MNI: Yellen: Best Guess Soft Infl Readings 'Will Not Persist'

--Expects Inflation To Move Higher Next Few Years

--Outside of Hurricane-Impacted Paryolls, Aspects Of Jobs Report Strong

By Kevin Kastner

     WASHINGTON (MNI) - Noting that soft U.S. inflation was "the biggest

surprise" in economy this year, Federal Reserve chair Janet Yellen said Sunday

that she, and most of the FOMC, expects a rebound in inflation in the coming

year.

     "My best guess is that these soft readings will not persist, and with the

ongoing strengthening of the labor markets, I expect inflation to move higher

next year. Most of my colleagues on the FOMC agree," Yellen said in remarks at

the G-30 International Banking Seminar.

     Yellen did acknowledge there could be structural aspect to the recent low

inflation, such as there being more slack in the U.S. labor markets than is

being perceived. 

     "If so, some further tightening in the labor market may be needed to lift

inflation back to 2% percent," Yellen said.

     The September employment report showed that payrolls declined by 33,000,

reflecting the impact of the hurricanes that hit the U.S. in August and

September.

     However, Yellen said that the long-term effects of the hurricane should be

"modest." 

     "I would expect employment to bounce back in subsequent months as

communities recover and people return to their jobs," Yellen said, noting that

other data in the jobs report were strong.

     She said that the unemployment rate is below the FOMC estimates of the

longer-run normal level and the labor force participation continues to

strengthen. 

     Yellen acknowledged that wage data have been mixed, but said that the most

recent data through September was "encouraging," with a pace consistent with a

tightening labor market.

     So, with the expectation that the softness in inflation is "temporary" and

that labor market conditions are expected to improve, the FOMC sees gradual

increases in the federal funds rate to be warranted. She noted that neutral rate

appears to "be low by historical standards," but is still above the current Fed

funds rate.

     "(W)e expect the neutral level of the federal funds rate to rise somewhat

over time, and, as result, additional gradual rate hikes are likely to be

appropriate over the next few years to sustain the economic expansion," she

said.

     She repeated, though, that "policy is not on a preset course" and that the

FOMC will continue to communicate any policy changes "as clearly and effectively

as possible" to reduce risks to global financial markets.

     Yellen reiterated that the funds rate is the FOMC's primary monetary policy

tool and that they do not plan to make adjustments to the balance sheet

normalization that is getting underway this month. She repeated that would be

considered only if there was a need to sharply reduce the funds rate to a

"material deterioration" in the economic outlook.

     Yellen said that she expects "the balance sheet will decline gradually and

predictably."

--MNI Washington Bureau; tel: +1 202-371-2121; email: kevin.kastner@marketnews.com

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