Yellen says future economic downturns likely to require further use of unconventional policy

US Fed chair Yellen gave the annual NEC Herbert Stein lecture a few hours agoThe speech was entitled «Monetary Policy Since the Financial Crisis» and may well have been her last.

  • Fed more likely to hit «zero lower bound» in future rate cut cycles
  • evidence suggests economy did better because of asset purchases and other Fed actions during crisis
  • downward pressure on yield from Fed asset holdings will dissipate only gradually
  • removal of mon pol accommodation working well so far
  • economy has made great strides
  • 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.
  • most FOMC participants now assess the longer-run value of the neutral federal funds rate as only 2.75% or so, compared with around 4.25% just a few years ago
  • some evidence that inflation expectations may have slipped
  • there is concern consistent miss on inflation will hurt Fed credibility
  • reasons for weak inflation since March not immediately clear
  • inflation undershoot pretty understandable until this year
  • negative rates may have benefits and is worth studying but also likely poses costs
  • whatever tax reform is approved is rich incentive effects to improve supply side of economy

«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»
«The bottom line is that we must recognise 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.»
Reuters report that Yellen was neither asked nor did she offer any comment on Trump’s current deliberations on appointing next Fed chair.

Full speech here for some week-end reading.
The FT have their take on the speech and the Fed chair selection issues here.
Even more dovish/cautious tones albeit not entirely unexpected from Yellen, but markets were closed when she made the speech so we should expect some USD-negative sentiment when Asian markets re-open.
             Yellen anticipates more QE rather than wiggle room in interest rates

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