A More Dovish Janet Yellen Speaks Again, Sees No Risks Of Economic Overheating

Following her Trump-weaker-dollar-destroying performance yesterday, Fed chair Janet Yellen reprises her role as Mnuchin-slayer tonight with an appearance at Stanford's Institute for Economic Policy Research. In a speech entitlted "The Economic Outlook and Conduct of Monetary Policy" she is expected to deliver a similarly hawkish tone confirming multiple rate hikes (though no rush) and potentially erasing the dollar weakness from today...


In her latest speech, which while a recap of remarks deliver yesterday had a far more dovish tone, Yellen reiterated monetary policy has not fallen behind the curve because the economy is not overheating and stated she well understood the risk of letting the economy run too hot for too long, MNI noted.

Delivering her second speech on Fed policy in two days and on the eve of President-elect Donald Trump's inauguration, she repeated her assessment that it is prudent to remove accommodation gradually over time as the U.S. labor market has largely recovered from the severe downturn in the wake of the financial crisis and as inflation stands much closer to the Fed's 2% objective than its first rate hike a year earlier.

"I consider it prudent to adjust the stance of monetary policy gradually over time -- a strategy that should improve the prospects that the economy will achieve sustainable growth with the labor market operating at full employment and inflation running at about 2 percent."

On Wednesday, Yellen said the policymaking Federal Open Market Committee expects to raise interest rates a few times a year until it reaches 3% by the end of 2019. But in her Thursday evening speech, Yellen delved into some of the "considerable" uncertainties that cloud the FOMC's call.

"it is important to emphasize the considerable uncertainty that attaches to such assessments and the need to constantly update them." adding that "In particular, the path of the neutral federal funds rate, which plays an important role in determining the appropriate policy path, is highly uncertain."

Some key factors bearing on the path of the neutral rate include productivity growth, the strength of global growth as well as potential for changes in fiscal policy -- a likely reference to Trump's promises to cut taxes, deregulate businesses and invest in infrastructure.  

"I would mention the potential for changes in fiscal policy to affect the economic outlook and the appropriate policy path. At this point, however, the size, timing, and composition of such changes remain uncertain," she said.

"However, as this discussion highlights, the course of monetary policy over the next few years will depend on many different factors, of which fiscal policy is just one."

Global growth could play another important role on the neutral rate through both trade and financial channels, the Fed chair said.

More importantly, she said that major swings in the dollar's exchange rate could present a headwind to inflation moving up to the Fed's target over the next couple years as the FOMC currently expects.

The dollar had another mention, when Yellen said "although core inflation is rising gradually from a low level, this increase mainly reflects the waning of the effects of earlier movements in the dollar, not upward pressure from resource utilization."

On the other hand, Yellen said she considers it "unlikely" that overheating "could rapidly emerge" as the labor market strengthens further, causing inflation to surge.

Economic growth is unlikely to pick up markedly in the near term, and the pace of monthly job gains has slowed in the past year. At the same time, wage growth has remained subdued.

"In the coming months, I expect some further strengthening in labor market conditions as the economy continues to expand at a moderate pace -- a view that is shared by most of my colleagues on the Federal Open Market Committee," she said.  

Yellen also spent a portion of her speech Thursday discussing benchmark policy rules, saying while they offer useful guidance, they are arguable still too restrictive.

Her full speech can be found here.

 

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