host: welcome viewers and listeners to a special. scarlette: thank you for joining us. we are here because janet yellen will be giving a speech shortly at umass amherst. this is a speech that is widely anticipated after the reserve decided to raise interest rates. >> this concern opportunity to decide her message. satisfied with her

perception of what the markets took her comments, this is an opportunity for her to refine that. headlines thatg it looks like a balanced speech from what we can see. the one thing she is saying is that she is reiterating that she expects we will be likely to raise rates later this year. that is a a question -- >> she said that at the press conference last time. it's sort of got lost in some of the other stuff. it also says that low inflation -- she is using that word due to transitory factors. they correctly called that one, so. >> she says the risk is that -- sheon expectations keeps highlighting these transitory factors but that also puts the said in a complicated spot. hike during a time

when inflation is backsliding. their preferred metric back to march, 2011 -- they are not making progress on the inflation front. they are looking at an economic situation where growth is decent and they say that says things should be turning but it is hard to initiate left off -- liftoff. >> building off of that idea, janet yellen saying there is still slack but the labor market has made progress. if the fed pays attention to inflation at the risk of the labor market? >> historically, if we look at the reactions, employment rate tend to be the driver of that function but if we look at the current environment they are very close to target on full employment, they are way off the mark on their inflation target so i think that now they are saying, let's look at the part

where we are not meeting our mandates and respond accordingly. >> one thing i noticed is that we see a tiny dollar take but , but not moving the markets genetically. hasmade a point that yellen delivered an major speech after everyone of her press conferences. >> he gives opportunity to come out and say, here is a chance to deliver my own views and show the public how they align with the committee. it seems to be the case that every time she has one of these speeches she has toed the line so it reinforces that she is right there with them in a lot of aspects. it is interesting from the headlines from this speech it seems like a noticeable omission to any specific international developments which obviously that has played a role in the

press conference last week so it will be interesting to see how she characterized that. >> should we presume that she is not as worried about international development? >> i don't think that's the case. she saw how the markets went haywire with the more prevalent mention of china. you saw the markets run wild with those remarks and i think she is steering clear with too much focus -- >> what you make of the reaction to that? she did not say anything about global economic conditions that were not already known by everyone. everyone knows -- >> but -- >> when she starts talking about it, it shows that it is on her radar screen. i think that is the reaction -- i sat down before we went on air and reread the transcript of the press conference and it is not

-- if anything, janet yellen knew going into today's speech she had to air a little slightly on the hawkish side. it, the dollar continues to gain. these are not huge moves that it is a further uptick,. markets taking this -- >> subtle nuance -- >> it is all about subtle nuances. give us an idea about what she said last time she gave a speech after a press conference. what did she highlight? what might that tell us about the way she views these opportunities? >> actually, it looked very similar to what she said last time. not much change. the big thing that people were looking for was that, is she going to expect a rate hike later this year? at the time, the international situation was not --

>> as dire -- chinesebefore the currency adjustment is some of those concerns about slowdown. it is remarkable how the message changed very much, even though investors definitely took last week as a bit of a shift. >> you said when he looked over the transcript, it is not as dovish. what did we miss the first time? detailgoes into greater about development in china and development in emerging markets and she says, we are not running off the rails but there is potentially an impact into the u.s. economy and into inflation but it is very -- it she treads very lately and suggest that these will be passing, transitory incidences and she really does kind of pound the table on how well the domestic economy is performing so these

are like my old risks -- mild risks on the periphery. let's just be clear with the headlines, she says it is likely appropriate to raise the rate later this year so she is not we areg the table saying definitely going, she is just expressing a preference. , who has noten begun speaking, at umass amherst -- when you look at the speakers who are due to speak in coming neither of these are voting members. but they will be next year. there is expectation that the fed may not move until next year. >> we know jim bullard has come out and spoken, arguing for a hike last week. we know where esther george

stands. it will be interesting to hear charlie evans next week, the new york fed president next week, these people are known as more on the dovish end of the spectrum and they seem to have been gaining influence over the past few months. they did not raise rates in september. it will be interesting to hear what they have to say. again nextave fisher week. >> currently, markets are pricing at 41% by the end of the year. does that sound right to you? >> i think that is on the low side. i don't think that if janet yellen was looking at our terminals, she would be happy to see the chances of rate hikes diminishing. >> she has definitely been watching that all day. >> i don't know specifically, but the fed wants to reserve the

option to raise rates later this year. that does not mean a commitment, but they want the option on the table. if it sinks to such a low level, they don't want to shock the markets. they want to keep that hovering around 50%. >> just to recap from janet yellen's speech that she has yet our judgmentsg, about appropriate monetary policy will change, she said. this is text that she will be giving. anticipates conditions will entail an initial increase later this year, inflation should return in the next two years. what do youd -- think it would take for them to hike this year? should it be a financial condition, or should we be more looking at global economies? what is the one thing that will make it happen? >> i am not when you say one

thing, i am going to say two things. she made it clear that there are two things. it is keeping a keen eye on financial conditions. if the dollar strengthens and of credit grows. grows, they're concerned about the feedback mechanism into the broader economy. we have to watch equity prices, as well. we have to watch those near-term indicators that will reflect this. inflation is an indicator. i expect that we will backslide. at 0.2 or 0.3 right now. we have to watch the near-term production gauges and concurrent economic activity, things like hiring and production. that will tell the fed if that

makes the feedback mechanism slow down the economy. >> concerns could come back. itthey will look through because it will be a headline, but the core is also losing altitude ever so slightly. fed iseems like the haunted by the temper tension in 2000 or team. it seems to info -- temper tantrum in 2013. they are mindful of the words they use. >> this is playing into another interesting story that the fed chose to start raising rates before shrinking balance sheets. you have got a lot of treasury securities that hold onto ballots sheets. before -- balance sheets. up that we are pushing against it, they said they are not going to start shrinking the balance sheet before raising rates, but obviously they will have to make a choice as to what to reinvest all of those

maturing securities into if they decide to continue doing that and sort of continue on that path so that will be interesting, be an interesting story over the next few months. >> i think that has implications. the post-lift off phase -- if the fed lets the balance sheet unwind, which they will not do early on because they will have enough trouble managing this range with all the liquidity in the system but when they start unwinding that balance sheet, that is putting a break on to the economy and that means that it will slow. right now, they are telling you 100 base points are tightening per year. pace will ultimately be slower as they wind down. learnedoncerns -- they the lesson of the tantrum. another thing haunting them is the fact that every central bank that has hiked has reversed itself.

do what extent -- to what extent is that a concern? huge concern because they are getting so much pressure from congress, more meddling into the fed and this sort of thing, it would signal a policy mistake. if they hike rates, they certainly will do so because they will do what is right for the economy but that will be a big failure on the part of the yellen-led fed. she looks at banks and says, i want to avoid that. >> do you find that whatever the fed says or does is highly politicized? >> absolutely. it is interesting to look back at her tha -- at her last testimony -- >> he have to cut you off because somebody more important is talking. now we go to amherst massachusetts to hear janet yellen. [applause]

janet yellen: my thanks to the chancellors for this lovely introduction. my thanks to the university of massachusetts for the honor of being invited to deliver this year's philip gamble memorial lecture. in my remarks today, i will discuss inflation and its role in the federal reserve's a conduct of monetary policy. i will begin by reviewing the history of inflation in the united states is the 19 axes. highlighting two key points. inflation is now much more stable than it used to be. running it is currently at a low level. costs then consider the associated with inflation and why these costs suggest that the federal reserve should try to

keep inflation closed to 2%. after briefly reviewing our policy action since the financial crisis, i will discuss the dynamics of of inflation and their implications for the outlook and monetary policy. anyucial responsibility of central bank is to control inflation. the average rate of increase in the prices of goods and services , keeping inflation stable at a moderately low level is important because for reasons i will discuss, inflation that is high, excessively low, or unstable, imposes significant households and businesses. as a result, inflation control is one half of the dual mandates of congress to lay down for the federal reserve, which is to pursue maximum employment and

price stability. has notral reserve always been successful in fulfilling the price stability element of its mandate. plots the percentage change in the price index for personal consumption expenditures. the measure of inflation that body usespolicymaking to define its goal. 1960's,g in the mid- inflation began to move higher. jumps in food and energy prices played a role in this move. but they were not the whole story. for as illustrated here, inflation was already moving up of war the food and energy shocks hit in the 1970's and

early 1980's. if we look at core inflation, which is the solid black line, which excludes food and energy prices, we see that it too starts and move higher in the 1960's and rises to very elevated levels during the 1970's which strongly suggests that something more than energy and food price shocks must have been at work. the second important feature of inflation over this period can be seen if we examine an ,stimate of its long-term trend which is plotted as the dotted black line in this figure. iseach point in time, this defined as the prediction from a statistical model of the level to which inflation is projected , onceurn in the long run the effects of any shocks of the

economy have fully played out. as can be seen from this figure, this estimated trend drifts higher over the 1960's and 1970's. this implies that during this period there was no stable anchor to which inflation could be expected to return. that is the conclusion generally supported by other prestigious economists will say that these features of inflation in the late 19 axes and 1970's, it is high level and lacks a stable anchor, reflected a combination of factors, including chronically overheated labor and product markets, the effects of the energy and food emergenceks, and the of an inflationary psychology,

whereby a rise in actual inflation led people to revise up their expectations for future inflation. together, these various factors caused inflation, actual and expected, to ratchet higher overtime. ultimately, however, monetary policy bears responsibility to the broad contour of what happened to inflation during this. riod because the federal reserve was insufficiently focused on returning inflation to a predictable low level, following the shocks to food and energy prices and those disturbances. in the late 1970's, the federal tighteningan monetary policy to reduce inflation. tightening,to this which percent but hated a severe economic downturn in the early

1980's. overall inflation moved persistently lower, averaging less than 4% from 1983-1990. inflation came down of further following the 1990-1991 recession, and subsequent slow recovery, and average at 2% for many years. ince the recession ended 2009, the united states is experienced inflation appreciatively below the 2% objective, and part reflecting the gradual pace of the sus -- subsequent economic recovery. examining the behavior of inflation's estimated long-term trend reveals another important change in inflation dynamics. caveat that these results are based on a specific

implementation of a particular statistical model, they imply that since the mid-90's, there has been no persistent movements in this predictive long run inflation rate, which has .emained very close to 2% remarkably, the stability is estimated to have continued during and after the recent severe recession, which saw the unemployment rate rise to levels comparable to those during the 1981-1982 downturn. as i will discuss, the stability of this trend appears linked to a change in the behavior of long-run inflation expectations, measures of which appear to be much better anchored today than in the past. likely reflects an improvement in the conduct of monetary policy.

event, this empirical analysis implies it over the past 20 years, inflation has been much more predictable over was backr term then it in the 1970's because the rates to which inflation was predicted to return no longer moved around appreciatively. that said, inflation is still --y consider -- varies inflation still varies considerably. as this figure highlights, the united states has experienced very low inflation on average since the financial crisis. in part, reflecting persistent economic weakness that has proven difficult to fully counter with monetary policy. overall inflation shown as the dashed red line, has averaged and 1.5% per year is 2008,

it is currently close to 0%. just a product of falling energy prices, as core inflation -- that is the solid black line -- has also been low on average over this. . period. adopted a longer run inflation objective of 2%, as measured by the price index. other central banks, including europe's central bank also has a 2% inflation target. reflected the fmo c's judgment that inflation and that persistently deviates up or down from a fixed low level can be costly in a number of ways. persistent high inflation

induces households and firms to spend time and effort trying to minimize their cash holdings in forces businesses to adjust prices more frequently than would otherwise be necessary. more importantly, high inflation also tends to raise the after-tax cost of capital, thereby discouraging business investment. these adverse effects occur because capital depreciation allowances and other aspects of our tax system are only partially indexed for inflation. unanticipated is -- if unanticipated, can be costly for households who rely bondssions and long-term to provide a significant portion of their retirement income. because the income provided by these assets is typically fixed in nominal terms, it's real

purchasing power may decline surprisingly quickly if inflation turns out to be consistently higher than originally anticipated, with potentially serious consequences for retirees as they age. rise in inflation also tends to reduce the purchasing power of labor income for a time because nominal wages and salaries are generally slow to adjust to movements in the overall level of prices. suggests that this effect is probably the number one reason why people dislike inflation so much. wages,longer run, real wages adjusted for inflation, appear to be largely independent of the average rate of inflation

, and instead are primarily determined by productivity, competition, and other nonmonetary factors. in support of this view, this figure shows that nominal wage growth tends to broadly track price inflation over long periods of time. inflation that is persistently low can also be costly. that have beens particularly relevant to monetary policy makers in recent years. the most important cost ishe combatw inflation can recessions. fightsy, the fmo c downturns by reducing the nominal federal funding rate, that is the rate charged by banks to lend to each other overnight. , current andons

expected, stimulate spending and hiring by lowering longer-term, real interest rates -- that is, nominal rates adjusted for inflation. and by improving financial conditions more broadly. that the federal fund rate and other nominal interest rates cannot go much below zero. always ansh is alternative. can feasiblye fmoc push the real fund rate is essentially the negative value of the inflation rate. as a result, the federal reserve has less room to ease monetary policy when inflation is very low. is a potentially serious problem because severe downturns such as the great

recession may require pushing real interest rates far below zero for an extended. riod of time to restore employment at a satisfactory pace. or this reason, pursuing tolerating persistently low inflation would be inconsistent with the other leg of the fmoc's mandate to promote employment. an unexpected decline in inflation is a sizable and persistent -- can also be costly because of increases to debt burdens of borrowers. consider homeowners who take out a conventional mortgage with the expectation that inflation will remain close to 2%, and say their nominal incomes will rise 4% per year.

if the economy were instead to experience chronic mild deflation, accompanied by flat or declining nominal incomes, then after a few years, the find it moreght difficult to cover mortgage payments and they anticipated. moreover, if house prices were to fall in line with consumer prices, rather than rising as expected, the equity in their home will be lower than they had anticipated. this situation, which is sometimes referred to as debt deflation, would also confront all households with outstanding student loans, automobile loans, or credit card debt, as well as businesses that have taken out hank loans or issued on -- bank loans or issued bonds. lenders would be receiving more income, but then net effect on

the economy is likely to be negative, in large part because borrowers typically and if the increase that service burdens and decline in collateral values are severe push borrowers into bankruptcy then the resulting hardship imposed on families, small business owners and laid-off workers may be very severe. earlier, after weighing the costs associated with various rates of inflation, the fomc decided that 2% inflation is an appropriate operational definition of its longer run price objectives. in the wake of the 2008 financial crisis, however, achieving both this objective and full employment,