Chair Yellen's final press conference was a fitting swan song for the Federal Reserve's first female leader and the one to shut the door on the institution's crisis era. In the broad strokes, it went as planned: the Fed delivered a rate hike and some predictable changes to its economic projections. In the press conference, Yellen lauded her successor Jerome Powell, declared satisfaction with progress in the economy, expressed gratitude for the privilege to serve, and mostly dodged questions on the looming tax bill. It wasn't a victory lap, but it was about as graceful an exit as anyone carrying a 10-bound binder of briefing notes is likely to muster.
What The Fed Did
- Announced a rate hike of 25 basis points, to a range of 1.25-1.50%
- No change in the median dots for 2018 (3 hikes) and 2019 (2 hikes), but an increase for 2020 (2 hikes instead of 1).
- GDP was marked up slightly in 2017 and 2019-2020, and marked up significantly (2.5% vs. 2.1%) for 2018.
- Unemployment was marked down modestly for 2017-2020, with the year-end rate at 3.9% for the middle two years.
- Virtually no change to the inflation projections, and no revisions of consequence to the official FOMC statement.
What It Means
- The press conference focused on two sets of issues that the official materials raised.
- First: What does the Fed think of the tax plan? Yellen noted that policy makers had incorporated expectations for short-term stimulus from the tax bill into their projections; beyond that, she dodged this question very artfully and in a manner that seems consistent with her expressed desire to stay in Washington after resigning from the Fed next year. Despite repeated questions, she refused to opine on whether now is the right time for fiscal stimulus, noting the Fed's job is to focus monetary policy. She didn't express even oblique commentary on the tax bill's provisions. The closest Yellen came to outright criticism was noting that the U.S. debt/GDP ratio needs to be put on a sustainable trajectory at some point and saying that growth of 4% would be "challenging." She noted that faster growth would be welcome if it were consistent with the Fed's monetary objectives and associated with increases in the economy's productive capacity (via incentives for capital spending and labor force participation), and that some of the bill's provisions could have these desired effects. But her comments never veered from the hypothetical; that massive "if" hung over all of them. It's the right question to imply, and leaving it as an implication deftly pushed the Fed a little further out of the spotlight that it has so uncomfortably occupied since the 2007-2009 crisis years.
- Second: How to reconcile the lack of change in the projections for either interest rates or inflation with the fact that growth is expected to be faster and unemployment lower than before? This question was popular among a number of sophisticated commentators on Twitter, but I think there's less here than meets the eye. The Fed's questions about the inflation outlook are deepening and this brings the need for higher rates into question as well. Apparently the Fed expects the transitory factors behind lowflation to persist -- after all, "transitory" doesn't mean "short." Put another (more wonkish) way: the Fed sees a flatter Phillips curve. If that's an unsatisfying answer, you can take your cold comfort from the fact that policy makers are equally uncomfortable with it.
- One sign of that discomfort: the Fed increasingly foresees that in 2020 it will have to raise its policy rate above the longer-run neutral rate, implying it will have let the labor market run a little hot over the prior two years.
- On a happier and more hiring-related note, Yellen said in the press conference that she was encouraged to hear that firms are increasingly taking on workers lacking desired skills and offering them training. She considered that a "natural development in a strong labor market that builds human capital and workers' skills." This would be consistent with another implication of the Fed's projections that others picked up on: accelerating growth but decelerating declines in unemployment imply faster productivity growth. Unfortunately, productivity growth has been as mysteriously weak as wage growth for several years, but next year could always be the year.
What Comes Next
- New leaders at the Fed, new members of the Federal Open Market Committee, and therefore a new set of dots await us at the March 2018 meeting. In addition, the composition of the voting members will shift toward the more hawkish, with Kashkari and Evans (two dovish dissenters this time) and Harker and Kaplan rotating off in favor of Wiliiams, Mester, Bostic and Barkin. All that, plus the uncertainties about the tax bill mean that the December meeting provides limited guidance for the March one.
- Nevertheless, most economists agree with the Fed's projection of three hikes next year, and the first is likely to come in March. Chairman Powell is likely to want to demonstrate continuity with current expectations, and to get on with the hikes amid the onset of tax-driven stimulus.
- Yellen came dangerously close to following her predecessors (Bernanke and Greenspan) and saying "This time it's different" when asked about the recent flattening of the yield curve. As Yellen noted, the current dynamic is one in which the short end of the curve is rising with Fed hikes, while the long end remains pinned. That is omniously reminiscent of the "conundrum period" of the 2000s, when capital inflows from abroad pushed down long rates and contributed to the U.S. housing bubble. The shrinkage of the Fed's balance sheet may offset this dynamic to some extent, but how much remains to be seen. Similarly, lighter regulation might decrease some demand for U.S. Treasury securities, pushing up rates, but it likewise remains to be seen whether that will happen, and whether that would be a net positive for financial stability and economic growth.
- We'll only really be able to judge Yellen's tenure with more hindsight. Maybe she was lucky to get out on a high note, or maybe she really did just stick the landing.