Janet Yellen: Inflation, uncertainty, and monetary policy

Speech by Ms Janet L Yellen, Chair of the Board of Governors of the Federal Reserve System, at the "Prospects for Growth: Reassessing the Fundamentals" 59th Annual Meeting of the National Association for Business Economics, Cleveland, Ohio, 26 September 2017.

The views expressed in this speech are those of the speaker and not the view of the BIS.

I would like to thank the National Association for Business Economics for inviting me to speak today and for the vital role the association plays in fostering debate on important economic policy questions.

Today I will discuss uncertainty and monetary policy, particularly as it relates to recent inflation developments. Because changes in interest rates influence economic activity and inflation with a substantial lag, the Federal Open Market Committee (FOMC) sets monetary policy with an eye to its effects on the outlook for the economy. But the outlook is subject to considerable uncertainty from multiple sources, and dealing with these uncertainties is an important feature of policymaking. Key among current uncertainties are the forces driving inflation, which has remained low in recent years despite substantial improvement in labor market conditions. As I will discuss, this low inflation likely reflects factors whose influence should fade over time. But as I will also discuss, many uncertainties attend this assessment, and downward pressures on inflation could prove to be unexpectedly persistent. My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation. In interpreting incoming data, we will need to stay alert to these possibilities and, in light of incoming information, adjust our views about inflation, the overall economy, and the stance of monetary policy best suited to promoting maximum employment and price stability.