Janet Yellen said FOMC policy makers have started the ball rolling when it comes to unwinding their $4.5 trillion balance sheet. They have made no decisions but, as previously signaled for this meeting, they have begun to discuss their reinvestment policy. Yellen, in her quarterly press conference, noted that policy makers need confidence in the economic trajectory in order to reduce the balance sheet, the normalizing of which she said will be gradual and predictable.
Regarding the outlook for stimulative policies under the Trump administration, Yellen repeated the Fed's position that it is still too early to know how actual changes in Washington will unfold. She did note, however, that some FOMC members are "penciling in" fiscal changes into their forecasts. Yellen herself said she would welcome stronger growth tied to fiscal policy.
Though low, she noted that labor market participation is steady and actually positive given the aging population. She also said the Fed expects the unemployment rate, currently at 4.7 percent, to continue to move lower (to 4.5 percent in the FOMC forecasts for 2018 and 2019). Yellen underscored points in the FOMC statement on inflation, that overall prices are very close to the Fed's 2 percent target though the core rate, which excludes energy, is very little changed, near 1.75 percent and likely to move higher only gradually before stabilizing around the 2 percent mark.
On wage inflation, she acknowledged that it has moved higher as the labor market has tightened which she said is consistent with the Fed's maximum employment objectives. And, despite slow productivity growth, she sees "some scope" for further wage increases. Separately, she noted that the FOMC would change policy should inflation persistently overshoot their 2 percent target.
Yellen is uncertain how strength in sentiment measures will pan out to actual spending decisions, saying many of her own contacts have a "wait-and-see" attitude. She noted that a wording change in the statement's description of future rate hikes, to "gradual increases" from "only gradual increases" in the prior statement, is not significant.
On possible changes in border taxes and their effects the dollar, she said that outcomes are "very uncertain". She noted one possible effect would be flight to safety into the dollar which she said would put downward pressure on exports and possibly drive imports higher.
Demand for Treasuries continues to improve with the 2-year yield down a sharp 8 basis points to 1.31 percent and the 10-year down 7 basis points to 2.50 percent. The dollar index is down 0.6 percent since the statement to 100.87. The Dow is moving higher, up 0.4 percent in reaction and testing 21,000 at 20,969.