Janet Yellen Falters During Massachusetts Speech

FRB Speech With Slideshow Yellen, Inflation Dynamics And Monetary Policy September 24, 2015

FRB Speech With Slideshow Yellen, Inflation Dynamics And Monetary Policy September 24, 2015

[Janet Louise Yellen (born August 13, 1946):] Source: LYBIO.net
Moreover, after the recession officially ended in 2009, the subsequent recovery was significantly slowed by a variety of persistent headwinds, including households with underwater mortgages and high debt burdens, reduced access to credit for many potential borrowers, constrained spending by state and local governments, and weakened foreign growth prospects. In an effort to return employment and inflation to levels consistent with the Federal Reserve’s dual mandate, the FOMC took a variety of unprecedented actions to help lower longer-term interest rates, including reducing the federal funds rate (the dotted black line) to near zero, communicating to the public that short-term interest rates would likely stay exceptionally low for some time, and buying large quantities of longer-term Treasury debt and agency-issued mortgage-backed securities.

These actions contributed to highly accommodative financial conditions, thereby helping to bring about a considerable improvement in labor market conditions over time. The unemployment rate, which peaked at 10 percent in 2009, is now 5.1 percent, slightly above the median of FOMC participants’ current estimates of its longer-run normal level. Although other indicators suggest that the unemployment rate currently understates how much slack remains in the labor market, on balance the economy is no longer far away from full employment. In contrast, inflation has continued to run below the Committee’s objective over the past several years, and over the past 12 months it has been essentially zero. Nevertheless, the Committee expects that inflation will gradually return to 2 percent over the next two or three years. I will now turn to the determinants of inflation and the factors that underlie this expectation.

Models used to describe and predict inflation commonly distinguish between changes in food and energy prices–which enter into total inflation–and movements in the prices of other goods and services–that is, core inflation. This decomposition is useful because food and energy prices can be extremely volatile, with fluctuations that often depend on factors that are beyond the influence of monetary policy, such as technological or political developments (in the case of energy prices) or weather or disease (in the case of food prices). As a result, core inflation usually provides a better indicator than total inflation of where total inflation is headed in the medium term. Of course, food and energy account for a significant portion of household budgets, so the Federal Reserve’s inflation objective is defined in terms of the overall change in consumer prices.

Indeed, empirical work that attempts to control for these factors suggests that the long-run inflation expectations embedded in asset prices have in fact moved down relatively little over the past decade. Nevertheless, the decline in inflation compensation over the past year may indicate that financial market participants now see an increased risk of very low inflation persisting.

Although the evidence, on balance, suggests that inflation expectations are well anchored at present, policymakers would be unwise to take this situation for granted. Anchored inflation expectations were not won easily or quickly: Experience suggests that it takes many years of carefully conducted monetary policy to alter what households and firms perceive to be inflation’s “normal” behavior, and, furthermore, that a persistent failure to keep inflation under control–by letting it drift either too high or too low for too long – could cause expectations to once again become unmoored.

Given that inflation has been running below the FOMC’s objective for several years now, such concerns reinforce the appropriateness of the Federal Reserve’s current monetary policy, which remains highly accommodative by historical standards and is directed toward helping return inflation to 2% over the medium term.

Before turning to the implications of this inflation model for the current outlook and monetary policy, I do think a cautionary note is in order.

The Phillips-curve approach to forecasting inflation has a long history in economics, and it has usefully informed monetary policy decisionmaking around the globe. But the theoretical underpinnings of the model are still a subject of controversy among economists.
Moreover, inflation sometimes moves in ways that empirical versions of the model, which necessarily are a simplified version of a complicated reality, cannot adequately explain. And for this reason, significant uncertainty attaches to Phillips curve predictions, and the validity of forecasts from this model do have to be continuously evaluated in response to incoming data.

But assuming that my reading of the data is correct and long-run inflation expectations are in fact anchored near their pre-recession levels, what implications does the preceding description of inflation dynamics have for the inflation outlook and for monetary policy?

This framework suggests, first, that much of the recent shortfall of inflation from our 2% objective is attributable to special factors whose effects are likely to prove transitory. As the solid black line in figure 8 indicates, PCE inflation has run noticeably below our 2% objective on average since 2008, with the shortfall approaching about 1 percentage point in both 2013 and 2014 and more than 1-1/2 percentage points this year. The stacked bars in the figure give the contributions of various factors to these deviations from 2 percent, computed using an estimated version of the simple inflation model I just discussed.

As the solid blue portion of the bars shows, falling consumer energy prices explain about half of this year’s shortfall and a sizable portion of the 2013 and 2014 shortfalls as well.

Another important source of downward pressure this year has been a decline in import prices, the portion with orange checkerboard pattern, which is largely attributable to the 15% appreciation in the dollar’s exchange value over the past year.

In contrast, the restraint imposed by economic slack, the green dotted portion, has diminished steadily over time as the economy has recovered and is now estimated to be relatively modest.

Janet Yellen Falters During Massachusetts Speech

Janet Yellen Falters During Massachusetts Speech

The Accurate Source To Find Transcript To Janet Yellen Falters During Massachusetts Speech.”

Janet Yellen Falters During Massachusetts Speech

[Janet Yellen Falters During Massachusetts Speech]

The Accurate Source To Find Transcript To Janet Yellen Falters During Massachusetts Speech.”

[Janet Yellen:] Source: L Y B I O . N E T
But I expect that inflation will return in the influence of lower energy prices and inflation below our goal [extended pause] I expect this to occur as the temporary factors that are currently weighing on inflation wane, provided that economic growth continues to be strong enough to complete the return of the economy to full employment and to [extended pause] to return to full employment and long-run inflation expectations remain well anchored. Most FOMC participants, including myself, um… we currently anticipate that achieving these conditions will likely entail an increase in the federal funds rate later this year.

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