Yellen Excerpt: FFR Remains Main Tool of Monetary Policy

     WASHINGTON (MN) -  - The following is a response of Federal Reserve

Chairman Janet Yellen to a question from a reporter at her press conference

following Wednesday's Federal Open Market Committee meeting.

     Question:

     Madam Chair, you just said in your opening remarks that reducing the

balance sheets should not be an active tool for monetary policy in normal times,

don't plan an adjustment to the balance sheet.  I wonder if we could explore if

there's any sensitivity to the plan you just announced.  If there's a spike in

interest rates, a plunge in the stock market, weakness in growth.  In the June

statement, you indicated that the only reason -- suggested -- the only reason

you would change the balance sheet is if it required first a change in the funds

rate.  Is that true?  Or if there's some unexpected development in markets, or,

for example, given that we don't know what the plans are on the fiscal side for

the deficit in terms of tax cuts, there could be a sudden spike in the deficit,

will the balance sheet reduction plan be immune to all of that?

And given that question, and the idea that this has never been done before, why

so much certainty about the plan you've just announced and apparent

unwillingness to adjust it?

     Yellen:

     So, we have two policy tools that are available to us to use, the balance

sheet and adjustments in short-term interest rates, our federal funds rate

target.  And historically, the committee has operated to adjust monetary

conditions to meet our economic goals when there are shocks to the economy by

adjusting the federal funds rate, our short-term interest rate target.  And

that's something, a technique of monetary control that we have used for a very

long time, that we're familiar with.  We believe we understand pretty well what

the effects are on the economy.  Market participants understand how that tool

has been used, and would likely be adjusted in response to shocks to the

economy.

And our preference is, when we have two different tools that we could use to

actively adjust the stance of policy, to prefer and to make a commitment that to

the maximum extent possible, the federal funds rate will be the active tool of

policy.  That's our go-to tool.  That is what we intend to use unless we think

that the threat to the economy is sufficiently great that we might have to cut

the federal funds rate, after we've moved it up to one to one and a quarter

percent and expect it to go up further, but a very significant negative shock to

the economy could conceivably force us back to the so-called zero lower bound.

We have said if there were that type of material deterioration in the outlook

where we could face a situation where the federal funds rate isn't a sufficient

tool for us to adjust monetary  policy.  We might stop rolloffs from our balance

sheet and resume reinvestment.  But, as long as we believe that we can use the

federal funds rate as a tool, that is what we fend to do.  So, if there are

small changes in the outlook that require a recalibration of monetary policy, we

will change our anticipated path in setting of the federal funds rate, but not,

for example, change the caps on reinvestment or stop continue reinvestment for a

few months, and then change it.  We think that provides greater clarity to

market participants about how policy will be conducted, and will be less

confusing and more effective in terms of conducting policy.

--MNI Washington Bureau; +1 202-371-2121; email: holly.stokes@marketnews.com

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