Economist's Insights

Yellen Tells Congress She Expects Gradual Tightening to Continue Despite Uncertainty Surrounding Inflation

Nov 29, 2017

Outgoing Fed Chair Yellen had a mostly upbeat message on the economy in the opening statement to what is likely her final testimony before the Joint Economic Committee of Congress. She said that “economic growth appears to have stepped up from its subdued pace early in the year” and added that “the economic expansion is increasingly broad based across sectors as well as across much of the global economy.”  In the conversational Q&A portion of her appearance, she noted that there are encouraging signs in the labor market but the continued decline in the unemployment rate has resulted in only modest wage gains so far during this expansion. She expanded on this perplexing labor dynamic by admitting that the relationship between unemployment and inflation has diminished. Even with unemployment so low and economic activity picking up at home and abroad, weakness in inflation metrics signals that neither the job market or the economy are currently running too hot. Nonetheless, the tightening labor market and better growth – paired with her (uncertain) expectation that inflation will move to 2% over the next couple of years – lead her to believe that the way forward is paved with additional gradual rate hikes to take the overnight rate back towards a neutral setting. On other matters, she was mostly mum on tax reform, talked about demographic disparities in the level of economic recovery, highlighted a concern around the sustainability of the national debt, and continued to show support for trimming regulations on smaller financial institutions but not a full repeal of Dodd-Frank.