In prepared text, outgoing Fed Chair Janet Yellen repeated that a series of gradual rate increases are in order. She said GDP is picking up despite of this year's heavy hurricane season and that the labor market is strong. Yet for the longer term, she warned that weakness in productivity and slowing expansion in the labor market will hold down economic growth.
Addressing the sharp gains underway in the stock market, she said asset valuations are "high by historical standards" but that risks to financial stability are still moderate. On inflation, she repeated that the core has been surprisingly subdued this year which likely reflects one-time factors (such as the drop in cell phone service fees) though she did concede that it could also reflect persistent factors (such as the aging population). She also noted that wage growth has remained "relatively modest".
Returning to rates, she repeated that the neutral level for the overnight funds rate, that is the level that neither stimulates nor slows growth, is low by historical standards which points ahead to a limited rise for the funds target. She noted, however, that if the neutral level picks up as most FOMC policy makers expect, then a longer series of rate hikes would be in store.
In questions and answers, Yellen stressed the importance of central bank independence saying the Fed needs to be shielded from short-term political pressures. On supervision, she agreed that regulatory burdens should be eased and that the Volcker rule, which limits trading on a bank's own accounts, should not apply to smaller banks. She said wage growth would be helped by stronger productivity growth and noted that the relationship between inflation and unemployment has grown more tenuous. Yet she repeated that inflation is likely to hit the 2 percent mark over the next year or two. On policy, she said the Fed remains accommodative which will support further growth for the economy and labor market which she further said are not overheating. She repeated the importance of gradually raising rates to neutral.