Janet Yellen’s, US Federal Reserve Chair, Economic Report to Congress | with Simplified Commentary
| Author – Mike Dunn
| Thought Leader
| Your Economic Junkie – Copyright – all rights reserved
Who is Janet Yellen and Why is she important to me?
Who is Janet Yellen? She is the Federal Reserve Chairperson.
Why is she important to my mutual fund portfolio? She is in charge of controlling the money supply of the largest economy in the world. Thus, interest rates. In other words, her foot can be on the virtual gas pedal and brake of the US economy.
Why quote and paraphrase this economic transcript?
Why quote? Since every word and phrase she says in her testimony is written by and reacted by the key players in the world economy, I listed the highlights of Ms. Janet Yellen’s opening remarks to her testimony to congress on 6/22/16. Only then did I paraphrase her comments above. This is extremely important for all investors to monitor even if your portfolio is managed by your investment firm.
Why paraphrase? Men statistically die earlier than women. Divorce and health issues, result in any women finding
themselves more and more in the role of being responsible for decisions for investing and managing the finances. Yes, it is a given that many woman are as smart or smarter than men in investing. These articles and blogs are help with the new roles women find themselves in. From mother and to bread winner and now add the title of investor.
Current Economic Situation and Outlook
- “During the first quarter of this year, job gains averaged 200,000 per month, just a bit slower than last year’s pace. And while the unemployment rate held steady at 5 percent over this period, the labor force participation rate moved up noticeably. In April and May, however, the average pace of job gains slowed to only 80,000 per month or about 100,000 per month after adjustment for the effects of a strike.”
- What this means – Job growth or soft jog growth is a key concern. If people do not have jobs they will not buy goods and service. If that happens, even more people will lose their jobs.
Job Growth in 2016
- “The unemployment rate fell to 4.7 percent in May, but that decline mainly occurred because fewer people reported that they were actively seeking work. A broader measure of labor market slack that includes workers marginally attached to the workforce and those working part-time who would prefer full-time work was unchanged in May and remains above its level prior to the recession.”
- What this means – The real unemployment rate is actually higher than 4.7 because many people have quit looking for work or their unemployment benefits have run out. At that point, they are not counted in the un-employment number by this definition.Many people disagree with this way of reporting the employment/un-employment information.
Uneven Economic Growth
- “Economic growth has been uneven over recent quarters. U.S. inflation-adjusted gross domestic product (GDP) is currently estimated to have increased at an annual rate of only 3/4 percent in the first quarter of this year.”
- What this means – The economy is currently growing very slowly and that is a concern.
Household Wealth and GDP (Gross Domestic Product)
- “Business investment outside of the energy sector was surprisingly weak. However, the available indicators point to a noticeable step-up in GDP growth in the second quarter. In particular, consumer spending has picked up smartly in recent months, supported by solid growth in real disposable income and the ongoing effects of the increases in household wealth. And housing has continued to recover gradually, aided by income gains and the very low level of mortgage rates.”
- What this means – Business investment is one of many future economic activity indicators. Lower investment usually means businesses do not want to invest into new projects or hire new people at a faster rate.
Household spending is up and expects slight interest rate growth over time
- The recent pickup in household spending, together with underlying conditions that are favorable for growth, lead me to be optimistic that we will see further improvements in the labor market and the economy more broadly over the next few years. Monetary policy remains accommodative; low oil prices and ongoing job gains should continue to support the growth of incomes and therefore consumer spending; fiscal policy is now a small positive for growth; and global economic growth should pick up over time, supported by accommodative monetary policies abroad. As a result, the FOMC (Federal Open Market Committee) expects that with gradual increases in the federal funds rate, economic activity will continue to expand at a moderate pace and labor market indicators will strengthen further.
- What this means – The 250 million people in the USA spend a lot of money on goods and services. When they spend more, it is a helps all the thousands and thousands interconnected wheels of the economy keep moving at a normal rate.
Inflation Outlook in 2016
- Turning to inflation, overall consumer prices, as measured by the price index for personal consumption expenditures, increased just 1 percent over the 12 months ending in April, up noticeably from its pace through much of last year but still well short of the Committee’s 2 percent objective. Much of this shortfall continues to reflect earlier declines in energy prices and lower prices for imports. Core inflation, which excludes energy and food prices, has been running close to 1-1/2 percent. As the transitory influences holding down inflation fade and the labor market strengthens further, the Committee expects inflation to rise to 2 percent over the medium term. Nonetheless, in considering future policy decisions, we will continue to carefully monitor actual and expected progress toward our inflation goal.
- What this means – Inflation is currently very low; however, it may rise slightly.
China and the World Economic Status
- China continues to face considerable challenges as it rebalances its economy toward domestic demand and consumption and away from export-led growth. More generally, in the current environment of sluggish growth, low inflation, and already very accommodative monetary policy in many advanced economies, investor perceptions of and appetite for risk can change abruptly. One development that could shift investor sentiment is the upcoming referendum in the United Kingdom. A U.K. vote to exit the European Union could have significant economic repercussions. For all of these reasons, the Committee is closely monitoring global economic and financial developments and their implications for domestic economic activity, labor markets, and inflation.
- What this means – The Chinese economy has experienced high growth. Many believe too fast plus it was supported by the government. They are quickly reaching a mature economy and the grow is slowing at a fast rate. This results in much economic and geo-political uncertainty. Generally speaking, economic markets hate uncertainty.
- BREXIT happed just after her speech however she seem to one of the few leaders concerned that it would pass. BREXIT is currently being digested by the world economic and banking community. More to follow in the next post.
2016 Monetary Policy
- “I will turn next to monetary policy. The FOMC seeks to promote maximum employment and price stability, as mandated by the Congress. Given the economic situation I just described, monetary policy has remained accommodative over the first half of this year to support further improvement in the labor market and a return of inflation to our 2 percent objective. Specifically, the FOMC has maintained the target range for the federal funds rate at 1/4 to 1/2 percent and has kept the Federal Reserve’s holdings of longer-term securities at an elevated level.”
- What this means – The FOMC (Federal Open Market Committee) ( I vacationed with a member before he retired) is a group of appointed economists retied business people who make decisions on how much money will be released into the economy and sets the interest rates (federal funds rate) of what banks charge each other on their massive daily transactions. The are saying they the are wanting to keep that rate at ¼ % to ½ percent. The problem is they are near zero percent. Hence, they cannot go below zero. That is actually a big problem for the world because they have exhausted their primary mechanism to fine tune the economy.
FOMC Plans (Federal Open Market Committee)
- “If inflation were to remain persistently low or the labor market were to weaken, the Committee would have only limited room to reduce the target range for the federal funds rate. However, if the economy were to overheat and inflation seemed likely to move significantly or persistently above 2 percent, the FOMC could readily increase the target range for the federal funds rate.”
- What this means – Inflation is still very low. This evidenced by the less than1% rate of return on your savings account at your bank. However, if the jobs reports improve and prices start to rise, the FED will raise the federal funds rates to cool off the economy forcing banks to charge more loans. Thus making the expansion into new business and buying houses more expensive. That will result in companies and people thinking twice about expanding and people putting off a purchase of a new house or a car.
Ms. Yellen’s full transcript