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Recent FedSpeak Highlights

  • Eric Rosengren I would also suggest that the optimal inflation rate is not likely to remain constant over time...  In my view, adopting an inflation range that allows for movement in the effective medium-run inflation goal might be a helpful addition to the Fed’s monetary policy framework...  If we set the range to – for example – 1.5 to 3.0 percent ...this would represent a set of inflation outcomes that are similar to those the U.S. has experienced over the past 20 years.

    [ January 12, 2018 ]

    I would also suggest that the optimal inflation rate is not likely to remain constant over time. An alternative, which would recognize that the inflation target should not necessarily be constant, is an inflation range with an adjustable inflation target. Within this framework, one could think of our inflation goal as defined by two components: A range of inflation rates that policymakers would find acceptable across many economic circumstances, and a medium-term goal within that range that policymakers would set, perhaps year by year, depending on specific economic circumstances.

    In my view, adopting an inflation range that allows for movement in the effective medium-run inflation goal might be a helpful addition to the Fed’s monetary policy framework.  An inflation range that allows some movement in the inflation target, depending on economic fundamentals, would be treating the Fed’s inflation goal more like the natural rate of unemployment, where we recognize that the natural rate will shift over time with demographic and other workforce characteristics.

    Of course, the advantages of greater inflation target flexibility would likely be partly offset by some costs. For instance, it is likely that such flexibility would generate more uncertainty about inflation in the medium to long run, since we cannot know for sure how long productivity and demographic trends would persist.7 However, if we set the range to – for example – 1.5 to 3.0 percent, and were successful in keeping inflation mostly in that range, this would represent a set of inflation outcomes that are similar to those the U.S. has experienced over the past 20 years.

    ...

    One way to avoid periods of prolonged low interest rates would be to alter the inflation target in response to changes in our estimates of real interest rates – estimates that have been changing of late. This would make inflation, like the natural unemployment rate, a target that could vary over time. If, for example, the monetary policy framework set an inflation range of, say 1.5 to 3.0 percent, the FOMC could vary its medium-term inflation target to be high, low, or in the middle of the range depending on economic factors that the Committee could determine at the beginning of each year. For example, in the current environment, with low population growth and low productivity growth, policy could move even more gradually to remove accommodation, and allow inflation to be somewhat higher in its range. Should the labor force or productivity grow more quickly, the Committee could seek to gradually reduce the inflation target within its range.

    ...

    An inflation range with an adjustable medium-run inflation goal is one way to address such concerns, but there are a variety of alternative frameworks also worth considering.18 In my view, we are approaching a time when a comprehensive reconsideration of the monetary policy framework is likely warranted, given the experience of the past 10 years. Any change we make should be designed to provide policymakers with the flexibility to set monetary policy appropriately as key features of the economy change, as they have repeatedly over U.S. economic history.

  • Patrick Harker [An] issue I’m watching is the yield curve, and I’m sure I’m not alone in this room. My assessment is that the worries so far have been inflated.

    [ January 12, 2018 ]

    [An] issue I’m watching is the yield curve, and I’m sure I’m not alone in this room. My assessment is that the worries so far have been inflated.

  • William C. Dudley Over the longer term, however, I am considerably more cautious about the economic outlook.  Keeping the economy on a sustainable path may become more challenging.  While the recently passed Tax Cuts and Jobs Act of 2017 likely will provide additional support to growth over the near term, it will come at a cost...  While this does not seem to be a great concern to market participants today, the current fiscal path is unsustainable.

    [ January 11, 2018 ]

    Broadly speaking, the prospects for continued economic expansion in 2018 look reasonably bright.  The economy is likely to continue to grow at an above-trend pace, which should lead to a tighter labor market and faster wage growth.  Under such conditions, I would expect the inflation rate to drift higher toward the FOMC’s 2 percent long-run objective.

    Over the longer term, however, I am considerably more cautious about the economic outlook.  Keeping the economy on a sustainable path may become more challenging.  While the recently passed Tax Cuts and Jobs Act of 2017 likely will provide additional support to growth over the near term, it will come at a cost.  After all, there is no such thing as a free lunch.  The legislation will increase the nation’s longer-term fiscal burden, which is already facing other pressures, such as higher debt service costs and entitlement spending as the baby-boom generation retires.  While this does not seem to be a great concern to market participants today, the current fiscal path is unsustainable.  In the long run, ignoring the budget math risks driving up longer-term interest rates, crowding out private sector investment and diminishing the country’s creditworthiness.  These dynamics could counteract any favorable direct effects the tax package might have on capital spending and potential output.

  • Robert S. Kaplan We want to avoid a situation where we have such an overheating that we’re playing catch up.

    [ January 10, 2018 ]

    “We want to avoid a situation where we have such an overheating that we’re playing catch up,” Kaplan said at a business event. The cuts are in part a concern, he said, “because I think debt levels of the country are unsustainable.”

  • Charles L. Evans “I think we have to be mindful of the fact that as we have all repriced real interest rates downwards that’s going to find its way into lower long term interest rates,” he told reporters. “We’ve been increasing short-term rates; it’s natural then almost mechanically for there to be a flattening of it.”

    [ January 10, 2018 ]

    “I don’t see any evidence of inflation moving up really fast, or even moving up enough,” Evans told reporters Wednesday after speaking in Lake Forest, Illinois, where he disclosed that at the Dec. 12-13 policy meeting he thought “it would be good to sort of put off the increases until about the middle of this year just to make sure the inflationary concerns resolve themselves.”

  • Raphael Bostic From Bloomberg: Bostic said his base case for 2018 was for two or three rate increases.

    [ January 8, 2018 ]

    Bostic said his base case for 2018 was for two or three rate increases, slightly below the median of three rate increases expected by his colleagues.

  • Loretta J. Mester I probably have one more (hike than the consensus) or a bit steeper path just because I think growth is picking up a little bit.

    [ January 5, 2018 ]

    Asked in an interview whether she agreed with the central bank’s median forecast for three rate rises this year, she said she was “about” in line. “I probably have one more (hike than the consensus) or a bit steeper path just because I think growth is picking up a little bit,” she said, adding she expects unemployment, now 4.1 percent, to settle around 4.75 percent.

  • Patrick Harker My own view is that two rate increases are likely to be appropriate for 2018.

    [ January 5, 2018 ]

    Inflation continues to run below target, not just in the U.S. but in countries across the globe. Domestically, I expect inflation will run a bit above target in 2019 and come down to target the following year, but I am more hesitant in this view than I am on economic activity. If soft inflation persists, it may pose a significant problem, which I’ll get to shortly.

    For that reason, my own view is that two rate increases are likely to be appropriate for 2018.

    Of course, I’ll continue to monitor the data as they roll in, but that’s the view as we start out the new year.

  • James Bullard We’ve really made no progress in the last two years toward our inflation target.

    [ January 5, 2018 ]

    We’ve really made no progress in the last two years toward our inflation target.

  • James Bullard A lot of good things were done in this tax bill… I do hold out the possibility that the tax bill will unleash a lot of investment in the U.S. and you will then get an outsized effect.

    [ January 4, 2018 ]

    “A lot of good things were done in this tax bill,” said Bullard, who endorsed the alignment of U.S. corporate taxes closer to developed world norms and said he felt that raising the standard deduction would weaken the constituencies behind itemized tax breaks that can distort economic decisions. “I do hold out the possibility that the tax bill will unleash a lot of investment in the U.S. and you will then get an outsized effect.”

    Bullard said his “base case” was for only a modest increase in capital spending, and a possible shift in the economy’s long-term potential growth by a few tenths of a percentage point -- not a dramatic change for the near term but important over the long run.

    A lot of good things were done in this tax bill… I do hold out the possibility that the tax bill will unleash a lot of investment in the U.S. and you will then get an outsized effect.

  • Eric Rosengren I do worry that we may start to see “reach for yield” kinds of behaviors on financial investments that could potentially have broader implications at a time when monetary or fiscal policy can’t react if we get a big negative shock.

    [ December 27, 2017 ]

    On the financial stability front, it’s not just the United States that has had low interest rates—it’s a global phenomenon. I do worry that we may start to see “reach for yield” kinds of behaviors on financial investments that could potentially have broader implications at a time when monetary or fiscal policy can’t react if we get a big negative shock.

  • Robert S. Kaplan So, let me answer it this way. I've been in the markets my entire adult life. I've been watching them since before I was an adult. And what I have learned is I don't always know what the market is saying, but I know it always pays to try to decipher what it's saying. And I think the bond market is saying expectations for future growth are sluggish and I think it's worth paying attention to that.

    [ December 19, 2017 ]

    KAPLAN:  I said to you when we've talked before, gradual and patient is my key comment. My own [2018] dot was three.  The 10-year Treasury is something I'll be watching. And what the 10-year does will also influence how many rate increases next year...  The yield curve is something I'll be watching carefully. So that could go (ph) the other way.

    FERRO: The yield curve is flattening and I wonder whether what the signal really is there. Because most people would say there's a massive balance sheet over the ECB, there's a massive balance sheet over the BOJ and that's why we've got this flattening, that's why the ten year yield is not rising. Do you see anything can that does to argue and resonate with you?

    KAPLAN: So it's a part of it and, by the way, I wish that was all of it. But my own view is a part of what's going on is global liquidity. But I think the bigger part of why the ten year is muted is sluggish expectations for out year GDP growth.

    And what I mean by that if you look at where potential GDP growth is five years from now, I think it is actually declining from where we are today. Why is that happening?  Aging demographics, slowing workforce growth and sluggish productivity, unless the United States improves early childhood literacy, college readiness and little skills training.

    So I think the 10-year Treasury tells you more about expectations for future growth which are sluggish. And so if you told me where we're going to have solid GDP growth the next two or three years trailing off to maybe below two percent five years from now, I would have expected a flattish yield curve and that's what you're seeing.

     ...

    MCKEE: You're talking about the 10-year as an indicator of the market's view of long term potential growth. That is completely different than the man down in Washington who seems to think the tax cut is going to change the whole fundamental picture for the United States. Is the market wrong or is the president wrong?

    KAPLAN: So, let me answer it this way. I've been in the markets my entire adult life. I've been watching them since before I was an adult. And what I learned is I don't always know what the market is saying, but I know it always pays to try to decipher what it's saying. And I think the market is saying expectations for future growth are sluggish and I think it's worth paying attention to that.

  • Neel Kashkari An inverted yield curve ...  is one of the best signals we have of elevated recession risk and has preceded every single recession in the past 50 years.

    [ December 18, 2017 ]

    An inverted yield curve, where short rates are above long rates, is one of the best signals we have of elevated recession risk and has preceded every single recession in the past 50 years. While the yield curve has not yet inverted, the bond market is telling us that the odds of a recession are increasing and that inflation and interest rates will likely be low in the future. These signals should caution the FOMC against further rate increases until it becomes clear that inflation is actually picking up.

  • John Williams Something like three rate increases next year, or two to three more increases in 2019, that seems like a reasonable view of this gradual removal of accommodation in a very benign environment.

    [ December 18, 2017 ]

    Something like three rate increases next year, or two to three more increases in 2019, that seems like a reasonable view of this gradual removal of accommodation in a very benign environment. Low unemployment, relatively low inflation - moving back to 2 percent [or] a little bit maybe above that. But it’s not an environment that I, at least right now, view as having really any big risks of either needing to tighten dramatically faster, or any real arguments not to continue on the path we’re on.

    Now, that could change. I’m sure you were going to ask - but one of the big question marks is how will the tax policies change -  what that package ends up looking like, and then obviously how that effects the economy in terms of consumer spending, business spending, and over the longer term how it affects the supply side of the economy.

    From Wall Street Journal interview published on December 5 but conducted before the blackout period.

  • Charles L. Evans I believe that leaving the target range at 1 to 1-1/4 percent at the current time would have better supported a general pickup in inflation expectations and increased the likelihood that inflation will rise to 2 percent.

    [ December 15, 2017 ]

    I am concerned that persistent factors are holding down inflation, rather than idiosyncratic transitory ones. Namely, the public’s inflation expectations appear to me to have drifted down below the FOMC’s 2 percent symmetric inflation target. And I am concerned that too many observers have the impression that our 2 percent objective is a ceiling that we do not wish inflation to breach, as opposed to the symmetric objective that it really is; that is, we would like to see the odds of inflation running modestly below 2 percent equal the odds of it running modestly above over the long run.

    I believe that leaving the target range at 1 to 1-1/4 percent at the current time would have better supported a general pickup in inflation expectations and increased the likelihood that inflation will rise to 2 percent along a path that is consistent with a symmetric inflation objective.

  • Janet L. Yellen Economists are not great at knowing what appropriate valuations are; we don't have a terrific record. And the fact that those valuations are high doesn't mean that they're necessarily overvalued...  I think when we look at other indicators of financial stability risks, there's nothing flashing red there or possibly even orange... If you ask me is this significant factor shaping monetary policy now; well, it's on the list of risks, but it's not a major factor

    [ December 13, 2017 ]

    Of course, the stock market has gone up a great deal this year. And we have in recent months characterized the general level of asset valuations as elevated. What that reflects is simply the assessment that looking at price-earnings ratios and comparable metrics for other assets other than equities, we see ratios that are in the high end of historical ranges. And so that's worth pointing out.

    But economists are not great at knowing what appropriate valuations are; we don't have a terrific record. And the fact that those valuations are high doesn't mean that they're necessarily overvalued.

    ...

    I think what we need to and are trying to think through is if there were an adjustment in asset valuations, the stock market, what impact would that have on the economy? And would it provoke financial stability concerns?

    And I think when we look at other indicators of financial stability risks, there's nothing flashing red there or possibly even orange. We have a much more resilient, stronger banking system.  We're not seeing ... some buildup in leverage or credit growth at excessive levels. So you know, this is something that the FOMC pays attention to. But if you ask me is this significant factor shaping monetary policy now; well, it's on the list of risks, but it's not a major factor

  • Janet L. Yellen My colleagues and I mainly see the likely tax package as boosting aggregate demand, but also having some potential to boost aggregate supply.

    [ December 13, 2017 ]

    I think my colleagues and I mainly see the likely tax package as boosting aggregate demand, but also having some potential to boost aggregate supply.

    ...

    We continue to think, as you can see from the projections that a gradual path of rate increases remains appropriate, even with almost all participants now factoring in their assessment of the impact of the tax policy.

    You know, it is projected that the tax cut package will lead to additions to the national debt and boost, by the end of the horizon, the debt to GDP ratio.  And I will say, and this is nothing new, it's something I've been saying for a long time. I am personally concerned about the U.S. debt situation. It's not that the debt to GDP ratio at the moment is extraordinarily or worrisomely high. But it's also not very low. And it's projected as the population continues to age and the baby boomers retire that that ratio will continue to rise in an unsustainable fashion. So the addition to the debt taking what is already a significant problem and making it worse is -- it is of concern to me.

    And I think it does suggest that in some future downturn, which could occur, just for whatever reason, the amount of fiscal space that would exist for fiscal policy to play an active role may well be limited.

  • Janet L. Yellen There is a strong correlation historically between yield curve inversions and recessions. But let me emphasize that correlation is not causation.  And I think there are good reasons to think that the relationship between the slope of the yield curve and the business cycle may have changed.

    [ December 13, 2017 ]

    I would say that the current slope is well within its historical range. Now there is a strong correlation historically between yield curve inversions and recessions. But let me emphasize that correlation is not causation.  And I think there are good reasons to think that the relationship between the slope of the yield curve and the business cycle may have changed.
    ...

    I think that the fact the term premium is so low and the yield curve is generally flatter, is an important factor to consider. Now, I think it is also important to realize that market participants are not expressing heightened concern about the decline of the term premium and when asked directly about the odd of recession, they see it as low, and I would concur with that judgment.

  • Charles L. Evans If the judgment was that we’re still likely to be underrunning our 2 percent objective, maybe we would stop briefly and assess for more information, maybe wait until mid-2018.

    [ December 5, 2017 ]

    I think our policy moves to date have been thoughtful and reasonable. We’ve increased our funds rate objective by 100 basis points. Maybe it’s time to stop and see whether inflation expectations are going to move in line with our 2 percent objective. And if the judgment was that we’re still likely to be underrunning our 2 percent objective, maybe we would stop briefly and assess for more information, maybe wait until mid-2018.

    From NY Times interview published on December 5 but conducted before the blackout period.

  • James Bullard There is a material risk of yield curve inversion over the forecast horizon if the FOMC continues on its present course of increases in the policy rate.

    [ December 1, 2017 ]

    “There is a material risk of yield curve inversion over the forecast horizon if the FOMC continues on its present course of increases in the policy rate,” Bullard said. “Yield curve inversion is a naturally bearish signal for the economy. This deserves market and policymaker attention.”

    He also discussed two possible ways to avoid an inverted yield curve—rising longer-term rates and policymaker caution. “It is possible that yield curve inversion will be avoided because longer-term nominal yields will begin to rise in tandem with the policy rate, but this seems unlikely as of today,” he said. “Given below-target U.S. inflation, it is unnecessary to push normalization to such an extent that the yield curve inverts.”