Chair Janet Yellen’s Press Conference Opening Remarks
December 14, 2016
Good afternoon. Today, the Federal Open Market Committee decided to raise the target range for the federal funds rate by 1/4 percentage point, bringing it to 1/2 to 3/4 percent. In doing so, my colleagues and I are recognizing the considerable progress the economy has made toward our dual objectives of maximum employment and price stability. Over the past year, 2-1/4 million net new jobs have been created, unemployment has fallen further, and inflation has moved closer to our longer-run goal of 2 percent. We expect the economy will continue to perform well, with the job market strengthening further and inflation rising to 2 percent over the next couple of years. I’ll have more to say about monetary policy shortly, but first I’ll review recent economic developments and the outlook.
Economic growth has picked up since the middle of the year. Household spending continues to rise at a moderate pace, supported by income gains and by relatively high levels of consumer sentiment and wealth. Business investment, however, remains soft, despite some stabilization in the energy sector. Overall, we expect the economy will expand at a moderate pace over the next few years.
Job gains averaged nearly 180,000 per month over the past three months, maintaining the solid pace that we’ve seen since the beginning of the year. Over the past seven years, since the depths of the Great Recession, more than 15 million jobs have been added to the U.S. economy. The unemployment rate fell to 4.6 percent in November, the lowest level since 2007, prior to the recession. Broader measures of labor market slack have also moved lower, and participation in the labor force has been little changed, on net, for about two years now, a further sign of improved conditions in the labor market given the underlying downward trend in participation stemming largely from the aging of the U.S. population. Looking ahead, we expect that job conditions will strengthen somewhat further.
Turning to inflation, the 12-month change in the price index for personal consumption expenditures was nearly 1-1/2 percent in October, still short of our 2 percent objective but up more than a percentage point from a year earlier. Core inflation – which excludes energy and food prices that tend to be more volatile than other prices – has risen to 1-3/4 percent. As the transitory influences of earlier declines in energy prices and prices of imports continue to fade, and as the job market strengthens further, we expect overall inflation to rise to 2 percent over the next couple of years.
Our inflation outlook rests importantly on our judgment that longer-run inflation expectations remain reasonably well-anchored. Market-based measures of inflation compensation have moved up considerably but are still low. Survey-based measures of longer run inflation expectations are, on balance, little changed. Of course, we remain committed to our 2 percent inflation objective and will continue to carefully monitor actual and expected progress toward this goal.
Let me now turn to the economic projections that were submitted for this meeting by Committee participants. As always, they conditioned their projections on their own individual views of appropriate monetary policy, which, in turn, depend on each participant’s assessment of the multitude of factors that shape the outlook. The median projection for growth of inflation adjusted gross domestic product (GDP) rises from 1.9 percent this year to 2.1 percent in 2017 and stays close to 2 percent in 2018 and 2019, slightly above its estimated longer-run rate. The median projection for the unemployment rate stands at 4.7 percent in the fourth quarter of this year. Over the next three years, the median unemployment rate runs at 4.5 percent, modestly below the median estimate of its longer-run normal rate. Finally, the median inflation projection is 1.5 percent this year and rises to 1.9 percent next year and 2 percent in 2018 and 2019.
Overall, these economic projections are very similar to those made in September: GDP growth is a touch stronger, the unemployment rate is a shade lower, and inflation, beyond this year, is unchanged.
Returning to monetary policy, the Committee judged that a modest increase in the federal funds rate is appropriate in light of the solid progress we have seen toward our goals of maximum employment and 2 percent inflation. We continue to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time to achieve and maintain our objectives. That’s based on our view that the neutral nominal federal funds rate – that is, the interest rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel – is currently quite low by historical standards. With the federal funds rate only modestly below the neutral rate, we continue to expect that gradual increases in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years.
This view is consistent with participants’ projections of appropriate monetary policy. The median projection for the federal funds rate rises to 1.4 percent at the end of next year, 2.1 percent at the end of 2018, and 2.9 percent by the end of 2019. Compared with the projections made in September, the median path for the federal funds rate has been revised up just 1/4 of a percentage point. Only a few participants altered their estimate of the longer-run normal federal funds rate, although the median edged up to 3 percent.
Of course, the economic outlook is highly uncertain, and participants will adjust their assessments of the appropriate path for the federal funds rate in response to changes to the economic outlook and associated risks. As many observers have noted, changes in fiscal policy or other economic policies could potentially affect the economic outlook. Of course, it is far too early to know how these policies will unfold. Moreover, changes in fiscal policy are only one of the many factors that can influence the outlook and the appropriate course of monetary policy. In making our policy decisions, we will continue – as always – to assess economic conditions relative to our objectives of maximum employment and 2 percent inflation. As I have noted on previous occasions, policy is not on a pre-set course.
Finally, we will continue to reinvest proceeds from maturing Treasury securities and principal payments from agency debt and mortgage-backed securities. As our statement says, we anticipate continuing this policy until normalization of the level of the federal funds rate is well under way.
Thank you. I’d be happy to take your questions.