The modest rate of wage growth is evidence, according to Janet Yellen, that the labor market, despite a 4.1 percent unemployment rate, is not overheated. Given the softness in wages and what she stressed is a frustratingly low path of inflation, Yellen said it could take a "longer period of a very strong labor market" before inflation finally does gain traction. Though the 4.1 percent unemployment rate is already 1/2 point below the Fed's own long-term projections, she would not describe the economy as being at full employment, rather only in the "vicinity" of full employment. Asked whether the Fed may have to rethink their assumptions on employment and inflation, she said it's "conceivable" that unemployment will have to come down even more before full employment is reached. She also repeatedly noted that one factor behind the lack of wage gains and lack of inflation is the workforce's low rate of productivity growth.
Yellen said expectations for tax cuts have helped the stock market post "significant" increases and have also translated to higher GDP and lower unemployment forecasts in quarterly FOMC projections. She said members "welcome" the possible cuts which they see boosting both consumer and capital spending.
Turning back to the stock market, she described valuations as "elevated" and at the high end of historical ranges relative to other assets, but she conceded that economists don't have "a terrific record" at judging the market noting that solid economic growth with low inflation is very likely a positive combination for stocks. She said the banking system is resilient and that credit growth is not excessive, though she did say that members do see stock gains as a possible risk to financial stability though signals are neither red nor even orange. On bitcoin, she said it is a "highly speculative asset" that plays only a small role in the financial payment system. She said it's important for the Fed to devote considerable resources in identifying emerging risks to the financial system but she doesn't see bitcoin as a "full blown" security risk.
Another possible risk developing is the flattening underway in the yield curve as short-term rates rise, in line with Fed rate hikes, and longer rates hold steady. She said there is much discussion underway in the Fed about the slope of the yield curve and that comparatively low long rates reflect a low term premium for future inflation risk. She also warned that the curve could now more easily invert as the Fed withdraws accommodation, that is short-term rates actually exceeding long rates which is consistent with recession. She also noted, however, that prior relationships in this matter, as in other areas of the economy, may have changed this cycle.
Yellen expressed strong confidence in her designated successor, Fed Governor Jerome Powell, who she described as "very capable" and "committed", like her other colleagues, to a sound banking system despite the prospect of regulatory relief in the banking sector under Powell's leadership. Yellen said it has been an "honor and privilege" to serve in a variety of senior positions in the Federal Reserve and added that her immediate plans are open.