The U.S. Economy and Monetary Policy [ Yellen ]

The U.S. Economy and Monetary Policy

Janet L. Yellen

October 15, 2017

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-Fall in oil prices

-Appreciation of the dollar

The biggest surprise in the U.S. economy this year has been inflation. These readings seemed consistent with the view that inflation had been held down by both the sizable fall in oil prices and the appreciation of the dollar starting around mid-2014, and that these influences have diminished significantly by this year.

What are the main problems ?

-Natural rate of unemployment

-Calculation of Longer-term inflation expectations

-Online shopping

-Sector-specific developments

Given that estimates of the natural rate of unemployment are so uncertain, it is possible that there is more slack in U.S. labor markets than is commonly recognized, which may be true for some other advanced economies as well. If so, some further tightening in the labor market might be needed to lift inflation back to 2 percent.

Some measures of longer-term inflation expectations have edged lower over the past few years in several major economies, and it remains an open question whether these measures might be reflecting a true decline in expectations that is broad enough to be affecting actual inflation outcomes.

Our framework for understanding inflation dynamics could be misspecified in some way. For example, global developments--perhaps technological in nature, such as the tremendous growth of online shopping--could be helping to hold down inflation in a persistent way in many countries.

Or there could be sector-specific developments--such as the subdued rise in medical prices in the United States in recent years--that are not typically included in aggregate inflation equations but which have contributed to lower inflation. Such global and sectoral developments could continue to be important restraining influences on inflation

Normalization policy

By limiting the volume of securities that private investors will have to absorb as we reduce our holdings, the caps should guard against outsized moves in interest rates and other potential market strains. 

Changing the target range for the federal funds rate is our primary means of adjusting the stance of monetary policy. Our balance sheet is not intended to be an active tool for monetary policy in normal times. We therefore do not plan on making adjustments to our balance sheet normalization program.

Dr. Engin YILMAZ

Ankara

18.10.2017