Yellen Excerpt: Not "Locked Into" Gradual Can Adjust

     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:

     You have now committed to a policy of reducing your balance sheet

gradually.  You've described even more gradually than usual.  You are locked in

for a long time to forecast that monetary policy will keep interest rates at a

low level and balance sheets at a high level.  If something goes wrong, does the

Fed have room to respond in the conditions in the several years and could you

describe what your plans are for a response that would be warranted?

Yellen:

     The only thing I would object to there is you said that we were locked in,

and I would say that we're not locked in.  We believe that economic conditions

will evolve in a way that will warrant gradual further increases in our federal

funds rate target, but if conditions evolve differently than that, whichever

direction that might be, it might be that growth is more rapid, the labor market

tightens more quickly than with assume, and inflation appears to be picking up

more rapidly than we had expected, we have not promised, no matter what, that

the path of interest rate increases will be gradual.  We believe that that will

be appropriate, but we always watching the economy and will adjust policy as

appropriate.

Now, as I said, the hurdle to changing our plans with respect to the balance

sheet in some sense is high.  If conditions were to weaken, we would really only

consider resuming reinvestment if it were what we refer to as a material

deterioration, and I tried to explain why that is.  But we will adjust monetary

policy.  What you see in the dot plot is each participant's best guess based on

the information they have today about what will be appropriate in light of their

expectations about how the economy would evolve and we think it's helpful to

show the public some sense that it helps in understanding our evaluation of the

economy but we're assessing incoming data, and these plans are subject to

change.  What's not subject to change is our commitment to doing everything in

our power to achieve the goals that Congress has assigned to us, which are price

stability or 2 percent inflation in unemployment.

     Question: 

     But do you in fact have room in the next two or three years to respond?

     Yellen:

     Certainly, if growth is stronger or in inflation picks up more rapidly, we

have room.  We have a certain amount of room now, and we have raised the funds

rate four times.  We believe that we are on a path where there will likely be

further increases over the next couple of years, which will give us greater

room, and we think the recovery is on a strong track.  So the reason for our

actions today and beginning to rundown the balance sheet is we think the economy

is performing well, and we have confidence in the outlook for the real economy. 

But, of course, there are shocks and if the negative shock to the economy were

sufficient, we recognize that we might be unable to pursue objectives purely by

cutting the federal funds rate, and that is why we say explicitly that we would

be prepared in that event to resume reinvestment and other tools that we used in

the financial crisis, forward guidance, would also be available to us.

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

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