Stop-go policy possibility in future

If we maintain a highly accommodative monetary policy for a very long time from here and the economy performs as we expect, namely, it's strong and the risks that are out there don't materialize, my concern will be that we will have much more tightening in labor markets than you see in these projections. And the lags will be probably slow. But eventually we will find ourselves with a substantial overshoot of our inflation objective. And then we'll be forced into a kind of stop-go policy. We will have pushed the economy so far it will have become overheated. And we will then have to tighten policy more abruptly than we like. And instead of having slow, steady growth, improvement in the labor market. 

And continued improvement and good performance in the labor market, I don't think it's good policy to then have to slam on the brakes and risk a downturn in the economy.

Global economy considerations

So with respect to global developments we reviewed developments in all important areas of the world but we have focused particularly on China and emerge markets. Now we have long expected and most analysts have to see some slowing in Chinese growth over time as they rebalance their economy. And they have planned that. And I think there are no surprises there.

The question is whether or not there might be a risk of a more abrupt slowdown than most analysts expect. And I think developments that we saw in financial markets in August in part reflected concerns that there was downside risk to Chinese economic performance and perhaps concerns about the -- the gaps where policymakers were addressing those concerns in addition we saw a very substantial downward pressure on oil prices in commodity markets. And those developments have had a significant impact on many emerging market economies that are important producers of commodities as well as more advanced countries including Canada which is an important trading partner of ours that's been negatively affected by declining commodity prices, declining energy prices. Now there are a lot of countries that are net importers of energy that are positively affected by those developments. But emerging markets important emerging markets have been negatively affected by those developments. And we have seen in significant outflows of capital from those countries, pressures on their exchange rates and concerns about their performance going forward so a lot of our focus has been on risks around China. But not just China, emerging markets more generally and how they may spill over to the United States. In terms of thinking about financial developments and our reaction to them, I think a lot of the financial developments were really -- so we don't want to really respond to market turbulence. 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 intermeeting 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 looking at as I emphasized a U.S. economy that has been performing well. And impressing us by the pace at which it's creating jobs. And the strength of domestic demand.

So we have that. We have some concerns about negative impacts from global developments and some tightening of financial conditions. We're trying to put all of that together in a picture.

I think importantly, we say in our statement that inspite of all of this, we continue to view the risks to economic activity and labor markets as balanced. So it's a lot of different pieces, different cross currents. Some strengthening the outlook. Some creating concerns. But overall, no significant change in the economic outlook.

Targeting inflation of over 2 percent

We're not trying to push the inflation rate above 2. It's always our objective to get back to 2. But 2% is not a ceiling. And if it were a ceiling, you would have to be conducting a policy that on average would hold the inflation rate below 2%. That is not our policy. We want to see the inflation rate get back to 2% as rapidly as we can.

But there are lags in the impact of money on the policy of our economy. And if we waited until inflation is back to two and that would probably mean that unemployment had declined well below our estimates of the natural rate and only then did we start to begin to -- you know the word tighten monetary policy I don't think is really right because we have an immensely accommodative monetary policy in place. 

So let me say just to begin to diminish the extraordinary degree of accommodation for monetary policy, we would be over-- we would likely overshoot substantially our 2% objective. And we might be faced within having to tighten policy in a way that could be disruptive to the real economy. And I don't think that's a desirable way to conduct policy.

Could see rate hike in October 2015 according to Janet Yellen

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.

And we will be looking at incoming developments, both financial and economic to try to make sure we feel really that the U.S. economy is doing well.

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.

I can't give you a recipe for exactly what we're looking to see. But as we say, we want to see continued improvement in the labor market and we would like to bolster our confidence that inflation will move back to 2%. And of course a further improvement in the labor market does serve that purpose. There could be other things we would see that could bolster that confidence. But further improvement in the labor market will serve to do that.

Expected rate hike target ranges more important than timing of rate hike says Janet Yellen

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% 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 towards our objectives.

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.

Concerns of overseas markets | Janet Yellen

The outlook abroad appears to have become more uncertain of late. And height end concerns about growth in -- heightened concerns about growth in China and other emerging market economies have led to volatility in financial markets. 

Development 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. 

These developments may restrain U.S. economic activities somewhat and are likely to put further downward pressure on inflation in the near term. Given the significant economic and financial interconnections between the United States and the rest of the world, the situation abroad bears close watching.

Reaffirming Fed Funds target rate range 0 to 25%

Good afternoon, as you know from our policy statement released a short time ago the Federal Open Market Committee reaffirmed the current 0 to .25% target range for the Federal funds rate. Since the committee met in July, the pace of job gains has been solid. 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.

Where 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.

The committee continues to anticipate that the first increase in the Federal funds rate will be appropriate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term.

It remains the case that the committee will determine the timing of the initial increase based on its assessment of the implications of incoming information for the economic outlook.

I will note that the importance of the initial increase should not be overstated. The stance of monetary policy will likely remain highly accommodative for quite some time after the initial increase in the Federal funds rate in order to support continued progress toward our objectives with maximum employment and 2% inflation.

I will come back to today's policy decision in a few moments. But first I would like to review recent economic developments and the outlook.

Smoothing through the quarterly volatility, U.S. real gross domestic product is estimated to have expanded at a 2.25% pace in the first half of the year. A notably stronger outcome than expected in June when committee participants had submitted economic projections.

Continued job gains and increases in real disposable income have supported household spending.

Growth in business fixed investment was moderate. Held down in part by a significant contraction in oil drilling activity as a result of the large drop in oil prices over the past year.

Moreover, net exports were a substantial drag on 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 a moderate pace of overall GDP growth, even though the 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% 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.

A broader measure of unemployment that includes individuals who want and are available to work but have not actively searched recently. And people who are working part time but would rather work full time has continued to improve.

That said, some cyclical weakness likely remains. While the unemployment rate is close to most FOMC participants estimates of the longer run normal level, the participation rate is still below estimates of its underlying trend. And voluntary part-time employment remains elevated and wage growth remains subdued.

Inflation has continued to run below our 2% objective. Partly reflecting declines in energy and import prices.

Low inflation is a problem for the Fed

Very low inflation may not sound like a real problem to many people. However, persistently low price inflation, which can tend to slow the pace of wage increases over time, can weaken the economy by, for example, making it more difficult for households and firms to pay off their debts. 

A persistent, very low inflation environment also tends to result in chronically low short-term interest rates. This type of situation would leave less scope for the FOMC to respond with its conventional monetary policy tool--namely, a cut in the federal funds rate--to counteract a weakening in the economy.

Will Janet Yellen raise rates ?

Will she or won’t she? Market commentators and the media will be all a-tizzy this week in anticipation of the September meeting of the Federal Open Market Committee (FOMC) and comments from U.S. Federal Reserve chairwoman Janet Yellen on Thursday. The question on their minds, and many investors’ minds too, is whether the Fed will, at long last, raise the target interest rate from zilch, where it has been sitting since 2009.
Fears grow that a U.S. Fed rate hike this week could unleash a global debt crisis

The world has now racked up more debt than before the 2008 crisis, making the global financial system dangerously vulnerable to tightening by the Fed, the top banking watchdog warns.

If Yellen does make her move, it will be both something of a surprise to the markets and something of a watershed in global monetary policy. 

Consumer inflation numbers are at lowest levels in 3 years

Consumer expectations for inflation three years ahead fell last month to the lowest level in records going back to June 2013, according to a Federal Reserve Bank of New York survey released Monday.

The median respondent to the New York Fed’s August Survey of Consumer Expectations predicted annual consumer price inflation three years hence would be 2.9 percent, down from 3 percent the month before. Median expected inflation a year ahead fell to 2.8 percent from 3 percent, marking the second-lowest response in the history of the survey.

The results come ahead of Sept. 16-17 meeting of Fed policy makers in Washington at which Fed Chair Janet Yellen and her colleagues will debate whether to raise interest rates for the first time in nearly a decade.

Officials said in a statement following their last meeting in July that they needed to see “some further improvement” in the job market and be “reasonably confident” in the inflation outlook. Their preferred measure of prices, the personal consumption expenditures price index, was up 0.3 percent in July from a year earlier and has run below the central bank’s 2 percent target for over three years.

Rate hikes to be gradual and modest if we see it

Fed Chair Janet Yellen has indicated she’d like to begin the rate increases sometime in 2015, though she says that weak economic data could cause the Fed to delay. The Fed has held short-term rates near zero since late 2008 in an effort to end the Great Recession and to strengthen the recovery.

Perhaps more important than when the Fed raises rates is how large the subsequent increases are and how quickly they come. Yellen has said she expects increases to be gradual and modest.