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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.
Chair Yellen, there's been extraordinary progress during your term as Chair
in lowering several measures of unemployment and underemployment and all while
inflation has remained subdued, but some people are even asking, why stop there.
Bill Sprigs the chief economist, who I think you know well, criticized the Fed
last week for seeking to maintain unemployment above 4 percent which he notes
necessarily keeping the unemployment rate among black Americans above 8 percent,
and he described this as a deliberate policy to sacrifice many hundreds of
thousands of potential workers and their families out of fear of future
inflation which, in fact, the Fed's preferred measure of inflation has not
exceeded 3 percent in more than 25 years. So I'm wondering how you would
respond to his frustration over the Fed's desire to continue raising rates when
core inflation really shows no sign of heading above the Fed's symmetric goal
So let me first say that employment is a very important part of our
mandate. We're charged by Congress with trying to pursue maximum employment,
and we've taken that very seriously. I'm very pleased and heartened by the
improvement we've seen in the labor market, and at 4.4 percent, the unemployment
rate has really fallen to quite a low level. As that's happened, the
unemployment rates for less advantaged groups in the labor market, particularly
African Americans and Hispanics has fallen more dramatically than that for the
nation as a whole, reversing the outsized increases that those groups
experienced when the financial crisis and great recession hit, and these are
really very positive developments.
So, we certainly seek a strong labor market, but we have a dual mandate, which
is, inflation and unemployment. And we also have to be mindful of our
obligation to achieve 2 percent inflation objective over the median term. Now,
I recognize, and it's important, that inflation has been running under our 2
percent objective for a number of years, and this is a concern, particularly if
it were to translate into lower inflation expectations. For a number of years,
there were very understandable reasons for that shortfall, and they included
quite a lot of slack in the labor market, which my judgment would be is largely
disappeared. Very large reductions in energy prices, and a large appreciation
of the dollar that lowered import prices starting in mid-2014. This year, the
shortfall of inflation from 2 percent, when none of those factors is operative
is more of a mystery. And I will not say that the committee clearly understands
what the causes are of that.
Now, we do, in our regular projections, show fan charts indicating the typical
size of forecast errors, all of the variables, GDP, the unemployment rate, and
inflation are forecast by ourselves and private forecasters with errors, and so,
there is variation in these economic variables from year to year.
I would say our judgment, as I said in the statement, is that this shortfall is
not largely related to cyclical considerations. You can see from the
projections that the committee participants submitted that we anticipate that
core and headline inflation will move up close to our 2 percent objective next
year. Namely, that the shortfall this year is due to transitory factors that
are likely to disappear over the course of the coming year, but I want to
emphasize that we do have a commitment to raising inflation to 2 percent, and as
we watch incoming data, the assessments that you see participants write down
about the path of the federal funds rate, they are not set in stone. They are
not definite plans. We will look at incoming data on inflation and on other
economic variables, including the labor market, in deciding what we should
actually do going forward.
And if it proves contrary to our expectations that this shortfall is
persistent, it will be necessary to adjust monetary policy to address that.
But, I want to point out that while there are risks that inflation could
continue below 2 percent, which we need to take account of in monetary policy,
monetary policy also repeats with a lag -- operates with a lag, and experience
suggests that tightness in the labor market gradually and with a lag tends to
push up wage and price inflation, and that's also a risk that we want to be
careful not to allow the economy to overheat in a way that would force us later
on somewhere down the road to have to tighten monetary policy rapidly, which
would cause a recession and threaten the very desirable labor market conditions
that we have now.
--MNI Washington Bureau; +1 202-371-2121; email: firstname.lastname@example.org