Reiterating the Message in the Statement and Projections

At the press conference, Yellen reinforced the basic message of the statement and the projections. We saw the statement and projections as suggesting a greater likelihood of a December hike. As a consequence, we restored our call for a rate hike in December (see our commentary). 

▪ Low inflation isn’t seen as reflecting substantially lower underlying inflation: “We believe this primarily  reflects developments that are largely unrelated to broader economic conditions.” 

▪ Low inflation is likely to be transitory, even if a few price shocks don’t explain all the weakness: “I’ve mentioned a few idiosyncratic things but frankly it’s more broad-based than just idiosyncratic things. The  fact that inflation is unusually low this year does not mean that that’s going to continue.” 

▪ However, Yellen emphasized that the FOMC is still assessing the underlying inflation rate based on the  incoming data: “Our understanding of the forces driving inflation is imperfect and in light of the  unexpected lower inflation readings this year, the Committee is monitoring inflation developments  closely.” 

▪ We have made the argument that the performance of and outlook for inflation is the key to understanding  the decision process for a December hike, and she emphasized that funds rate decisions will still depend  very much on the incoming data: “I want to emphasize that we do have a commitment to raising inflation  to 2 percent, and as we watch incoming data, the assessments that you see participants write down  about the path of the federal funds rate, they are not set in stone.” 

▪ She reiterated the need for continuing normalization at a gradual pace so as to prevent a need for more rapid tightening: “We want to be careful not to allow the economy to overheat in a way that would force  us later on somewhere down the road to have to tighten monetary policy rapidly, which would cause a  recession and threaten the very desirable labor market conditions that we have now.” 

▪ In response to being asked about how elevated asset prices factor into monetary policy decisions, she  repeated the FOMC’s usual position: “We are taking account of movements in asset prices in evaluating  the appropriate stance [of] policy.” Asset prices are “important in determining the impact on the overall  outlook.” ▪ She outlined the conditions that would merit resumption of reinvestment: “The Committee would be  prepared to resume reinvestments if a material deterioration in the economic outlook were to warrant a  sizable reduction in the federal funds rate.”

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