Yellen Excerpt: Tax Package Could Boost Demand And Supply

     WASHINGTON (MNI)  - 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 from :

     I want to follow up on the question about tax changes. When you addressed

it earlier today and spoke to congress last month you describe that you would

welcome higher growth in the context of the employment and inflation mandate. I

wonder how you judge the major provisions of the house and senate tax plans,

corporate rate cut, immediate expensing of big ticket purchases, new rates for

pass throughs, temporary rate cuts for individuals. Do you see those on balance

boosting the productive capacity of the U.S. economy, as opposed to simply

increasing aggregate demand? 

     Related to that, how would you view the benefit of such tax changes now,

when the economy is nearing full employment, versus at earlier periods when

there was greater resource slack? 

Yellen:

     So, I think my colleagues and I mainly see the likely tax package as

boosting aggregate demand, but also having some potential to boost aggregate

supply. So changes on the corporate tax side, the reduction in the corporate tax

rate, expensing, are the lower the cost of capital, and while there are a range

of estimates and uncertainty about how much stimulus that will provide to

investment, in general, I would see some stimulus to investment. In terms of

aggregate supply effects, stronger pace of investment could boost capital

formation and thereby raise productivity growth and potential GDP or output to

some extent. Exactly how large those effects might be remain uncertain, but that

is a channel. 

     And I suppose it's also possible, I'm uncertain how significant this would

be, that lower marginal effect of tax rates for those groups that will see them

could boost labor supply, and again there are a range of estimates in the

literatures. I indicated I think participants have reviewed a number of pieces

of analysis, including the joint committee on taxation estimates, and the many

outside analysts who have weighed in on this and been influenced by that kind of

analysis. 

     But there is a good deal of uncertainty about what the impacts would be.

And to the extent that there are larger impacts than those analyses assume on

aggregate supply or potential GDP, in the context of an economy that's had

disturbingly low productivity growth, that would be welcome, and could support

faster GDP growth at least for some period without creating the need to tighten

monetary policy to offset that. 

     So there are potentially both demand and supply effects here. Importantly,

you really don't, at the end of the day, see very much change in the federal

funds rate path. Participants do recognize that the unemployment rate is lower

than their estimates of its long run sustainable rate, so I think we are in the

vicinity of full employment.

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

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