A Challenging Decade and a Question for the Future (speech by Janet Yellen, The Fed chair)
A Challenging Decade and a Question for the Future
Chair Janet L. Yellen
At the 2017 Herbert Stein Memorial Lecture, National Economists Club, Washington, D.C.
I am delighted to address the National Economists Club, and I am also honored on this occasion to be associated with Herb Stein, whose public service and scholarship--characterized by careful analysis, clear-eyed pragmatism, and sharp wit--exemplified the best in our profession. Herb was willing to consider new ideas and new approaches to government policy, and that openness fits with the subject of my remarks today. Namely, I will discuss the unconventional monetary policy tools used by the Federal Reserve since the start of the financial crisis and Great Recession and the role that those tools may play in addressing future economic challenges.
Nearly 10 years ago, with our nation mired in its worst economic and financial crisis since the Great Depression, the Federal Open Market Committee (FOMC) confronted a key challenge to the pursuit of its congressionally mandated goals of maximum employment and price stability: how to support a weakening U.S. economy once our main conventional policy tool, the federal funds rate, had been lowered to essentially zero. Addressing that problem eventually led to a second challenge: how to ensure that we could scale back monetary policy accommodation in an orderly fashion once it was no longer needed. Failure to meet either challenge would have significantly compromised our ability to foster maximum employment and price stability, leading to serious consequences for the livelihoods of millions of Americans.
I will argue today that we have met the first challenge and have made good progress to date in meeting the second. Thanks in part to the monetary policy accommodation provided in the aftermath of the crisis--especially through enhanced forward rate guidance and large-scale asset purchases--the U.S. economy has made great strides. Indeed, with the economy now operating near maximum employment and inflation expected to rise to the FOMC´s 2 percent objective over the next couple of years, the FOMC has been scaling back the accommodation provided in response to the Great Recession. In no small part because of our authority to pay interest on excess reserves, the process of removing policy accommodation is working well.
After discussing a few issues related to our recent decision to start reducing the size of the Federal Reserve´s balance sheet, I will address a key question: What is the appropriate future role of the unconventional policy tools that we deployed to address the Great Recession? While I believe that influencing short-term interest rates should continue to be our primary monetary policy lever in normal times, our unconventional policy tools will likely be needed again should some future economic downturn drive short-term interest rates back to their effective lower bound. Indeed, empirical analysis suggests that the neutral federal funds rate--defined as the level of the federal funds rate that is neither expansionary nor contractionary when the economy is operating near its potential--is much lower than in previous decades. Consequently, the probability that short-term interest rates may need to be reduced to their effective lower bound at some point is uncomfortably high, even in the absence of a major financial and economic crisis.
I will return to the question about the future of our various policy tools, but first I would like to review our experience this decade, which I view as instructive for addressing that question.
Meeting the Challenge of Providing Additional Accommodation
A substantial body of evidence suggests that the U.S. economy is much stronger today than it would have been without the unconventional monetary policy tools deployed by the Federal Reserve in response to the Great Recession. Two key tools were large-scale asset purchases and forward guidance about our intentions for the future path of short-term interest rates. The rationale for those tools was straightforward: Given our inability to meaningfully lower short-term interest rates after they reached near-zero in late 2008, the FOMC used increasingly explicit forward rate guidance and asset purchases to apply downward pressure on longer-term interest rates, which were still well above zero.
Longer-term interest rates reflect, in part, financial market participants´ expectations of the future path of short-term interest rates. As a result, FOMC communications that affect those expectations--such as the enhanced forward rate guidance provided in our post-meeting statements in the aftermath of the Great Recession--can affect longer-term interest rates.1 In addition, longer-term interest rates include a term premium, which is the compensation demanded by investors for bearing the interest rate risk associated with longer-term securities. When the Federal Reserve buys longer-term securities in the open market, the remaining stock of securities available for purchase by the public declines, which pushes the prices of those securities up and thus depresses their yields by lowering the term premiums embedded in those yields.2 Several studies have found that our forward rate guidance and asset purchases did appreciably reduce longer-term interest rates.3
The FOMC´s goal in lowering longer-term interest rates was to help the U.S. economy recover from the recession and stem the disinflationary forces that emerged from it. Some have suggested that the slow pace of the economic recovery proves that our unconventional policy tools were ineffective. However, one should recognize that the recovery could have been much slower in the absence of our unconventional tools. Indeed, the evidence strongly suggests that forward rate guidance and securities purchases--by substantially lowering borrowing costs for millions of American families and businesses and making overall financial conditions more accommodative--did help spur consumption and business spending, lower the unemployment rate, and stave off disinflationary pressures.4
Other central banks also deployed unconventional policy tools in the years that followed the financial crisis.5 Evidence accumulated from their experience also supports the notion that these tools have helped stimulate economic activity in their countries after their short-term interest rates were lowered to near-zero--and, in some cases, even below zero.6
Meeting the Challenge of Scaling Back Accommodation
By 2014, the U.S. economy was making notable progress toward the FOMC´s goals of maximum employment and price stability. The unemployment rate had dropped to 6 percent by midyear--well below its Great Recession peak of 10 percent--and other measures of labor market conditions were also showing significant improvement. In addition, inflation, as measured by the change in the price index for personal consumption expenditures, had reached about 1-3/4 percent by mid-2014 after hovering around 1 percent in the fall of 2013. Reflecting that progress, the Federal Reserve´s focus was shifting from providing additional monetary policy accommodation to scaling it back.7 A key question for the FOMC then was how to reduce the degree of accommodation in the context of a vastly expanded Federal Reserve balance sheet.
One possible approach was to start by reducing the Federal Reserve´s securities holdings while short-term interest rates remained at the lower bound. We could allow securities to roll off the Federal Reserve´s balance sheet and even sell securities, thereby putting upward pressure on long-term rates while calibrating the pace and configuration of the reduction in our holdings as warranted by our maximum employment and price stability objectives. Eventually, once our securities holdings had shrunk sufficiently, the FOMC could start nudging up its short-term interest rate target.
One problem of this "last in, first out" approach was that the FOMC does not have any experience in calibrating the pace and composition of asset redemptions and sales to actual and prospective economic conditions. Indeed, as the so-called taper tantrum of 2013 illustrated, even talk of prospective changes in our securities holdings can elicit unexpected abrupt changes in financial conditions.
Given the lack of experience with reducing our asset holdings to scale back monetary policy accommodation and the need to carefully calibrate the removal of accommodation, the FOMC opted to allow changes in the Federal Reserve´s securities holdings to play a secondary role in the Committee´s normalization strategy. Rather than balance sheet shrinkage, the FOMC decided that its primary tool for scaling back monetary policy accommodation would be influencing short-term interest rates.
As we explained in our "normalization principles" issued in September 2014, the FOMC decided to maintain the overall size of the Federal Reserve´s securities holdings at an elevated level until sometime after the FOMC had begun to raise short-term interest rates.8 Once normalization of the level of the federal funds rate was "well under way" and the Committee judged that the economic expansion was strong enough that further increases in short-term interest rates were likely to be warranted, the FOMC would gradually and predictably reduce the size of the balance sheet by allowing the Federal Reserve´s securities holdings to "run off"--that is, we would allow our balance sheet to shrink passively by not reinvesting all of the principal payments from our securities.9
One advantage of the FOMC´s chosen approach to scaling back accommodation is that both the FOMC and the public have decades of experience with adjustments in short-term interest rates in response to changes in economic conditions. Nonetheless, the post-crisis environment presented a new test to the FOMC´s ability to influence short-term interest rates.
Before the crisis, the FOMC could raise the federal funds rate--the rate at which banks with excess reserves lend to banks with a reserve need--by removing a small amount of reserves from the banking system. That would translate into a higher federal funds rate because reserves were relatively scarce to begin with. The intuition was simple: The FOMC would signal that it was going to tighten conditions in the reserve market, and the cost of obtaining reserves in the market--the federal funds rate--would rise. Other market interest rates would then increase accordingly.
After the crisis, however, reserves were plentiful because the Federal Reserve funded its large-scale asset purchases through adding reserves to the system--crediting the bank accounts of those who were selling assets to the Fed. Moreover, in light of the FOMC´s decision not to sell the longer-term securities it acquired, reserves were likely to remain plentiful for the foreseeable future. Consequently, when the time came to remove accommodation, a key question for the Committee was how to raise the federal funds rate in an environment of abundant reserves.10 An important part of the answer to that question came in the Federal Reserve´s authority to pay interest on excess reserves. The Congress granted the Federal Reserve that authority in 2006, to become effective in 2011. However, in the fall of 2008, the Congress moved up the effective date to October 2008.
Having authority to pay interest on excess reserves means that the Federal Reserve can influence the federal funds rate and other short-term interest rates regardless of the amount of excess reserves in the banking system. The mechanics of the new framework are straightforward: Banks will generally only provide short-term funding at an interest rate around or above what they could earn at the Fed. As a result, if the Federal Reserve raised the rate it paid, other short-term lending rates would likely rise as well.11 This new approach for raising short-term interest rates is working well: Since December 2015, we have raised the interest paid on excess reserves and the target range for the federal funds rate by 100 basis points, and the effective federal funds rate has risen accordingly.12
A Closer Look at Our Balance Sheet Strategy
In light of our recent decision to start reducing our securities holdings this month, I would like to discuss a few aspects of our balance sheet strategy.13 The FOMC anticipated that its decision to maintain the size of the Federal Reserve´s securities holdings at an elevated level until sometime after the beginning of rate hikes would keep some downward pressure on longer-term interest rates well after the end of its asset purchase programs. Although estimates of the effect of our securities holdings on longer-term interest rates are subject to uncertainty, a recent study reported that the Federal Reserve´s securities holdings were reducing the term premium on the 10-year Treasury yield by roughly 1 percentage point at the end of 2016.14
The guidance that the FOMC would eventually start a gradual and predictable reduction of the Federal Reserve´s securities holdings implied that the downward pressure on longer-term yields would likely diminish over time as financial market participants came to expect that the start of balance sheet normalization was nearing. Indeed, with that process now under way, it is likely that our securities holdings are now depressing the term premium on the 10-year yield by somewhat less than the 1 percentage point estimate reported for late last year.
Several factors suggest that the downward pressure on term premiums exerted by our securities holdings is likely to diminish only gradually as our holdings shrink. For instance, as I have already noted, our intention to reduce our balance sheet by reducing reinvestment of repayments of principal on our holdings--rather than selling assets--has been well communicated for several years now. As a result, we do not anticipate a jump in term premiums as our balance sheet reduction plan gets under way. In addition, the maturity distribution of our securities holdings is such that it will take some years for the size of our holdings to normalize via runoff.15
The judgment that the downward pressure on term premiums will decline only gradually as we reduce the size of our balance sheet stands in sharp contrast to evidence suggesting that this pressure built up rather quickly when we were expanding our balance sheet. To understand this contrast, remember that, unlike our plan to shrink our balance sheet, the various phases of our asset purchases had, to differing degrees, an element of surprise, with asset purchase announcements occasionally leaving a distinct imprint on the path of longer-term yields. Moreover, each of our asset purchase programs resulted in a rapid increase in our securities holdings during a relatively short period, whereas the normalization process will play out gradually over many years.
I have focused thus far on the likely response of term premiums to our balance sheet reduction plan. Let me turn my attention briefly to the likely response of longer-term yields, which, as I have noted, reflect both a term premium component and expectations of the future path of short-term interest rates. While the available evidence points to a strong reaction of longer-term yields to our asset purchases, it is conceivable that those yields will react much more modestly to our balance sheet reduction plan.
Consider, for instance, a hypothetical scenario in which the FOMC has decided not to rely on balance sheet reduction to scale back accommodation, choosing instead to continue to reinvest indefinitely all principal payments from the Federal Reserve´s securities holdings. If financial market participants perceived no change in the economic outlook and no intention on the part of the FOMC to alter the overall stance of monetary policy, the FOMC´s inclination to leave the size of the balance sheet unchanged would be taken as an indication that the FOMC would instead rely more on increases in short-term interest rates to scale back accommodation, resulting in a faster pace of short-term interest hikes. On net, longer-term yields may be little affected by this hypothetical scenario: While the decreased emphasis on balance sheet reduction would depress term premiums and hold longer-term yields lower, the expected faster pace of short-term interest rate increases would push longer-term yields higher.16
A Key Question for the Future
As the financial crisis and Great Recession fade into the past and the stance of monetary policy gradually returns to normal, a natural question concerns the possible future role of the unconventional policy tools we deployed after the onset of the crisis. My colleagues on the FOMC and I believe that, whenever possible, influencing short-term interest rates by targeting the federal funds rate should be our primary tool. As I have already noted, we have a long track record using this tool to pursue our statutory goals. In contrast, we have much more limited experience with using our securities holdings for that purpose.
Where does this assessment leave our unconventional policy tools? I believe their deployment should be considered again if our conventional tool reaches its limit--that is, when the federal funds rate has reached its effective lower bound and the U.S. economy still needs further monetary policy accommodation.
Does this mean that it will take another Great Recession for our unconventional tools to be used again? Not necessarily. Recent studies suggest that the neutral level of the federal funds rate appears to be much lower than it was in previous decades.17 Indeed, most FOMC participants now assess the longer-run value of the neutral federal funds rate as only 2-3/4 percent or so, compared with around 4-1/4 percent just a few years ago.18 With a low neutral federal funds rate, there will typically be less scope for the FOMC to reduce short-term interest rates in response to an economic downturn, raising the possibility that we may need to resort again to enhanced forward rate guidance and asset purchases to provide needed accommodation.19
Of course, substantial uncertainty surrounds any estimates of the neutral level of short-term interest rates. In this regard, there is an important asymmetry to consider. If the neutral rate turns out to be significantly higher than we currently estimate, it is less likely that we will have to deploy our unconventional tools again. In contrast, if the neutral rate is as low as we estimate or even lower, we will be glad to have our unconventional tools in our toolkit.
The bottom line is that we must recognize that our unconventional tools might have to be used again. If we are indeed living in a low-neutral-rate world, a significantly less severe economic downturn than the Great Recession might be sufficient to drive short-term interest rates back to their effective lower bound.
Let me conclude with a brief summary. As a result of the Great Recession, the Federal Reserve has confronted two key challenges over the past several years: One, the FOMC had to provide additional policy accommodation after short-term interest rates reached their effective lower bound; and two, subsequently, as we made progress toward the achievement of our mandate, we had to start scaling back that accommodation in the presence of a vastly expanded Federal Reserve balance sheet.
Today I highlighted two points about the FOMC´s experience with those challenges. First, the monetary policy tools that the Federal Reserve deployed in the immediate aftermath of the crisis--explicit forward rate guidance, large-scale asset purchases, and the payment of interest on excess reserves--have helped us overcome these challenges.
Second, in light of evidence suggesting that the neutral level of short-term interest rates is significantly lower than it was in previous decades, the likelihood that future monetary policymakers will have to confront those two challenges again is uncomfortably high. For this reason, we must keep our unconventional policy tools ready to be deployed again should short-term interest rates return to their effective lower bound.
Source: FED statement
Adauga un comentariu
Adauga un comentariu folosind contul de Facebook
Alte stiri din categoria: Noutati Federal Reserve
A Challenging Decade and a Question for the Future Chair Janet L. Yellen At the 2017 Herbert Stein Memorial Lecture, National Economists Club, Washington, D.C. I am delighted to address the National Economists Club, and I am also honored detalii
Speech August 25, 2017 Financial Stability a Decade after the Onset of the Crisis Chair Janet L. Yellen At "Fostering a Dynamic Global Recovery," a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming A decade has passed detalii
Semiannual Monetary Policy Report to the Congress Chair Janet L. Yellen, July 12, 2017 Before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C. Chairman Hensarling, Ranking Member Waters, and other members of the Committee, I am detalii
Federal Reserve (FED), banca centrala a Statelor Unite ale Americii (SUA), a majorat dobanda de politica monetara la asa-numitul nivel "target range" de 1-1,25% pe an, pentru a doua oara in ultimele trei saptamani, datorita cresterii economiei americane. Iata detalii
Bogdan Octavian Marin, director executiv al Directiei Managementul Canalelor Retail
„Scenariul jocului este următorul: Cu toţii ... vezi profil
- Topul bancilor dupa active in 2016
- Topul bancilor dupa active in 2015
- Topul bancilor dupa active in 2014
- Cota de piata a bancilor dupa active la finalul anului 2013, conform datelor BNR
- Topul bancilor cu cele mai mici comisioane la internet banking
- Jaewoo Lee, new IMF mission chief for Romania and Bulgaria
- IMF concludes article IV consultation with Romania
- IMF statement on the stability of the banking system in Ukraine
- Global House Prices: Time to Worry Again?
- FMI: Raport de asistenta tehnica - Imbunatatirea administrarii riscului de conformare pe care il prezinta marii contribuabili
- HSBC, by first direct and Bud, is trialling an open banking app model
- Probleme cu autorizarea platilor online cu carduri Mastercard si Maestro
- Sistemul informatic al Raiffeisen (carduri, ATM-uri, POS-uri, online banking) nu a functionat in aceasta dimineata
- UniCredit prepares for multinational roll-out of instant payments
- BCR: Program de lucru cu publicul, de Pasti
- Depozitele bancare nu intra in campania electorala
- FGDB explica modul de aplicare a procedurii de recapitalizare interna a unei banci cu depozitele negarantate ale clientilor (bail-in)
- Valoarea depozitelor garantate de FGDB a crescut cu 50 miliarde lei in ultimul an, la 221 miliarde lei in total
- FGDB aminteste ca toate conturile si depozitele din bancile romanesti sunt garantate in limita a 100.000 de euro
- EBA launches 2018 EU-wide stress test exercise
- Opinion on the use of innovative solutions in the customer due diligence process
- EBA Risk Dashboard
- EBA Risk Dashboard confirms steady improvements in the EU banking sector but banks profitability and business model sustainability remain key challenges
- EBA report on risks and vulnerabilities in the EU banking sector
- ECB: Insights into the digital transformation of the retail payments ecosystem
- ECB introductory statement on Governing Council decisions
- Speech by Mario Draghi, President of the ECB: Sustaining openness in a dynamic global economy
- Deciziile de politica monetara ale BCE
- Mario Draghi, President of the ECB: Introductory statement to the press conference (with Q&A)
- Federal Reserve issues FOMC statement
- A Challenging Decade and a Question for the Future (speech by Janet Yellen, The Fed chair)
- Janet Yellen speech: Financial Stability a Decade after the Onset of the Crisis
- Janet Yellen - Semiannual Monetary Policy Report to the Congress
- Federal Reserve majoreaza din nou dobanda
- EBRD hails Moldova banking breakthrough
- Banca Transilvania and EBRD become majority shareholders of Victoriabank in Moldova
- BERD devine actionar Agricover Holding
- Life satisfaction: the pursuit of happiness - EBRD study
- EBRD is launching a new Green Economy Financing Facility in Romania
- Economistii Bancii Transilvania estimeaza decelerarea PIB-ului de la 7% in 2017 la 4,2% in 2018
- Cresterea economica este nesustenabila, avertizeaza economistii Bancii Transilvania
- Estimarile economice din Romania sunt modeste, in pofida conditiilor financiare bune (studiu GfK)
- National Bank of Romania could leave unchanged the key rate in 2017
- Poland: EU funds - key factor for growth next year
- Romania implements SME Initiative: EUR 580 m for Romanian businesses
- European Investment Bank (EIB) is lending EUR 20 million to Agricover Credit IFN
- Obligatiunile Good Pople SA (FRU21) au debutat pe piata AeRO
- BVB avertizeaza doua firme ca nu si-au respectat obligatiile de raportare
- Raiffeisen Centrobank (RCB) a lansat produse de investitii tip warrant la BVB
- BVB a initiat procesul de fuziune cu Sibex
- Directiva privind Serviciile de Plata (PSD)
- Hotararea Guvernului nr. 2/2018 pentru modificarea si completarea Hotararii Guvernului nr. 717/2009 privind aprobarea normelor de implementare a programului "Prima casa"
- Normele metodologice pentru aplicarea Ordonantei de urgenta a Guvernului nr. 193/2002 privind introducerea sistemelor moderne de plata
- Legea nr. 151 din 2015 privind procedura insolventei persoanelor fizice
- Legea nr. 258/2017 privind comparabilitatea comisioanelor aferente conturilor de plati, schimbarea conturilor de plati si accesul la conturile de plati cu servicii de baza
- Instanta constata caracterul abuziv al dobanzii variabile din contractele de credit ale BCR
- Clauze abuzive in contractele de credit ale Raiffeisen
- BCR a fost reclamata la CEDO de clientii care au pierdut procesele privind clauzele abuzive din contractele de credit
- Instanta de judecata decide executarea silita a girantului unui credit, debitorul principal fiind insolvabil
- Decizia Curtii de Apel Bucuresti de anulare a Ordinului ANPC impotriva Raiffeisen Bank privind debitarea veniturilor clientilor
- Statisticile creditelor acordate de banci populatiei (decembrie 2017)
- Statisticile creditelor acordate de banci firmelor (decembrie 2017)
- Statisticile cardurilor, platilor, POS-urilor si bancomatelor
- Creditele noi acordate de banci au scazut cu 13%
- Biroul de Credit: restantele populatiei la banci si IFN-uri sunt in crestere
- Ministerul Finantelor a imprumutat 2 miliarde euro de pe pietele internationale
- Ministerul Finantelor pregateste noi formulare de plata a CAS si CASS, in locul Declaratiei 600
- Guvernul a alocat garantii de 2 miliarde lei pentru Programul Prima Casa in 2018
- Transferul contributiilor de la angajator la angajat va avea aplicabilitate cel putin pana in anul 2020, spune Ministerul Finantelor
- Sinteza proiectului de buget pentru anul 2018 publicata de Ministerul Finantelor
- Numarul fimelor active din Romania, conform statisticilor Registrului Comertului
- Evolutia istorica a cresterii anuale a Produsului Intern Brut (PIB), conform datelor Institutului National de Statistica (INS)
- Evolutia istorica a valorii Produsului Intern Brut (PIB), conform datelor Institutului National de Statistica (INS)
- Transferurile de bani ale romanilor din strainatate au ajuns la 2,1 miliarde euro anul trecut, conform statisticilor Eurostat
- Salariul mediu net si brut lunar pe economie - evolutie istorica intre in anii 1991 - 2016, conform datelor Institutului de Statistica (INS)
Buna am si eu o nelamurire sunt plecata se 5 ni din tara in primele luni am platit rata pe care o aveam la cetelem prin posta dupa care copii miau spus ca nu se mai plateste prin posta si te sa merg prin banci sa vad cum fac unde trebuie sa apelez sa pot primi informatii in legatura cu aceasta problema
Buna seara am si eu o intrebare la dumneavoastra sotul meu a avut o executare el fiind titularul ... detalii
Exista si IFN uri care fac ... detalii
poprire angajator si banca
Ciprian, daca bnca a gresit si v-a luat mai multi bani decat trebuia, atunci trebuie sa va dea ... detalii
poprier pe pe venit de la angajator si banca
multumesc dnl vasile coman , vreau sa mai mentionez ca problema a inceput anul trecut in luna iulie ... detalii