December 17, 2014

Chair Yellens Press Conference

FINAL

Transcript of Chair Yellens FOMC Press Conference

December 17, 2014

CHAIR YELLEN. Good afternoon. The Federal Open Market Committee concluded its
last meeting of the year earlier today. As indicated in our policy statement, the FOMC
reaffirmed its view that the current 0 to percent target range for the federal funds rate remains
appropriate. The Committee also updated its forward guidance for the federal funds rate,
indicating that the Committee judges that it can be patient in beginning to normalize the stance
of monetary policy. This new language does not represent a change in our policy intentions and
is fully consistent with our previous guidance, which stated that it likely will be appropriate to
maintain the current target range for the federal funds rate for a considerable time after the end of
our asset purchase program. But with that program having ended in October, and the economy
continuing to make progress toward our objectives, the Committee judged that some
modification to our guidance is appropriate at this time. I will have more to say about our policy
decisions in a moment, but first let me review recent economic developments and the outlook.
In the labor market, progress continues toward the FOMCs objective of maximum
employment. The pace of job growth has been strong recently, with job gains averaging nearly
280,000 per month over the past 3 months; over the past 12 months, job gains averaged nearly
230,000 per month. The unemployment rate was 5.8 percent in November, three-tenths lower
than the latest reading available at the time of the September FOMC meeting. Broader measures
of labor market utilization have shown similar improvement, and the labor force participation
rate has leveled out. As noted in the FOMC statement, underutilization of labor resources
continues to diminish. Even so, there is room for further improvement, with too many people
who want jobs being unable to find them, too many who are working part time but would prefer

Page 1 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

full-time work, and too many who have given up searching for a job but would likely do so if the
labor market were stronger.
The Committee continues to see sufficient underlying strength in the economy to support
ongoing improvement in the labor market. Real GDP looks to have increased robustly in the
third quarter, reflecting solid consumption and investment spending. Smoothing through the
quarterly ups and downs earlier this year, real GDP expanded around 2 percent over the four
quarters ending in the third quarter, and the available indicators suggest that economic growth is
running at roughly that pace in the current quarter. The Committee continues to expect a
moderate pace of growth going forward.
Inflation has continued to run below the Committees 2 percent objective, and the recent
sizable declines in oil prices will likely hold down overall inflation in the near term. But as the
effects of these oil price declines and other transitory factors dissipate and as resource utilization
continues to rise, the Committee expects inflation to move gradually back toward its objective.
In making this forecast, the Committee is mindful of the recent declines in market-based
measures of inflation compensation. At this point, the Committee views these movements as
likely to prove transitory, and survey-based measures of longer-term inflation expectations have
remained stable. That said, developments in this area obviously bear close watching.
This outlook is reflected in the individual economic projections submitted in conjunction
with this meeting by the FOMC participants. As always, each participants projections are
conditioned on his or her own view of appropriate monetary policy. The central tendency of the
unemployment rate projections is slightly lower than in the September projections and now
stands at 5.2 to 5.3 percent at the end of next year, in line with its estimated longer-run normal
level. Committee participants generally see the unemployment rate declining a little further over

Page 2 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

the course of 2016 and 2017. The central tendency of the projections for real GDP growth is
2.3 to 2.4 percent for 2014, up a bit from the September projections. Over the next three years,
the projections for real GDP growth run somewhat above the estimates of longer-run normal
growth. Finally, although FOMC participants project inflation in the near term to be lower on
account of the decline in energy prices, they continue to see inflation moving gradually back
toward 2 percent. The central tendency of the inflation projections is 1.0 to 1.6 percent next
year, rising to 1.8 to 2.0 percent in 2017.
As I noted earlier, the Committee reaffirmed its view that the current 0 to percent
target range for the federal funds rate remains appropriate. Regarding forward guidance for the
federal funds rate, our October statement indicated that it likely would be appropriate to maintain
the current target range for the federal funds rate for a considerable time following the end of our
asset purchase program, especially if projected inflation continues to run below the Committees
2 percent longer-run goal. Todays statement, which indicates that the Committee judges that it
can be patient in beginning to normalize the stance of monetary policy, does not signify any
change in the Committees policy intentions as set forth in its recent statements. As before, this
judgment is based on the Committees assessment of realized and expected progress toward its
objectives of maximum employment and 2 percent inflationan assessment that is based on a
wide range of information, including measures of labor market conditions, indicators of inflation
pressures and inflation expectations, and readings on financial developments.
Given that the Committee is not signaling a change in policy, why did we update our
guidance? The reason is that, with the asset purchase program having been wound down in
October, it seemed less helpful to continue to communicate about the possible timing of our first
rate increase with reference to an event that is receding into the past. Instead, we have shifted to

Page 3 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

language that better reflects the Committees focus on the economic conditions that would make
liftoff appropriate. Employment is rising at a healthy rate and the U.S. economy is
strengthening, reflecting, in part, a highly accommodative stance of monetary policy. Of course,
inflation has been running somewhat below our goal of 2 percent, but we project that gap to
close gradually over time. As progress in achieving maximum employment and 2 percent
inflation continues, at some point it will become appropriate to begin reducing policy
accommodation. But, based on its current outlook, the Committee judges that it can be patient in
doing so. In particular, the Committee considers it unlikely to begin the normalization process
for at least the next couple of meetings.
This assessment, of course, is completely data dependent. If incoming information
indicates faster progress toward the Committees employment and inflation objectives than the
Committee now expects, then increases in the target range for the federal funds rate are likely to
occur sooner than currently anticipated. Conversely, if progress proves slower than expected,
then increases in the target range are likely to occur later than currently anticipated.
Once we begin to remove policy accommodation, it continues to be the Committees
assessment that, even after employment and inflation are near mandate-consistent levels,
economic conditions may, for some time, warrant keeping the target federal funds rate below
levels the Committee views as normal in the longer run. This guidance is consistent with the
paths for appropriate policy given by FOMC participants. Assuming that the economy evolves
broadly in line with participants expectations, almost all participants believe that it will be
appropriate to begin raising the target range for the federal funds rate in 2015.
There are a range of views on the appropriate timing of liftoff within the year, in part
reflecting differences in participants expectations for how the economy will evolve. By the time

Page 4 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

of liftoff, participants expect to see some further decline in the unemployment rate and additional
improvement in labor market conditions. They also expect core inflation to be running near
current levels but foresee being reasonably confident in their expectation that inflation will move
back toward our 2 percent longer-run inflation objective over time. Of course, as I previously
emphasized, the timing of the initial rise in the federal funds rate target, as well as the path for
the target thereafter, are contingent on economic conditions.
By late 2016, the median projection for the federal funds rate, at 2.5 percent, remains
more than 1 percentage point below the longer-run value of 3 percent or so projected by most
participants, even though the central tendency of the unemployment rate by that time is slightly
below its estimated longer-run value and the central tendency for inflation is close to our
2 percent objective. FOMC participants provide a number of explanations for the federal funds
rate running below its normal longer-run level at that timein particular, the residual effects of
the financial crisis, which are likely to continue to constrain household spending and constrain
credit availability for some time. But as these factors dissipate further, most participants expect
the federal funds rate to move close to its longer-run normal level by the end of 2017.
Finally, the Committee will continue its policy of reinvesting proceeds from maturing
Treasury securities and principal payments from holdings of agency debt and MBS. The
Committees sizable holdings of longer-term securities should help maintain accommodative
financial conditions and promote further progress toward our objectives of maximum
employment and inflation of 2 percent.
Thank you, and Ill be happy to take your questions.
JON HILSENRATH. Jon Hilsenrath from the Wall Street Journal. Chair Yellen, a
number of Fed officials have projected in the lead-up to this meeting that the most likely timing

Page 5 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

for liftoff was around the middle of next year. I wonder if you could clarify that. You said in
your statement that patient means not for at least two meetings. Your forecast thatthe
FOMCs forecasts seem to be consistent with something like a middle-of-the-year liftoff. Can
you speak to that? And can you also speak to the downdraft were seeing in inflation now and,
in particular, the market-based inflation expectations and whether that gives the Committee any
hesitance about proceeding towards liftoff in the months ahead?
CHAIR YELLEN. So I did say that the statement that the Committee can be patient
should be interpreted as meaning that it is unlikely to begin the normalization process for at least
the next couple of meetings. Now, that doesnt point to any preset or predetermined time at
which normalization iswill begin. There are a range of views on the Committee, and it will be
dependent on how incoming data bear on the progress the economy is making.
First of all, I want to emphasize that no meeting is completely off the table, in the sense
that if we do see faster progress toward our objectives than we currently expect, then it is
possible that the process of normalization would occur sooner than we now anticipate. And, of
course, the converse is also true. So, at this point, we think it unlikely that it will be
appropriatethat we will see conditions for at least the next couple of meetings that will make it
appropriatefor us to decide to begin normalization. A number of Committee participants have
indicated that, in their view, conditions could be appropriate by the middle of next year, but there
is no preset time. And there are a range of views as to when the appropriate conditions will
likely fall in place. So thats something we will be watching closely as the year unfolds.
You asked also, I think, about inflation. And, as I mentioned in my press statement,
especially with the downward pressures on inflation that we expect to see for a little while
because of declining oil prices and falling import prices, we certainly expect headline inflation to

Page 6 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

be under downward pressure for a while. And, as I mentioned, most participants do envision that
conditions will be appropriate sometime during this coming year to begin normalizing policy.
And they do largely expect that inflation will becore inflation will probably be running close
to its current level. And headline inflation could even be lower. But what they will want to have
is a feeling of reasonable confidence that when we start the process of normalizing policy, that it
will be moving up over time. And, of course, as labor market conditions continue to improve,
history suggests that as long as inflation expectations remain well anchored, that thats likely to
occur.
MARTIN CRUTSINGER. Marty Crutsinger with the Associated Press. Given the
whats happening now with the transition with the Fed, there seems to be a pattern developing
that the market expects big news to come when you have a press conference and no news to
come when you dont have one. But is that a good expectation? And is there any thought to
starting to have a press conference at every meeting?
CHAIR YELLEN. So I would really like to discourage that expectation. Every meeting
that we have is a live meeting at which the Committee could make a policy decision. And we
will feel free to do so. So I would really like to strongly discourage the expectation that policy
moves can only occur when theres a scheduled press conference. And we have long had in
place the ability to hold a press conference call, rather than an in-person press conference. And
we did do so on a number of occasions in earlier years. So the Committee, clearly, would want
to be able to explain its reasoning. As we begin the process of normalizing policy, every
meeting is live. And if we were to decide at a meeting to begin to normalize policy, I expect we
would hold a press conference call.

Page 7 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

STEVE LIESMAN. Was there concernSteve Liesman, CNBCwas there concern

expressed at the meeting that the signal coming from marketsand a variety of marketslower
oil prices, lower yields around the world, was one of deflation, and that that risk was one that
should, perhaps, overshadow the concern about inflation on the other side?
CHAIR YELLEN. Well, thanks Steve. Were very attentive to global developments and
certainly discuss them in the meeting. The very substantial decline we have seen in oil prices is
one of the most important developments shaping the global outlook. It will have different effects
in different regions and could well have effects on financial markets, as we are seeing. I think
the judgment of the Committee is that, from the standpoint of the United States and the U.S.
outlook, that the decline we have seen in oil prices is likely to be, on net, a positive. Its
something thats certainly good for families, for households. Its putting more money in their
pockets. Having to spend less on gas and energy, and so, in that sense, its like a tax cut that
boosts their spending power. The United States remainsalthough our production of oil has
increased dramatically, we still remain a net importer of oil. Of course there may be some offset
in the form of reduced drilling activity, and possibly some change, some reduction in cap-ex
plans in the drilling area. But, on balance, I would see these developments as a positive for the
standpoint of the U.S. economy.
With respect to deflation, we see downward pressure on headline inflation from declining
energy prices. We certainly recognize that that is going to be pushing down headline inflation
and may even spill over, to some extent, to core inflation. But, at this point, although we
indicated were monitoring inflation developments carefully, we see these developments as
transitory. And the Committee continues to believeespecially with the improvement were
seeing in the labor market, which we expect to continuethat inflation will move back up to our

Page 8 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

2 percent objective over time. As I indicated, we will want to feel, I believe, that people will
expect to feel reasonably confident about that when theywhen the process of normalization
begins. But we do expect them to be transitory.
ROBIN HARDING.Robin Harding from the Financial Times. Madame Chair, theres a
big gap between the pace markets expect you to raise interest rates and the rate youve indicated
in your dot plot. Are markets misunderstanding your intentions? Thank you.
CHAIR YELLEN. So thats difficult for me to say. What I want to say is that our
objective is to communicate as clearly as we possibly can about our plans and how we see the
economic environment unfolding. When the participants in the Committee fill out their
projections, theyre asked to give the path of the federal funds rate and of the various economic
variables that they consider most likely. Theyre not asked to talk about all the different things
that could happen, recognizing there is uncertainty, and the paths of the funds rate that they
would consider appropriate if those other alternatives were to happen. But other alternatives, I
think, are priced into the market. And one reason that the market prices may be different than
the Committees is because they place probability on other outcomes that look different than
what they regard as the modal forecast. They may also have a different set of expectations about
how theabout the economic outlook and how its likely to unfold. So I recognize that there are
significant differences. I cant tell you exactly what theyre due to. But what I do want to do is
communicate as clearly as I can, on behalf of the Committee, how we think the economys likely
to progress and how we would likely set the federal funds rate over time if that forecast bears
out.
ROBIN HARDING. It doesnt make you uncomfortable, where markets are now?

Page 9 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

CHAIR YELLEN. There are a number of different factors that are bearing on the path of
market interest rates, I think, including global economic developments. It is often the case that
when oil prices move down and the dollar appreciates, that that tends to put downward pressure
on inflation compensation and on longer-term rates. We also have safe-haven flows that may be
affecting longer-term Treasury yields. So I cant tell you exactly what is driving market
developments. But what I can say is that we are trying to communicate our thoughts as clearly
as we can.
STEVEN MUFSON. Hi. Steve Mufson from the Washington Post. I was just hoping
you could go into a little more detail about the oil effect. Even though you see it as transitory,
does that give you a little more room to keep rates low in the next few months? And if
alternately, if prices bounce back, whats that going to do to your ability to change rates, and
how might you react to that?
CHAIR YELLEN. Well IId say, you know, that I think what we have seen since the
mid-80s is that, in an environment where inflation expectations are well anchored, that
movements in oil and commodity prices and import prices tend to have transitory effects on the
inflation outlook. There were many years in which we had unanticipated increases in oil prices,
really beginning in 2004 and 2005, that put upward pressure on headline inflation and sometimes
even spilled through into core, and, typically, the Committee looked through those impacts on
inflation with the view that they would be transitory. And I think experience bears out that they
were transitory. And I think thats the Committees expectation here. Inflation, even core
inflation, has been running below our inflation objective. Movements in oil, you know, now
down and perhaps later up, will move inflation around, certainly headline inflation. But the
Committee, at this point, anticipates those impacts to be transitory. So as long as participants

Page 10 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

feel reasonably confident that the inflation projection is one where we expect to meet our
2 percent objective over time, thats what I think how theyll be looking at things as we decide
on the path for the funds rate.
BINYAMIN APPELBAUM. Binya Appelbaum, New York Times. Does a couple
mean two? And when you talk about reasonable confidence in inflation expectations, can you
elaborate a little bit about what it would take to give you reasonable confidence that inflation is
headed back to 2 percent?
CHAIR YELLEN. So a coupleI believe the dictionary probably says, a couple
means two. So, a couple means two. And with respect to inflationour forecast for inflation
and inflation expectations, let me start by saying I think its important that monetary policy be
forward looking. The lags in monetary policy are long, and, therefore, the Committee has to
base its decisions on how to set the federal funds rate looking into the future. Theory is
important, and theories that are consistent with historical evidence will be something that
governs the thinking of many people around the table. Typically, we have seen that as long as
inflation expectations are well anchored, that as the labor market recovers, well gradually see
upward pressure on both wages and prices, and that inflation will tend to move back toward
2 percent. I think historically we have seen, as the economy strengthens and slack diminishes,
that inflation does tend to gradually rise over time. And as longyou know, Ijust speaking
for myself, I will be looking for evidence that I think strengthens my confidence in that view
and, you know, looking at the full range of data that bear on whether or not thats a reasonable
view of how events will unfold. But its likely to be a decision thats based on forecasts and
confidence in the forecast.

Page 11 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

MICHAEL FLAHERTY. Michael Flaherty, Reuters News. Chair Yellen, a lot of

attention has been focused on liftoff. But, I wonder, has the Committee discussed what happens
after that liftoff and what, you know, the rate path would be after you make the first move?
CHAIR YELLEN. So, I think you raise a very important point because, although there is
a great deal of market focus on the timing of liftoff, what to matter in thinking about the stance
of policy is what the entire path of interest rates will look like. And I really dont have much for
you other than to say that they will be data dependentthat, over time, the stance of policy will
be adjusted to try to keep the economy on a track where we see continuing progress toward
achieving our goals of maximum employment and price stability. Theresyou know, the
federal funds rate has been sitting in the 0 to percent range now for six years. This isand we
have a very large balance sheet. We are providing a very highly accommodative monetary
policy. And even as we begin to normalize the stance of monetary policy, when that becomes
appropriate, its important to remember that monetary policy will still be very accommodative
for a long time. And as we begin to normalize policy, we will be looking at unfolding economic
developments. And as the economy strengthens, and we come closer to achieving our
objectives, I think its very likely that we will, you know, progress on the path of normalizing
policy. But I cant tell you, specifically, other than saying it will depend on progress, and moves
will be data dependent. I cant say much more than that.
GREG IP. Chair Yellen, the Committees projections show unemployment running
below your own views on where full employment should be for the next several years. Does that
reflect a desire on the part of the Committee that the economy run somewhat above potential for
a while? And, if so, can you elaborate on why it wants that and what purpose it achieves? And,
related to the question that Jon Hilsenrath asked earlier, youve called the decline in inflation

Page 12 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

and market-based measures of inflation expectationstransitory. But this decline has been very
pronounced in the five-year-forward range. So were talking about expectations that inflation
many years from now will be below target. And some market participants see that as evidence of
declining credibility in the Committees long-term objective. Why do you still view that as
transitory?
CHAIR YELLEN. So youyour first question is: Why is it that the Committee sees
unemployment as declining slightly below its estimate of the longer-run natural rate? And, I
think, in part, the reason for that is that inflation is running below our objective, and the
Committee wants to see inflation move back toward our objective over time. And a short period
of a very slight undershoot of unemployment below the natural rate will facilitate a slightly faster
return of inflation to our objective. It is, I should say, a very small undershoot in a situation
where there is great uncertainty about exactly what constitutes maximum employment or a
longer-run normal rate of unemployment. We also do see the different measures of slack in the
labor market point to different assessments of just what maximum employment is. The standard
unemployment rate, for quite some time now, has been signaling a little bit less slack in the labor
market than measures that are somewhat broader that, for example, include the unusually large
number of people who were part-time employed but would prefer full-time jobs. And the portion
of the decline weve seen in labor force participation, that looks like it would disappear in aor
be eroded in a stronger economy. And so it may be that with a very small undershoot of this
longer-run normal level of the unemployment rate, as measured by the standard unemployment
rate, well be seeing some further progress on those other margins of slack. But its important to
point out that the Committee is not anticipating an overshoot of its 2 percent inflation objective.

Page 13 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

Oh, and longer-dated expectations. Well, what I would say, we refer to this in the
statement as inflation compensation rather than inflation expectations. The gap between the
nominal yields on 10-year Treasuries, for example, and TIPS have declinedthats inflation
compensation. And five-year, five-year-forwards, as youve said, have also declined. That
could reflect a change in inflation expectations, but it could also reflect changes in assessment of
inflation risks. The risk premium thats necessary to compensate for inflation, that might
especially have fallen if the probabilities attached to very high inflation have come down. And it
can also reflect liquidity effects in markets. And, for example, its sometimes the case that
when there is a flight to safety, that flight tends to be concentrated in nominal Treasuries and
could also serve to compress that spread. So I think the jury is out about exactly how to interpret
that downward move in inflation compensation. And we indicated that we are monitoring
inflation developments carefully.
PETER COOK. Madame Chair, Peter Cook of Bloomberg Television. I want to follow
up, if I could, on firming going forward, on the normalization once liftoff takes place. I know
you said this is going to be data dependent. Does that suggest to markets, to those watching, that
the measured pace weve seen in a previous tightening cycle, those quarter-point increments, that
thats not something markets should expect? And whats your own takeaway from how effective
that measured pace was back in that previous tightening cycle?
And if I could follow up just separately on the dissents at this meeting. There were three
dissents, a notable number, certainly. What does that suggest about the debate around the table
and your ability to forge consensus going forward? Are you disappointed with the number of
dissents?

Page 14 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

CHAIR YELLEN. So let me start with the number of dissents. There is a wide range of
opinion in the Committee. I think its appropriate for people to be able to express their views.
And, in a sense, you see dissents on both sides. I think the statement does a good job of
reflecting what the majority of the Committee thinks is appropriate policy. So atyou know, at
a time like this, where we are making consequential decisions, I think its very reasonable to see
divergences of opinion. And just remind me, what was the otherabout the
PETER COOK. Measured pace.
CHAIR YELLEN. measured pace. There certainly has been no, you know, decision
on the part of the Committee to move at a measured pace or to use language like that. I think
quite a few people, looking back on the use of that language in theI cant remember if it was
12 or 16 meetings, where there were 25 basis point moves. Wed probably not like to repeat a
sequence in which there was a measured pace and 25 basis point moves at every meeting. So I
certainly dont want to encourage you to think that there will be a repeat of that.
Many members of the Committee, participants, have said that they think policy should be
based on the actual evolution of economic activity and inflation, which tends to be variable over
time, and thats why I say I anticipate it will be data dependent. We have continued to provide
guidance, the same guidance that we have for some time, that says the Committee anticipates
that, even after employment and inflation are near mandate-consistent levels, economic
conditions may, for some time, warrant keeping the target federal funds rate below levels the
Committee views as normal in the longer run.
I know thats a mouthful, but it says, in effect, that the Committee believes that the
economic conditions that have made recovery difficult, were getting beyond them. They are
optimistic that those conditions will lift. They see the longer-run normal level of interest rates as

Page 15 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

around 3 percent. So theres no view in the Committee that there is secular stagnation in the
sense that we wont eventually get back to pretty historically normal levels of interest rates. But
they have said, itll, you know, the economy has required to get where it is a good deal of
monetary policy accommodation; we expect to be able to normalize policy. But, until those
conditions have lifted that have held back economic activity, monetary policy will need to stay
accommodative. So, in that sense, perhaps thats equivalent to saying that the path of
normalization is anticipated to be relatively gradual. But, again, the path of rates will depend on
how economic conditions actually evolve, and thats nothing more than an expectation on the
part of the Committee.
PEDRO DA COSTA. Pedro da Costa with Dow Jones Newswires. Enough about rates.
I want to ask you about the New York Fed. The New York Feds been in the news a lot lately.
President Dudley was invited to Congress to testify about conflicts of interest there. You had
things like the Segarra tapes, the Beim report, and, most recently, the revelation that a former
New York Fed official was exchanging information with someone at Goldman Sachs who was
alsohad New York Fed connections. I just wonderand also there were scandals during the
crisis related to Stephen Friedman regarding the New York Fed, and his purchase of Goldman
Sachs stock. Do you see the New York Fed as a black mark on the Fed system because of these
recurring scandals? Have you talked to Bill Dudley about reforming the image of that particular
regional Fed? And do you think a person that hasthat spent 21 years of his career at Goldman
Sachs is in a position to regain public credibility about conflicts of interest?
CHAIR YELLEN. Well, let me say that I think its very important for the Federal
Reserve System to have confidence in the quality of its supervision. And I do have a good deal
of confidence in the quality of our supervision program, for the banking organizations we

Page 16 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

supervise in general, and that also applies to the largest banking organizations. We rely on
examiners who are in the field and at the Reserve Banks to be providing information about
whats happening in those organizations. But that information feeds into a process in which it is
not individuals at any single Reserve Bank. But, at the Board, its a Board-led process, and it
involves senior officials at a number of different Reserve Banks. Its also a multidisciplinary
process that involves not only people from supervision, but those from markets, from economic
research. Experts who focus on financial stability all come together to evaluate the information
that they have and to assign supervisory ratings and decide on the appropriate program for all of
those large institutions. Weve strengthened the process of supervision enormously since the
crisis, and I feel a very good sense of confidence in how were carrying that out.
Now, it is important to make sure that we have fed into this process all the information
thats relevant to making the right decisions. And when there are individuals who are examiners,
who may disagree with others in their team about how to interpret whats going on at a particular
institution, its important that there be channels by which they can make sure that disagreements
are fed up to the highest levels. This is true throughout the work we do. We do economic
forecasting, and ourthe FOMC receives information to help us make decisions, but obviously
there are disagreements aboutamong economists about how to interpret developments. Its
also important for us there to make sure we understand alternative views. So this is important in
supervision. Weve announced that the Board has undertaken a review of whether or not there
are appropriate mechanisms in place in all of the Reserve Banks that individuals who disagree
with decisions can make their own views known and feed into the process, and weve also asked
our inspector general to look into that.

Page 17 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

JEFF KEARNS. Thank you. Jeff Kearns from Bloomberg News. Id also like to get off
monetary policy and ask you about the Federal Reserves relationship with Congress.
Specifically, how worried are you about legislation that has been proposed, and may be proposed
again in the next Congress, that would reduce Fed independence? Would you see yourself trying
to fight back? Or would you see yourself trying to go to Congress to work with them to do more
with transparency or something else to reduce their concerns without making them law? And, if
there were bills sent to the White House, would you talk to the President about vetoing them? Or
do you have any confidence that he would veto bills that would reduce the Feds independence?
Thanks.
CHAIR YELLEN. So let me simply say that Congress has assigned us important tasks in
monetary policy and in other roles that we perform, and the Federal Reserve is highly focused on
attempting to carry out the mandates that Congress has given us in the area of monetary policy.
Its our dual mandate to promote maximum employment and price stability, and thats what
were working on.
You know, I would say that the ability of a central bank to make the decisions about
monetary policy that it regards as in the best longer-run interests of the economy, free of shortrun political interference, is very important to the effective conduct of monetary policy. And I
think that history shows, not only in the United States but around the world, that central bank
independence promotes better economic performance. So I do think central bank independence
is very important, and that its important to make sure that we can make the decisions we think
are best, free of short-run political interference with respect to monetary policy.
We should be accountable, and we are accountable to Congress in explaining what we do.
I believe strongly in transparency, and I believe strongly that we should communicate as clearly

Page 18 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

what we are doing and the rationale for doing it, and I am very open to looking for ways
ourselves to improve our communications and transparency, and working with Congress to do
that. But I would be very concerned about actions. Back in 1978, Congress explicitly passed
legislation to ensure that there would be no GAO audits of monetary policy decisionmaking
namely, policy audits. I certainly hope that will continue, and I will try to forcefully make the
case for why thats important.
JEFF KEARNS. Would it veto?
CHAIR YELLEN. I cannot speak for the White House. I wouldnt attempt to do that.
PETER BARNES. Peter Barnes of Fox Business, maam. And also, Ill stay off of
interest rates. And first, I want to wish you happy holidays.
CHAIR YELLEN. Thank you.
PETER BARNES. And, second, I want to ask you about the Russian economy. Did that
come up in the meeting in your discussion about the global economic developments? As you
know, theres a lot of concern that with the drop in oil prices, the Russian economy could be in
some trouble. Russia owes a lot of money to U.S. and foreign banks and Russian companies. Is
there any concern about default? Any concern about possible contagion? And, if so, has the Fed
taken any steps to prepare for that? Thank you.
CHAIR YELLEN. Well, we certainly did review global economic developments,
including developments in the Russian economy. Clearly, Russia has been hit very hard by the
decline in oil prices, and the ruble has depreciated enormously in value, and this is posing a
series of very difficult economic conditions in the Russian economy.
Of course we discussed what the potential spillovers are to the United States, which could
occur both through trade and financial linkages. But these linkages are actually relatively small.

Page 19 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

Russia accounts for less than 1 percent of U.S. trade volume, and U.S. banks exposure to
Russian residents is really quite small in terms ofrelative to their capital. In terms of the
portfolios of U.S. residents, there are Russian securities, but they arethey account for a very
small share. So I expect that the linkages back to the spillovers to the United States, both
through trade and financial channels, would be small. Europe, of course, is somewhat more
exposed to Russia, both because Russia is an important supplier of oil and natural gas to Europe
and the financial linkages are somewhat greater. But, in the case of the United States, I see the
spillovers relativeit is pretty small. But were obviously watching that closely.
GREG ROBB. Greg Robb from MarketWatch. Also, happy holidays.
CHAIR YELLEN. Thank you. Same to you.
GREG ROBB. Theres a contagion risk to thefrom low oil prices that people are
talking about in the markets. What does it mean to the banks that have lent, you know, into the
oil patch with the low oil prices? And I guess, you know, your warnings about leveraged
loansyou have made warnings over the past year about leveraged lending. Are you worried
that they havent been heeded? Thank you.
CHAIR YELLEN. So, I mean, there is someyoure talking about in the United States
exposure? I mean, we have seen some impacts of lower oil prices on the spreads for high-yield
bonds, where theres exposure to oil companies that may see distress or a decline in their
earnings, and we have seen some increase in spreads on high-yield bonds more generally. I think
for the banking system, as a whole, the exposure to oilIm not aware of significant issues
there. This is the kind of thing that is part of risk management for banking organizations and the
kind of thing they look at in stress tests. But the movements in oil prices have been very large
and undoubtedly unexpected.

Page 20 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

Wein terms of leverage, and whether or not levered entities could be badly affected by
movements in oil prices, leverage in the financial system, in general, is way down from the
levels before the crisis. So its not a major concern that there are levered entities that would be
badly affected by this, but well have to watch carefully. There have been large and unexpected
movements in oil prices.
STEVE BECKNER. Good afternoon, Chair Yellen. Steve Beckner of MNI. I will go
back to interest rates, if you dont mind. Actually, its a question about balance sheet effects on
the overall appropriate level of monetary policy. In reaffirming the reinvestment policy, the
FOMC says, once again, that this will help maintain accommodative financial conditions. In the
past, its said that the large portfolio of securities will exert a downward effect on long-term
interest rates. As you look forward to raising short-term rates, to what extent does the FOMC
need to take into account this sort of residual, accommodative effect of maintaining a large
balance sheet?
CHAIR YELLEN. So I agree, and thats why we stated that we typically think of the
monetary policy impact of our asset purchases as depending on the stock of assets that we hold
on our balance sheet rather than the flow of purchases, and so were reminding the public that we
continue to hold a large stock of assets, and that is tending to push down term premiums in
longer-term yields. We made clear when weor tried to make clearwhen we issued our
normalization principles in September that we intend to use changes in our target for the federal
funds rate as the main tool that we will actively use to adjust financial conditions. Rather than
actively planning to sell the assets that weve put onto our balance sheet, sometime after we
begin raising our targets for short-term interest rates, depending on economic and financial
conditions, were likely to reduce or cease reinvestment and gradually run down the stock of our

Page 21 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

assets. But our active tool for adjusting monetarythe stance of monetary policy so that it is
appropriate for the economic needs for the country, that will be done through adjusting our shortterm target range for the federal funds rate.
KEVIN HALL. Kevin Hall with McClatchy Newspapers. I cant believe nobodys
asked you the most important question, about whats going on with your San Francisco 49ers,
since everybodys already wished you a happy holiday.
Can you talk a little bit about housing? Few things are more important to Americans in
their wealth creation than housing. Youve, in your statement, noted that it continues to be a
drag. Mr. Dudley haswas actually relatively upbeat in his forecast. I dont know if thats a
view shared on the Committee. What do you think is holding housing back? What can Congress
do? What will you tell Congress in the coming year? And moreand a clarification on the
Dudley question from earlier. You didnt mention him by name in your being pleased by quality
of supervision. Are you pleased with Mr. Dudleys handling of the events?
CHAIR YELLEN. So let me start with that. I have great confidence in President
Dudley. Hes done a fine job in running the New York Fed, and I want to be very clear that I
have great confidence in him. Hes a distinguished public servant, and he has worked very hard
in the aftermath of the crisis to make sure that the New York Fed is doing all that it needs to do
to contribute to the work that we do both in financial stability and in supervision. And lets see,
the other question that you asked was about
KEVIN HALL. Housing.
CHAIR YELLEN. about housing. So, you know, Ive been surprised that housing
hasnt recovered more robustly than it has. In part, I think it reflects very tight credit
continuing tight credit conditions for any borrower that doesnt have really pristine credit, you

Page 22 of 23

December 17, 2014

Chair Yellens Press Conference

FINAL

know, credit ratings, and my hope is that that situation will ease over time. In addition,
household formation has been very depressed, and my expectation is that, as the labor market
continues to improve and households feel better about their financial condition, that we will see
household formation pick up and a somewhat stronger recovery than weve seen thus far in
housing.

Page 23 of 23