Yellen Addresses Congress

The Federal Reserve’s semi-annual Monetary Policy Report was presented to Congress today, while Janet Yellen, Federal Reserve Chair, is expected to give her remarks and briefly discuss the current economic situation and outlook.

Current Economic Situation and Outlook

Since her last appearance in February 2017, in her view, the U.S. labour market continues to strengthen as “job gains have averaged 180,000 per month so far this year, down only slightly from the average in 2016 and still well above the pace we estimate would be sufficient, on average, to provide jobs for new entrants to the labor force.” Unemployment within the market declined since the start of the year with 4.4% being reported in June. Janet Yellen indicated this is, “5‑1/2 percentage points below its peak in 2010 and modestly below the median of Federal Open Market Committee (FOMC) participants’ assessments of its longer-run normal level.”

The economy appears to have expanded at a moderate pace on average. Inflation-adjusted gross domestic product according to the Fed Chair, currently, is expected to have increased at an annual rate of 1.5% in the first quarter. More recent indicators suggest growth picked up within the second quarter driven by household spending which, “has picked up in recent months and continues to be supported by job gains, rising household wealth, and favorable consumer sentiment.”

Yellen emphasized in her remarks that, “inflation, overall consumer prices, as measured by the price index for personal consumption expenditures, increased 1.4 percent over the 12 months ending in May, up from about 1 percent a year ago but a little lower than earlier this year.” Federal Reserve Chair Janet Yellen underlined that the U.S. economy should continue to expand over the next few years, allowing the central bank to keep gradually raising interest rates, while also stressing the Fed is monitoring too-low inflation.

Remarks further noted that additional job gains should continue to back the growth of incomes and, therefore, consumer spending; global economic growth should support further gains in U.S. exports; and favorable financial conditions, coupled with the prospect of continued gains in domestic and foreign spending and the ongoing recovery in drilling activity, should continue to support business investment. These developments should increase resource utilization somewhat further, thereby fostering a stronger pace of wage and price increases.

Monetary Policy

Turning to monetary policy, the Fed Chair noted the FOMC continues to pursue maximum employment and price stability.  The FOMC raised the target range for the federal funds rate by 0.25% point at both its March and June meetings, bringing the target to a range of 1% to 1.25%. This was done as the Committee recognized the progress made by the economy. Yellen’s anticipates that as the evolution of the economy “will warrant gradual increases in the federal funds rate over time to achieve and maintain maximum employment and stable prices. That expectation is based on our view that the federal funds rate remains somewhat below its neutral level–that is, the level of the federal funds rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel.”

Balance Sheet

Lastly, the Fed Chair earmarked that the Federal Reserve will commence normalization of its balance sheet later this year. This process will see the Committee gradually reducing the Federal Reserve’s securities holdings by decreasing its reinvestment of the principal payment it receive from the securities held in the System Open Market Account.



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