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.”