Raise rates or hold

Janet Yellen, chair of the US Federal Reserve, and other members of the FOMC (Federal Open Market Committee) decided against raising U.S. interest rates last month in September 2015. The FOMC will meet again this week to reconsider. What should we expect? Should Janet Yellen try and raise rates or hold steady ?

Fed has NOT made income inquality worse says Yellen

It is true that interest rates effect asset prices but they have complex effect through balance sheets through liabilities and assets. To me the main thing that an accommodative monetary policy does is put people back to work. Since income inequality is surely exacerbated by having a high unemployment and a weak job market that has the most profound negative effects on the most vulnerable individual, to me putting people back to work and seeing a strengthening of the labor market that has a disproportionately favorable effect on vulnerable portions of our population, that's not something that increases income inequality.

There have been a number of studies that have been done recently that have tried to take account of many different ways in which monetary policy, acting through different parts of the transmission mechanism affect inequality and there's a lot of guesswork involved and different analyses can come up with different things. But a pretty recent paper that's quite comprehensive concludes that the -- that Fed policy has not exacerbated income inequality.

We try our best to make the best economic decision with available data

I think the main drivers of the turbulence have been concerns about the global outlook. That's how I read it. But I know that of course there is uncertainty about Fed policy. As I mentioned, we're well aware that there's been a huge focus on the decision today. And you know I would ask you to appreciate that there are a lot of cross currents in economic and financial developments that we need to take into account in deciding on what the appropriate course of policy is. And we don't make continuous decisions every single day about our policy. We meet periodically. 

We do our darnest to pull together the best analysis we can. And to exchange views. And to arrive at committee decisions. I do understand that during this inter-meeting period, that every word that an FOMC member has said has been parsed for its potential implications for what our decision will be. I think that's an unfortunate state of affairs.

But I understand I think it's natural when you're at a point when the conditions may be falling in place for there to be a shift in policy. It's natural that that should happen. And it does to some extent contribute to uncertainty in financial markets.

Expecting housing market to improve more

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 have 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's not the driver of -- 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 decent outlook for investment spending but I would continue to expect housing to improve and remember we're envisioning if things go the way 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. 

On the other hand as time passes and we move beyond the window in which short rates are zero it will be natural for long rates to rise some and of course we recognize that the housing market is sensitive to mortgage rates it is an important factor but that's something that of course we're taking into account in thinking about what's the appropriate path of policy.

Janet Yellen on negative interest rates

Let me be clear that negative interest rates was not something that we considered very seriously at all today. It was not one of our main policy options. But one participate in the committee would like to see additional accommodation is concerned by the inflation outlook and thinks that we need additional stimulus, additional accommodation, to provide that and propose doing so by moving interest rates negative. That's something we have seen in several European countries. It's not something we talked about today. 

Look, I don't expect that we're going to be in a path of providing additional accommodation. But if the outlook were to change in a way that most of my colleagues and I do not expect, and we found ourselves with a weak economy that needed additional stimulus, we would look at all of our available tools. And that would be something that we would evaluate in that kind of context.