In light of that data dependence of our policy, i really do not think a single rate increase of 25 basis points in december has had much significance for the outlook, and we will continue to adjust our thinking in light of incoming data in whatever direction is appropriate. I want to come back to these longer run rate reductions you have been asked about. On 10 year treasury notes have fallen below 1. 6 . 5year notes, near 1 . Inewhere in the world, germany and japan, longterm bond yields are negative. How do you explain this low level of longterm bond yields, and doesnt give you any pause in looking at your own projections, coming to a conclusion about whether those projections are possibly still way too high, and the bond market is at a much lower level . Chair yellen i think the levels of longerterm rates reflect essentially two things. One is Market Expectations about the path of shortterm rates, if we are considering a 10year treasury security, what would be the path of shortterm rates over the next 10 years . The second factor is the socalled term premium, or the that investors demand in order to hold a longerterm security, instead of to invest shortterm. Clearly, Market Expectations for the path of shortterm Interest Rates over the next 10 years remain low. That is a factor, that is an important factor that, i think, holding down the level of longerterm yields. Perhaps as important, or maybe even more important, the term premium is also low and has also probably come down. When we engaged in longerterm asset purchases, our very purpose in doing that was to drive down longerterm yields by ,aking these assets scarcer more valuable to the public that wants to invest in longerterm securities. We were consciously attempting to drive down that premium. We continue to hold a large quantity of those securities, but we are not adding to them. , theny parts of the world ecb, for example, the bank of japan, are also engaging in quantitative easing, buying longerterm assets, and pushing down those term premium. Those are very low, as well as the expected path of short rates. [inaudible] i want to say again, we are quite uncertain about where rates are heading in the longerterm. We write down our best estimates. At this time, of what is a longer than normal run of the federalunderrate funds rate. There is great uncertainty in that number. As i said, we have good reason to believe this socalled neutral rate, rate compatible with the economy operating at full employment is low at the present time. Believe as a base case it is reasonable to assume those rates will move up over time, but we are not certain of that. It is one of the uncertainties. There could be revisions in either direction. Recent times, revisions have mainly been in a downward direction. The idea that a loan neutral rate may be closer to the new normal. But you do still see some reversions