Yellen’s Prepared Testimony: Some Hints on Timing

Chair Yellen’s prepared remarks were fairly bland, but there were a couple takeaways. She essentially ruled  out the possibility of an announcement on balance sheet policy at the July FOMC meeting by providing no  new hints on the timing–unlike some other policymakers, who have used phrasing like “relatively soon.” As  in her June press conference, she noted that outsized reductions in certain categories of prices in recent  months will hold down 12-month inflation for some time, implying that the FOMC will be willing to continue  normalizing monetary policy even though the 12-month rate isn’t likely to rebound quickly. Her remarks  reaffirmed our sense that the FOMC is ready to get started on runoff plans in September but will hold off on  the next rate hike until December.  

Here are a few highlights: 

• She continues to downplay the decline in core inflation. 

o “It appears that the recent lower readings on inflation are partly the result of a few unusual  reductions in certain categories of prices; these reductions will hold 12-month inflation down  until they drop out of the calculation.” 

• The Phillips curve is not dead. 

o “There is, for example, uncertainty about when–and how much–inflation will respond to  tightening resource utilization.” 

• Noticeably absent was concern about the consequences of overshooting. The prospect of inflation  returning to the 2 percent objective appeared to be the sole concern that is weighing on monetary  policy decisions. 

• She continued to distinguish between the “currently quite low” neutral rate and the “longer-run”  neutral rate. The current neutral level is still below levels that prevailed in recent decades as a result  of so-called headwinds that are anticipated to diminish “somewhat.” 

• She devoted a paragraph to the role of simple policy rules in informing monetary policy decisions and pointed to the more in-depth discussion that was included in the Monetary Policy Report itself. o “Prescriptions [of simple policy rules] cannot be applied in a mechanical way; their use requires careful judgments about the choice and measurement of the inputs into these rules, as well  as the implications of the many considerations these rules do not take into account.” 

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