Janet Yellen: Adjustment of the Federal Funds Rate May Be Appropriate Later This Month?
Chair Janet L. Yellen At The Executives' Club of Chicago, Chicago, Illinois, March 3, 2017
From Adding Accommodation to Scaling It Back
I am pleased to join you today to discuss the US economy and the Federal Reserve's monetary policy. I strongly believe that my colleagues and I should explain, as clearly as we can, both the reasons for our decisions and the fundamental principles that underlie our strategy.
Today I will review the conduct of monetary policy during the nearly 10 years since the onset of the financial crisis. Although the Federal Reserve's policy strategy for systematically pursuing its congressionally mandated goals of maximum employment and price stability has not changed during this period, the Federal Open Market Committee (FOMC) has made significant tactical adjustments along the way. I will spend most of my time today discussing the rationale for the adjustments the Committee has made since 2014, a year that I see as a turning point, when the FOMC began to transition from providing increasing amounts of accommodation to gradually scaling it back.
The process of scaling back accommodation has so far proceeded at a slower pace than most FOMC participants anticipated in 2014. Both unexpected economic developments and deeper reevaluations of structural trends affecting the U.S. and global economies prompted us to reassess our views on the outlook and associated risks and, consequently, the appropriate stance of monetary policy, both in the near term and the longer run. Looking ahead, we continue to expect the evolution of the economy to warrant further gradual increases in the target range for the federal funds rate. However, given how close we are to meeting our statutory goals, and in the absence of new developments that might materially worsen the economic outlook, the process of scaling back accommodation likely will not be as slow as it was in 2015 and 2016.
I should note that I will discuss the process of scaling back accommodation mostly from the perspective of our interest rate decisions, which my FOMC colleagues and I see as our primary tool for actively adjusting the stance of monetary policy when our actions are not constrained by the zero lower bound on short-term interest rates.
Assessing the Degree of Monetary Policy Accommodation
In our monetary policy deliberations, the FOMC always faces two fundamental questions: First, how do we assess the current stance of monetary policy? Second, what are the strategic and tactical considerations that underpin our decisions about the appropriate stance of monetary policy going forward? These questions are difficult because the interactions between monetary policy and the economy are complex. Policy affects the economy through many different channels, and, in turn, many factors influence the appropriate course of policy.
Gauging the current stance of monetary policy requires arriving at a judgment of what would constitute a neutral policy stance at a given time. A useful concept in this regard is the neutral "real" federal funds rate, defined as the level of the federal funds rate that, when adjusted for inflation, is neither expansionary nor contractionary when the economy is operating near its potential. In effect, a "neutral" policy stance is one where monetary policy neither has its foot on the brake nor is pressing down on the accelerator. Although the concept of the neutral real federal funds rate is exceptionally useful in assessing policy, it is difficult in practical terms to know with precision where that rate stands. As a result, and as I described in a recent speech, my colleagues and I consider a wide range of information when assessing that rate. As I will discuss, our assessments of the neutral rate have significantly shifted down over the past few years.
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