Stocks Slip As Yellen Says Trump Fiscal Boost "Not Needed", May Not Improve Productivity

Reading between the lines, Janet Yellen squirmed her way through question after question focused on the effect of Trump's potential fiscal stimulus plan without a definitive answer except to say that a "fiscal boost not obviously needed to get back to full employment" warning that "policymakers must take GDP-to-Debt ratio into account", and questioned whether a tax reduction plan would improve the economy or productivity at all.

Question from CNBC: In recent testimony your advice was for fiscal authorities to increase productive capacity of the economy. Do individual and business tax cuts increase the productive capacity of the economy? And how would the fed's reaction be different to fiscal policies that increase the productive capacity of the economy and those that don't?


Yellen: So, the statement that I made that it would be useful to increase the productive capacity of the economy reflects my concern that productivity growth has been very low. It is the ultimate determination of the evolution of living standards. Policies that would improve productivity growth would include policy changes that enhance education, training, workforce development, policies that spur either private or public investment to enhance the quality of capital, in the United States, that workers have to have to work with, and policies that spur innovation or competition or the formation of new firms. So tax policies can have that effect. It really depends on the specifics. I don't think there is anything that I could say in general about what tax policy would do, but and I really can't tell you what the fed's response would be to any policy changes that are put into effect. I wouldn't want to speculate until I were more certain of the details and how they would affect the likely course of the economy.


Follow up from CNBC: If there was a rush of fiscal policy, that did not increase the productive capacity of the economy, would that mean the Federal Reserve would have to move more quickly with raising rates?


Yellen: It is something I can't generalize about, because while it would be desirable to have tax policies that do increase the productive capacity of the economy, an increase in the pace of productivity change is one of the factors that does affect the economy's neutral rate, a boost to productivity could spur investment. As we have been saying, we estimate that the value of the neutral federal funds rate is quite low, and one of the reasons for that is slow productivity growth. So it's very hard to generalize about it, because it could affect that neutral rate.


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Question from the Washington Post: I'm curious, you and your predecessor had both at times called for more fiscal stimulus, to help with the outlook, the growth outlook. I'm wondering how much do you judge the economy has capacity for fiscal stimulus right now? It's a version of Steve's question but I think we are trying to get at, how much can happen before we run the risk of overheating?


Yellen: Well, I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now. So with a 4.6 percent unemployment, and a solid labor market, there may be some additional slack in labor markets, but I would judge that the degree of slack has diminished. So I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment. But nevertheless, let me be careful that I am not trying to provide advice to the new administration or to Congress as to what is the appropriate stance of policy. There are many considerations that Congress needs to take account of, and many bases for justifying changing fiscal policy. I've continued to highlight the importance of spurring productivity growth, that I think that would be something that is beneficial for the economy. Of course, it's also important for congress to take account of the fact that, as our population ages, that the debt to GDP ratio is projected to rise, and that needs to continue to be taken into account. So there are many factors that I think should enter into such decisions.

And it appears to have taken the shine off of stocks...