Yellen Excerpt: Must Consider Dual Mandate; No Pre-set Course

     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:

     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

for inflation. 

     Yellen:

     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: holly.stokes@marketnews.com

[TOPICS: MMUFE$,M$U$$$]