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Commentary

Federal Reserve Chair Janet Yellen’s speech excerpt

US-Fed-Reserve.png

Here is a short excerpt of the Speech given by Janet L. Yellen – Chair of the Board of Governors of the Federal Reserve System at the World Affairs Council of Philadelphia, Philadelphia, Pennsylvania (complete speech here)

US Fed Reserve

Current Conditions and the Outlook for the U.S. Economy

  • Recent developments have been mixed
  • Economy has registered considerable progress toward the goal of maximum employment and price stability
  • News from the labour market has been good and recent signs of a slowdown in job creation bear close watching
  • Gradual increases in the federal funds rate only if incoming data are consistent with labour market conditions strengthening and inflation making progress toward the 2% objective.
  • Inevitable uncertainty surrounding the outlook for the economy:
    • Economic situation in Europe or China
    • S. productivity growth pick up
    • Rise in Oil Prices

The Current Economic Situation

  • Latest labour market report was disappointing
    • Payroll gains reported were much smaller in April and May than earlier in the year
    • Fewer people reported that they were actively seeking work
    • Number of people filing new claims for unemployment insurance remains quite low
    • Public’s perceptions of the health of the labor market remain positive.

The Economic Outlook

  • Recent data on retail sales and motor vehicle sales point to a significant step-up in consumer spending and GDP growth this quarter.
  • Expect the economic expansion to continue, with the labor market improving further and GDP growing moderately.

Some Important Uncertainties

  • Weak investment performance in recent months is concerning, and Friday’s employment report provides another reminder that the question is still relevant.
  • Uncertainty in the economic situation abroad – China faces considerable challenges in rebalancing its economy toward domestic demand and consumption. Another development that could shift investor sentiment is the upcoming referendum in the United Kingdom. A U.K. vote to exit the European Union could have significant economic repercussions.
  • Outlook for productivity growth – productivity growth is the key determinant of improvements in living standards, supporting higher pay for workers without increased costs for employers. Recent weak productivity growth likely helps account for the disappointing pace of wage gains during this economic expansion.
  • How quickly inflation will move back to 2%? – as long as oil prices do not resume their earlier declines and the dollar does not rise substantially further, inflation will move up to 2% over the next one to two years

Conclusion

Further gradual increases in the federal funds rate will probably be appropriate to best promote the FOMC’s goals of maximum employment and price stability. What is certain is that monetary policy is not on a preset course, and that the Committee will respond to new data and reassess risks.