E A Conversation With Janet Yellen

We attended the recent Schwab Impact 2018 Conference in Washington, D.C. A highlight of the meeting was the interview with Janet Yellen, the former Federal Reserve Chairwoman. In her conversation, she discussed a wide range of topics important to investors.

Janet Yellen noted that despite the recent stock market correction, the U.S. economy overall is in good shape. GDP growth hit 3.5% in the third quarter, or 3% annualized. She believes the U.S. economic expansion will extend through 2019, making it the longest expansion in the country’s history. Unemployment remains low. There are more job openings than people to fill them with the 3.7% unemployment rate at the lowest level in 50 years. 

She expects growth of the U.S. economy will slow next year to 2% to 3% with the unemployment rate falling even further and inflation in the range of 2.1% to 2.2%. She thinks 2% GDP growth is consistent with stable employment levels. Productivity and/or the labor market would need to increase for 3% GDP growth to be sustainable. 

Given tight labor markets and strong growth, the Federal Reserve is taking its foot off the accelerator by gradually raising interest rates. The Fed has hiked interest rates three times this year and is expected to increase rates once more in December. Janet Yellen agrees that more interest rate increases are needed. Yellen remarked, “At this point, a couple more interest rate increases are necessary to stabilize growth at a sustainable pace and stabilize the labor market so it doesn’t overheat.” While inflation measures have hovered around 2%, monetary policy acts with long lags. Therefore, the central bank has to head off inflation expectations before they become embedded.

While President Trump has said that the Fed “has gone crazy” by raising rates so much, Janet Yellen disagreed by pointing out that financial conditions remain accommodative. She said that real interest rates (nominal interest rates less inflation) today are essentially zero. She expects the federal funds rate will average around 3% over the next 10 years, which translates into a real (inflation-adjusted) rate of 1%. 

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