Janet Yellen speech at University of Baltimore

In a moment, I will explain why I am particularly proud and honored to be speaking to the new graduates of this university, but first I'd like to address students on a topic that I expect is on the minds of many of you, which is the job market.

The short version of what I have to say is that while I expect workers will continue to face some challenges in the coming years, I believe, for two reasons, that the job prospects and career opportunities for new graduates at this time are very good. First, after years of a slow economic recovery, you are entering the strongest job market in nearly a decade. The unemployment rate, at 4.6 percent, is near what it was before the recession. This is a level that has been associated with good job opportunities. Job creation is continuing at a steady pace; the layoff rate is low; and job openings are up over the past couple years, which is another sign of a healthy job market. There are also indications that wage growth is picking up, and weekly earnings for younger workers have made strong gains over the past couple of years. That is probably one reason why younger workers reported feeling significantly more optimistic about the job market compared with 2013, according to a survey published just today by the Federal Reserve.

Challenges do remain. The economy is growing more slowly than in past recoveries, and productivity growth, which is a major influence on wages, has been disappointing.

But it also looks like the economic gains of the past few years are finally raising living standards for most people. Median household income grew and poverty fell significantly in 2015, although these measures were still lagging their levels from before the recession. An improving economy may be especially important for you, as new graduates. Those who graduate and enter the workforce during a strong economy are more likely to find employment, remain employed, and enjoy persistently higher earnings.

The second reason for optimism is that you have already done the one thing that research shows is most important to a successful and stable working life: earning the degrees you will receive today. Economists are not certain about many things. But we are quite certain that a college diploma or an advanced degree is a key to economic success. Those with a college degree are more likely to find a job, keep a job, have higher job satisfaction, and earn a higher salary. The advantage in earnings is large. College grads' annual earnings last year were, on average, 70 percent higher than those with only a high school diploma. Back in 1980, the difference was only 20 percent. The gap in earnings is significant only a few years after graduation--almost $18,000 a year, according to some recent data. Beyond these advantages, research also shows that a college or graduate degree typically leads to a happier, healthier, and longer life.

One explanation for the greater advantage in recent decades conferred by higher education is that it reflects an increase in the demand for educated workers compared with others. The drivers of this increasing demand for those with college and graduate degrees are likely to continue to be important. Let me mention two of the most important factors.

First, technology. For decades, technological advances have increasingly allowed simpler, repetitive tasks to be done more cheaply and safely by machines. This kind of work in factories, stores, and offices often required only a high school education. At the same time, technological advances have increased demand for workers with the education necessary to perform the ever-growing share of jobs where technology is important. More recently, further advances are automating increasingly complex tasks and allowing workers with the ability and flexibility to use technology to be more productive. Higher education has also changed in response, and one of the most important things many of you learned at the University of Baltimore was how to learn, adapt, and succeed in the technology-rich environment of most workplaces.

The second major development in the job market is globalization, which allows goods and services to be produced wherever it is most economical. Offshoring and trade have profoundly affected the U.S. economy. No one knows which jobs and which industries will thrive as globalization continues or how each of you will be affected, but I can say that the education you have earned will provide an important advantage. Like technological change, globalization has reinforced the shift away from lower-skilled jobs that require less education to higher-skilled jobs that require college and advanced degrees. The jobs that globalization creates in the United States, serving a global economy of billions of people, are more likely to be filled by those who, like you, have secured the advantage of higher education.

While globalization will likely continue and technology will continue to advance, we don't know how fast the economy will grow, what new technologies will be developed, or how quickly and consistently employment will expand. What is considerably more certain, however, is that success will continue to be tied to education, in part because a good education enhances one's ability to adapt to a changing economy.

One reason for the increasing economic advantage of a college or graduate degree is the very slow growth of earnings in the last few decades for those with only a high school education. It concerns me, as it should concern all of us, that many are falling behind. Improvements in elementary and secondary education can help prepare more people for college and the opportunities college makes available, but for those who do not attend college, we must find other ways to extend economic opportunity to everyone in America.

In discussing higher education, you may have noticed that I have spoken in terms of completing your degrees. Research shows that a large share of the benefits I have described from higher education comes only to those who graduate. Even those completing three or more years of college benefit much less when they don't get a degree. For example, some of you may be worried about paying off loans you have taken out to pay for your education. The good news is that the vast majority of student borrowers who complete their degrees find work that allows them to keep up with their payments and pay off their loans.

Everything I have said so far could apply to the graduates this year of any college or university. The rest of what I have to say is about you, the 2016 graduates of the University of Baltimore. I have learned a bit about you recently, with the help of the university's staff. Let me tell you a few things about some of your classmates that you may not know.

Among you today is a full-time student who found the time each semester to volunteer with non-profit organizations, including one that helps refugees from other countries find their place in this community. Another of your fellow students, who used to doubt that she could ever afford college, has become a student leader. She made the Dean's List every semester after transferring from community college.

Like many of you, another of your fellow graduates took day and evening classes to balance work and family demands. She was forced to change jobs to accommodate this schedule. She later decided her future lay in digital communications, which required her to switch majors after taking some required classes. Today she will become the first person in her family to graduate from college.

Some of you were born in other countries. One of you lived in four other countries before coming to the University of Baltimore for a master's degree. Many of you have contributed to the sense of community at the University of Baltimore by actively participating in student life. One of you has even decided to seek a career helping other students as a student affairs professional.

These are a few of the outstanding people who will join you in walking across this stage today. Let me describe one more.

To that student, sitting in the audience, I would say: you deserve a tremendous amount of credit. Based on what I have learned, you did not have all of the advantages that can pave the way to college and graduate school. You overcame obstacles to make it here, and more obstacles to complete your degree. One of the biggest of these obstacles, in fact, was that some people doubted you could or would succeed. But others in your life believed in you. Some of them are here today. They believed in you, and you believed in yourself, and your talent and intelligence and hard work enabled you to earn the degree you are about to receive.

If this sounds like you, then you are absolutely right, because I am not describing just one member of the University of Baltimore's Class of 2016--I am trying to describe every one of you. In different ways, I expect all of you have overcome obstacles and demonstrated resilience and determination to succeed. All of you have gained knowledge and used your intelligence and talents to complete your degrees. As impressed as I am with any individual graduating today, I am more impressed with what all of you have achieved.

Let me tell you what else I have learned. More than the students of some colleges and universities, I know that many of you have deep roots in this city and in the county. Many of you will start careers, build your lives, and raise your families here. The challenges you have overcome are the challenges faced by many people in Baltimore and in communities throughout America. Your success, which we celebrate today, is also the promise of a brighter future for this city. The degrees you have worked so hard to earn and the opportunities now opening up to you represent the stubborn, earnest hope that anyone and everyone who strives to succeed still can succeed.

And that is why I consider it a rare privilege to speak to you today, and a great honor to be associated with the University of Baltimore and the members of the Class of 2016. Thank you, and congratulations. 

Rate Hike may be possible in December 2016

Janet Yellen announced recently that the central bank would once again hold off on raising its interest rate target, opting instead to wait for the American economy to pick up steam before tightening its monetary policy.

The Federal Open Market Committee (FOMC), which determines the target for the interest rate at which banks lend to one another in the short term, is expected to raise its rate target after the group’s next meeting, between Dec. 13 and 14, 2016. 

“From a policy perspective, we of course need to bear in mind that an accommodative monetary stance, if maintained too long, could have costs that exceed the benefits by increasing the risk of financial instability or undermining price stability.” 

Strong confidence in monetary policies to deal with economic crisis

Although fiscal policies and structural reforms can play an important role in strengthening the U.S. economy, my primary message today is that I expect monetary policy will continue to play a vital part in promoting a stable and healthy economy. 

New policy tools, which helped the Federal Reserve respond to the financial crisis and Great Recession, are likely to remain useful in dealing with future downturns. Additional tools may be needed and will be the subject of research and debate. But even if average interest rates remain lower than in the past, I believe that monetary policy will, under most conditions, be able to respond effectively. 

We need to increase our productivity growth

Beyond monetary policy, fiscal policy has traditionally played an important role in dealing with severe economic downturns. A wide range of possible fiscal policy tools and approaches could enhance the cyclical stability of the economy.  For example, steps could be taken to increase the effectiveness of the automatic stabilizers, and some economists have proposed that greater fiscal support could be usefully provided to state and local governments during recessions. As always, it would be important to ensure that any fiscal policy changes did not compromise long-run fiscal sustainability.

Finally, and most ambitiously, as a society we should explore ways to raise productivity growth. Stronger productivity growth would tend to raise the average level of interest rates and therefore would provide the Federal Reserve with greater scope to ease monetary policy in the event of a recession. But more importantly, stronger productivity growth would enhance Americans' living standards. Though outside the narrow field of monetary policy, many possibilities in this arena are worth considering, including improving our educational system and investing more in worker training; promoting capital investment and research spending, both private and public; and looking for ways to reduce regulatory burdens while protecting important economic, financial, and social goals. 

How Federal Reserve can fight future turmoils

What does the future hold for the Fed's toolkit? For starters, our ability to use interest on reserves is likely to play a key role for years to come. In part, this reflects the outlook for our balance sheet over the next few years. As the FOMC has noted in its recent statements, at some point after the process of raising the federal funds rate is well under way, we will cease or phase out reinvesting repayments of principal from our securities holdings. Once we stop reinvestment, it should take several years for our asset holdings--and the bank reserves used to finance them--to passively decline to a more normal level. But even after the volume of reserves falls substantially, IOER will still be important as a contingency tool, because we may need to purchase assets during future recessions to supplement conventional interest rate reductions. 

Forecasts now show the federal funds rate settling at about 3 percent in the longer run. In contrast, the federal funds rate averaged more than 7 percent between 1965 and 2000. Thus, we expect to have less scope for interest rate cuts than we have had historically.

In part, current expectations for a low future federal funds rate reflect the FOMC's success in stabilizing inflation at around 2 percent--a rate much lower than rates that prevailed during the 1970s and 1980s. Another key factor is the marked decline over the past decade, both here and abroad, in the long-run neutral real rate of interest--that is, the inflation-adjusted short-term interest rate consistent with keeping output at its potential on average over time. Several developments could have contributed to this apparent decline, including slower growth in the working-age populations of many countries, smaller productivity gains in the advanced economies, a decreased propensity to spend in the wake of the financial crises around the world since the late 1990s, and perhaps a paucity of attractive capital projects worldwide. Although these factors may help explain why bond yields have fallen to such low levels here and abroad, our understanding of the forces driving long-run trends in interest rates is nevertheless limited, and thus all predictions in this area are highly uncertain. 

Would an average federal funds rate of about 3 percent impair the Fed's ability to fight recessions? Based on the FOMC's behavior in past recessions, one might think that such a low interest rate could substantially impair policy effectiveness. As shown in the first column of the table in the handout, during the past nine recessions, the FOMC cut the federal funds rate by amounts ranging from about 3 percentage points to more than 10 percentage points. On average, the FOMC reduced rates by about 5-1/2 percentage points, which seems to suggest that the FOMC would face a shortfall of about 2-1/2 percentage points for dealing with an average-sized recession. But this simple comparison exaggerates the limitations on policy created by the zero lower bound. As shown in the second column, the federal funds rate at the start of the past seven recessions was appreciably above the level consistent with the economy operating at potential in the longer run. In most cases, this tighter-than-normal stance of policy before the recession appears to have reflected some combination of initially higher-than-normal labor utilization and elevated inflation pressures. As a result, a large portion of the rate cuts that subsequently occurred during these recessions represented the undoing of the earlier tight stance of monetary policy. Of course, this situation could occur again in the future. But if it did, the federal funds rate at the onset of the recession would be well above its normal level, and the FOMC would be able to cut short-term interest rates by substantially more than 3 percentage points.

A recent paper takes a different approach to assessing the FOMC's ability to respond to future recessions by using simulations of the FRB/US model.19 This analysis begins by asking how the economy would respond to a set of highly adverse shocks if policymakers followed a fairly aggressive policy rule, hypothetically assuming that they can cut the federal funds rate without limit. It then imposes the zero lower bound and asks whether some combination of forward guidance and asset purchases would be sufficient to generate economic conditions at least as good as those that occur under the hypothetical unconstrained policy. In general, the study concludes that, even if the average level of the federal funds rate in the future is only 3 percent, these new tools should be sufficient unless the recession were to be unusually severe and persistent.

Figure 2 in your handout illustrates this point. It shows simulated paths for interest rates, the unemployment rate, and inflation under three different monetary policy responses--the aggressive rule in the absence of the zero lower bound constraint, the constrained aggressive rule, and the constrained aggressive rule combined with $2 trillion in asset purchases and guidance that the federal funds rate will depart from the rule by staying lower for longer. As the blue dashed line shows, the federal funds rate would fall far below zero if policy were unconstrained, thereby causing long-term interest rates to fall sharply. But despite the lower bound, asset purchases and forward guidance can push long-term interest rates even lower on average than in the unconstrained case (especially when adjusted for inflation) by reducing term premiums and increasing the downward pressure on the expected average value of future short-term interest rates. Thus, the use of such tools could result in even better outcomes for unemployment and inflation on average.

Of course, this analysis could be too optimistic. For one, the FRB/US simulations may overstate the effectiveness of forward guidance and asset purchases, particularly in an environment where long-term interest rates are also likely to be unusually low.22 In addition, policymakers could have less ability to cut short-term interest rates in the future than the simulations assume. By some calculations, the real neutral rate is currently close to zero, and it could remain at this low level if we were to continue to see slow productivity growth and high global saving. If so, then the average level of the nominal federal funds rate down the road might turn out to be only 2 percent, implying that asset purchases and forward guidance might have to be pushed to extremes to compensate. Moreover, relying too heavily on these nontraditional tools could have unintended consequences. For example, if future policymakers responded to a severe recession by announcing their intention to keep the federal funds rate near zero for a very long time after the economy had substantially recovered and followed through on that guidance, then they might inadvertently encourage excessive risk-taking and so undermine financial stability.

Finally, the simulation analysis certainly overstates the FOMC's current ability to respond to a recession, given that there is little scope to cut the federal funds rate at the moment. But that does not mean that the Federal Reserve would be unable to provide appreciable accommodation should the ongoing expansion falter in the near term. In addition to taking the federal funds rate back down to nearly zero, the FOMC could resume asset purchases and announce its intention to keep the federal funds rate at this level until conditions had improved markedly--although with long-term interest rates already quite low, the net stimulus that would result might be somewhat reduced.

Despite these caveats, I expect that forward guidance and asset purchases will remain important components of the Fed's policy toolkit. In addition, it is critical that the Federal Reserve and other supervisory agencies continue to do all they can to ensure a strong and resilient financial system. That said, these tools are not a panacea, and future policymakers could find that they are not adequate to deal with deep and prolonged economic downturns. For these reasons, policymakers and society more broadly may want to explore additional options for helping to foster a strong economy.

On the monetary policy side, future policymakers might choose to consider some additional tools that have been employed by other central banks, though adding them to our toolkit would require a very careful weighing of costs and benefits and, in some cases, could require legislation. For example, future policymakers may wish to explore the possibility of purchasing a broader range of assets. Beyond that, some observers have suggested raising the FOMC's 2 percent inflation objective or implementing policy through alternative monetary policy frameworks, such as price-level or nominal GDP targeting. I should stress, however, that the FOMC is not actively considering these additional tools and policy frameworks, although they are important subjects for research. 

Fed would consider buying stocks directly in the future

The Fed is more restricted in which assets it can purchase than other central banks. If we found, I think as other countries did, that they could reach the limits in terms of purchasing safe assets like longer-term government bonds, it could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions.

Unveiling the Feds new toolkit

To address the challenges posed by the financial crisis and the subsequent severe recession and slow recovery, the Federal Reserve significantly expanded its monetary policy toolkit. In 2006, the Congress had approved plans to allow the Fed, beginning in 2011, to pay interest on banks' reserve balances.

In the fall of 2008, the Congress moved up the effective date of this authority to October 2008. That authority was essential. Paying interest on reserve balances enables the Fed to break the strong link between the quantity of reserves and the level of the federal funds rate and, in turn, allows the Federal Reserve to control short-term interest rates when reserves are plentiful. In particular, once economic conditions warrant a higher level for market interest rates, the Federal Reserve could raise the interest rate paid on excess reserves--the IOER rate. A higher IOER rate encourages banks to raise the interest rates they charge, putting upward pressure on market interest rates regardless of the level of reserves in the banking sector.

While adjusting the IOER rate is an effective way to move market interest rates when reserves are plentiful, federal funds have generally traded below this rate. This relative softness of the federal funds rate reflects, in part, the fact that only depository institutions can earn the IOER rate. To put a more effective floor under short-term interest rates, the Federal Reserve created supplementary tools to be used as needed. For instance, the overnight reverse repurchase agreement (ON RRP) facility is available to a variety of counterparties, including eligible money market funds, government-sponsored enterprises, broker-dealers, and depository institutions. Through it, eligible counterparties may invest funds overnight with the Federal Reserve at a rate determined by the FOMC. Similar to the payment of IOER, the ON RRP facility discourages participating institutions from lending at a rate substantially below that offered by the Fed.

Our current toolkit proved effective last December. In an environment of superabundant reserves, the FOMC raised the effective federal funds rate--that is, the weighted average rate on federal funds transactions among participants in that market--by the desired amount, and we have since maintained the federal funds rate in its target range.

Two other major additions to the Fed's toolkit were large-scale asset purchases and increasingly explicit forward guidance. Both were used to provide additional monetary policy accommodation after short-term interest rates fell close to zero. Our purchases of Treasury and mortgage-related securities in the open market pushed down longer-term borrowing rates for millions of American families and businesses. Extended forward rate guidance--announcing that we intended to keep short-term interest rates lower for longer than might have otherwise been expected--also put significant downward pressure on longer-term borrowing rates, as did guidance regarding the size and scope of our asset purchases.

In light of the slowness of the economic recovery, some have questioned the effectiveness of asset purchases and extended forward rate guidance. But this criticism fails to consider the unusual headwinds the economy faced after the crisis. Those headwinds included substantial household and business deleveraging, unfavorable demand shocks from abroad, a period of contractionary fiscal policy, and unusually tight credit, especially for housing. Studies have found that our asset purchases and extended forward rate guidance put appreciable downward pressure on long-term interest rates and, as a result, helped spur growth in demand for goods and services, lower the unemployment rate, and prevent inflation from falling further below our 2 percent objective.

Two of the Fed's most important new tools--our authority to pay interest on excess reserves and our asset purchases--interacted importantly. Without IOER authority, the Federal Reserve would have been reluctant to buy as many assets as it did because of the longer-run implications for controlling the stance of monetary policy. While we were buying assets aggressively to help bring the U.S. economy out of a severe recession, we also had to keep in mind whether and how we would be able to remove monetary policy accommodation when appropriate. That issue was particularly relevant because we fund our asset purchases through the creation of reserves, and those additional reserves would have made it ever more difficult for the pre-crisis toolkit to raise short-term interest rates when needed.

The FOMC considered removing accommodation by first reducing our asset holdings (including through asset sales) and raising the federal funds rate only after our balance sheet had contracted substantially. But we decided against this approach because our ability to predict the effects of changes in the balance sheet on the economy is less than that associated with changes in the federal funds rate. Excessive inflationary pressures could arise if assets were sold too slowly. Conversely, financial markets and the economy could potentially be destabilized if assets were sold too aggressively. Indeed, the so-called taper tantrum of 2013 illustrates the difficulty of predicting financial market reactions to announcements about the balance sheet. Given the uncertainty and potential costs associated with large-scale asset sales, the FOMC instead decided to begin removing monetary policy accommodation primarily by adjusting short-term interest rates rather than by actively managing its asset holdings.

That strategy--raising short-term interest rates once the recovery was sufficiently advanced while maintaining a relatively large balance sheet and plentiful bank reserves--depended on our ability to pay interest on excess reserves. 

Fed's simple toolkit for monetary policies came under pressure in 2007-2009

The global financial crisis revealed two main shortcomings of the simple toolkit. The first was an inability to control the federal funds rate once reserves were no longer relatively scarce. 

Starting in late 2007, faced with acute financial market distress, the Federal Reserve created programs to keep credit flowing to households and businesses.6 The loans extended under those programs helped stabilize the financial system. But the additional reserves created by these programs, if left unchecked, would have pushed down the federal funds rate, driving it well below the FOMC's target. To prevent such an outcome, the Federal Reserve took several steps to offset (or sterilize) the effect of its liquidity and credit operations on reserves.

By the fall of 2008, however, the reserve effects of our liquidity and credit programs threatened to become too large to sterilize via asset sales and other existing tools. Without sufficient sterilization capacity, the quantity of reserves increased to a point that the Federal Reserve had difficulty maintaining effective control over the federal funds rate. 

Fed's old policy toolkit was easy to use

Prior to the financial crisis, the Federal Reserve's monetary policy toolkit was simple but effective in the circumstances that then prevailed. Our main tool consisted of open market operations to manage the amount of reserve balances available to the banking sector.

These operations, in turn, influenced the interest rate in the federal funds market, where banks experiencing reserve shortfalls could borrow from banks with excess reserves. Before the onset of the crisis, the volume of reserves was generally small--only about $45 billion or so.

Thus, even small open market operations could have a significant effect on the federal funds rate. Changes in the federal funds rate would then be transmitted to other short-term interest rates, affecting longer-term interest rates and overall financial conditions and hence inflation and economic activity. This simple, light-touch system allowed the Federal Reserve to operate with a relatively small balance sheet--less than $1 trillion before the crisis--the size of which was largely determined by the need to supply enough U.S. currency to meet demand. 

When circumstances change, monetary policies need to adapt to it

Looking ahead, the FOMC expects moderate growth in real gross domestic product (GDP), additional strengthening in the labor market, and inflation rising to 2 percent over the next few years. Based on this economic outlook, the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives. Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook.

And, as ever, the economic outlook is uncertain, and so monetary policy is not on a preset course. Our ability to predict how the federal funds rate will evolve over time is quite limited because monetary policy will need to respond to whatever disturbances may buffet the economy. In addition, the level of short-term interest rates consistent with the dual mandate varies over time in response to shifts in underlying economic conditions that are often evident only in hindsight. For these reasons, the range of reasonably likely outcomes for the federal funds rate is quite wide. The reason for the wide range is that the economy is frequently buffeted by shocks and thus rarely evolves as predicted. 

When shocks occur and the economic outlook changes, monetary policy needs to adjust. What we do know, however, is that we want a policy toolkit that will allow us to respond to a wide range of possible conditions. 

US economy continuing to improve

U.S. economic activity continues to expand, led by solid growth in household spending. But business investment remains soft and subdued foreign demand and the appreciation of the dollar since mid-2014 continue to restrain exports. While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market. 

Smoothing through the monthly ups and downs, job gains averaged 190,000 per month over the past three months. Although the unemployment rate has remained fairly steady this year, near 5 percent, broader measures of labor utilization have improved. Inflation has continued to run below the FOMC's objective of 2 percent, reflecting in part the transitory effects of earlier declines in energy and import prices. 

Financial crisis was why we had to create innovations in monetary policies

The Global Financial Crisis and Great Recession posed daunting new challenges for central banks around the world and spurred innovations in the design, implementation, and communication of monetary policy. 

Odds of a Rate hike has increased

In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook.

Enough Economic growth has been created to improve labor market

In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.

Our decisions always depend on the degree to which incoming data continues to confirm the [Fed’s] outlook.

While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market.

The [Fed] expects moderate growth in real gross domestic product, additional strengthening in the labor market, and inflation rising to 2% over the next few years. Based on this economic outlook, the [Fed] continues to anticipate gradual increases in the federal funds rate will be appropriate over time.

Janet Yellen to speak in Jackson Hole on Friday August 26, 2016

Awaiting Fed Chair Yellen at Jackson Hole. Since the committee met in July 2016, another strong employment report has been received and the Q2 GDP numbers, although soft at the headline level, contained very solid readings on private consumption. We believe this will be sufficient for Chair Janet Yellen to give a more constructive assessment of labor markets and economic momentum in Jackson Hole on August 26.

If the August employment report, scheduled for release on September 2 (after the Economic Policy Symposium at Jackson Hole), is solid, then we expect the Fed to raise rates at its September meeting. That said, the concerns in some corners of the committee about the inflation outlook may support a shift in the reaction function away from observed labor market progress toward actual progress on inflation. Should this policy shift take place, then the next rate increase is likely to be deferred to December, if not further into 2017.

Appropriate monetary policy - press conference

Fed meeting likely to have a dovish outcome

Federal Reserve Chairwoman Janet Yellen will likely strike a dovish tone on interest rates against a backdrop of middling economic growth and slowly rising inflation, Ameriprise Financial Chief Market Strategist David Joy said yesterday.

The Fed's policymaking committee kicks off a two-day meeting Tuesday. Wall Street is not expecting the central bank to raise rates, but investors will be listening for clues about the path of future rate hikes during Yellen's press conference at the close of the meeting on Wednesday.

Markets rallied last month after Yellen said the Fed would "proceed cautiously in adjusting policy" in remarks to the Economic Club of New York. The Fed raised benchmark rates by a quarter of a percent in December. 

Four more Rate hikes expected this year

On 16 December 2015, the Fed Chair Janet Yellen raised rates by 0.25 percent, the first increase in nine years. On the day of the rise, the Dow jumped more than 200 points to 17,700.

The Fed had been looking at four rates rises this year in 2016. If there is carnage on Wall Street, that will be quietly forgotten about. There are indications the single quarter point raise could even be reversed. Neither of Yellen’s predecessors, Alan Greenspan or Ben Bernanke, were willing to let the markets tank, and it is unlikely that Yellen will want to either if she can possibly avoid it

Low inflation in medical sector

For Federal Reserve Chair Janet Yellen, the current too-low inflation rate is not only “transitory,” it’s also “idiosyncratic.”

"There are various idiosyncratic factors that affect core inflation. But I personally don’t think we’re in a world where inflation is being determined in a different way than it has historically."

Janet Yellen's role in 2016 Presidential race

When the Federal Reserve, led by Chair Janet Yellen, raised interest rates recently for the first time in nearly a decade – ending seven years of rates essentially sitting at zero – economy-watchers divided into two camps. One believes it was high time for the Fed to start moving away from the exceedingly easy monetary policy that was a staple of the response to the Great Recession. The other says that the economy is still too weak, with wages too low and the labor market too slack, to risk any rate increase right now.

The dispute boils down to which should be of greater concern: the specter of easy money sparking inflation as the economy recovers or the threat of rate hikes choking growth. Through its manipulation of the federal funds rate (which is the rate at which banks lend to each other) and its other tools, the Fed expands or contracts the money supply in an effort to achieve its so-called "dual mandate" of full employment and low inflation. Raising rates too fast hurts credit, economic growth and wages. Waiting too long, however, risks letting inflation get out of control.

Having sided with those who said it was time to hike, the question now for Yellen and the rest of the central bank's board is what comes next. Its answer will not only determine the course of the U.S. economy, but could very well affect who steps into the Oval Office after President Barack Obama takes his leave.

How would Yellen and co. play a role in the 2016 race? Well, while American elections get treated as a battle over leadership skills and personality, a huge part of the outcome is governed by simple economic fundamentals: If the economy is improving, the incumbent party wins. If it's not, the other folks do.

So if the Fed has hit the brakes too soon and the recovery gets stifled, that'll benefit the Republicans. But if it's right in its analysis and conditions keep improving – thereby cementing President Barack Obama's reputation as a turnaround artist – the Democrats will likely reap the rewards.