Yellen Says Time for Job-Boosting Budget Stimulus Has Passedby and
Fed chair says fiscal policy should focus on productivity
Yellen stresses she’s not giving Trump policy advice
Federal Reserve Chair Janet Yellen said the central bank is operating amid a “cloud of uncertainty” about budget policy under Donald Trump but one thing is clear: The labor market doesn’t need a shot of fiscal stimulus any more.
While saying that she wasn’t providing the president-elect with advice on his tax and spending plans, Yellen repeatedly stressed the importance of focusing any budget actions on boosting productivity and thus the long-term performance of the economy.
She told a press conference Wednesday after the Fed raised interest rates for the first time in a year that the economy was doing fine and that unemployment was back around its pre-recession levels.
“Fiscal policy is not obviously needed to provide stimulus to help us get back to full employment,” she said.
Trump campaigned on an ambitious plan to slash corporate and individual taxes, boost spending on defense and build up the nation’s infrastructure.
Yellen acknowledged that she and her predecessor Ben Bernanke had been vocal proponents of a more expansionary budget policy in the past. But that was when unemployment was “substantially higher” than the 4.6 percent level it is now, she said.
Policy makers are prepared to allow the jobless rate to stay a bit below their 4.8 percent median estimate of full employment for a while to help lift inflation to their 2 percent target, the Fed chair said.
But she denied that she had come out in favor of gunning the economy to push the jobless rate sharply lower to see if that would draw a lot more Americans into the work force.
“The overall impression is the Fed is not inclined to play ball with the Trump administration,” said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina.
“The Fed was willing to run the economy a little hot when fiscal policy was on the sidelines,” Vitner added. “Now that we are looking at a more active fiscal policy, they are taking a harder line.”
Fed policy makers now expect to raise interest rates three times next year, instead of the two they had foreseen in September before the election, according to their median forecast.
Yellen laid out a variety of reasons for what she called the “very tiny” increase in the rate forecast, including the potential impact of the federal budget on the economy.
“Some of the participants, but not all of the participants, did incorporate some assumption of a change in fiscal policy into their projections,” she said.
Yellen suggested that the Fed had time to plot its monetary strategy as the budgetary picture and its likely impact on gross domestic product becomes clearer.
“The Fed doesn’t want to be seen as interfering in fiscal policy, but they should and will respond to fiscal policy developments,” said Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore and a former Fed economist.
“A very large fiscal stimulus -- say one to two percentage points of GDP -- would be viewed with some apprehension in the current circumstances and would have to lead to somewhat tighter monetary policy,” he added.
In response to a reporter’s question, Yellen reiterated her intention to serve out her four-year term as Fed chair.
She also left open the possibility that she might stay on the Fed board as a governor if she wasn’t reappointed as Fed leader when her tenure ends on Feb. 3, 2018. Her 14-year term as board member expires in 2024.
There’s one precedent for staying put: Marriner Eccles completed his term as Fed chairman January 1948 but remained on the board until July 1951.
“I recognize I might or might not be reappointed,” the 70-year-old Yellen said, when asked if she wanted another term. “It’s a decision that I don’t have to make and don’t have thoughts on at this time.”
“I recognize too that I could stay on as a board member and that is a decision for another day,” she added.