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Fed Chair Delivers Speech on FOMC Economic Outlook & Developments

pen-and-paper [1]Today, Federal Reserve [2] Chair Janet L. Yellen delivered a speech [3] at the City Club of Cleveland in Cleveland, Ohio speaking on the recent developments within the Federal Open Market Committee [4] (FOMC) and the economic outlook moving forward. Yellen addressed issues like recession recovery, labor market conditions, inflation developments, economic outlook, monetary policy, long-run economic growth.

“On those occasions and in appearances such as this one today, the aim is to account for the FOMC's policy actions and explain how they are intended to achieve the specific goals that the Congress has assigned us,” Yellen said. “We do so because it is important that the Federal Reserve remains accountable within the framework of our democracy. We also do so because we can more effectively achieve our mandated goals--maximum employment and price stability--as well as help maintain stability in the financial system if people understand what we are doing and why. Finally, it's important for us to hear perspectives and experiences from a wide range of participants in the economy. This club stands for free and open communication, and so does the Federal Reserve.”

In her speech, Yellen highlighted that recovery from the Great Recession, the nation’s most severe economic downturn since the 1930’s, caused the Federal Reserve to take action push recovery forward from the financial crisis, the severe recession, and keep the risk of inflation from falling far below levels consistent with price stability.

“The FOMC aggressively cut our short-term interest rate target, the federal funds rate, from above 5 percent to near zero by the end of 2008 to lower borrowing costs and help spur household spending and business investment,” Yellen. “With short-term interest rates near zero, the FOMC provided further support to the economy through our large-scale asset purchases--buying large amounts of Treasury and mortgage-related securities in the open market. These purchases pushed down longer-term borrowing rates for millions of American families and businesses.”

Yellen also noted, the national unemployment rate has declined significantly during the economic recovery, but the lower level of the unemployment rate today does not fully capture the extent of slack remaining in the labor market.

“In assessing labor market slack, we try to distinguish between the effects of cyclical fluctuations in the economy and the influences of longer-term structural changes, such as the aging of the workforce and other demographic trends,” Yellen said. “Cyclical and structural factors both have affected a number of measures of labor market outcomes that bear on our assessment of slack, including labor force participation, the number of people working part time who would rather work full time, the pace of hiring, and the rate at which people are quitting jobs.”

Despite moving closer to the goal of maximum employment, the FOMC has made less progress toward meeting their inflation goal of 2 percent, Yellen says. Consumer price inflation has been close to zero over the past year, mostly due to the drop in crude oil prices since last summer has pushing down prices for gasoline and other consumer energy products.

“Very low inflation may not sound like a real problem to many people,” Yellen said. “However, persistently low price inflation, which can tend to slow the pace of wage increases over time, can weaken the economy by, for example, making it more difficult for households and firms to pay off their debts. A persistent, very low inflation environment also tends to result in chronically low short-term interest rates. This type of situation would leave less scope for the FOMC to respond with its conventional monetary policy tool--namely, a cut in the federal funds rate--to counteract a weakening in the economy.”

Over the next several years, Yellen believes that the fundamental factors underlying U.S. economic activity are solid and should lead to some pickup in the pace of economic growth in the coming years. She expects that employment will continue to expand and the unemployment rate will decline further.

“An improving job market should, in turn, help support a faster pace of household spending growth,” Yellen said. “In addition, growing employment and wages should make consumers more comfortable in spending a greater portion of their incomes than they have been in the aftermath of the Great Recession. Moreover, increases in house values and stock market prices, along with reductions in debt in recent years, have pushed up households' net worth, which also should support more spending. Finally, interest rates faced by borrowers remain low, reflecting the FOMC's highly accommodative monetary policies.”

Click here view Federal Reserve Chair Janet L. Yellen's Speech.  [3]