Yellen tells Maloney no excess reserves rate hike prior to raising main fed funds rate

WASHINGTON – Congresswoman Carolyn B. Maloney (D-NY) today questioned Federal Reserve Chair Janet Yellen about what actions the Federal Reserve might take after the wind down of Quantitative Easing (QE3). For the first time, Yellen indicated that the Fed will not start raising the interest rate on excess reserves in the interim period between the end of QE3 and the first rate hikes in 2015. Yellen also indicated that the Fed would primarily use "forward guidance" as the main policy tool in the interim period between October 2014 and the first rate hikes in 2015.

A transcript of the exchange is below. Video of the exchange is available here: http://www.c-span.org/video/?c4503790/maloney-questions-yellen

MALONEY: Thank you, and welcome, Madam Chair.

I'd like to ask you about the Fed's exit from its monetary stimulus. As you testified, the Fed is currently on pace to wind down its QE3 purchases by the end of October. But right now, the market isn't expecting the Fed to start raising interest rates until the third quarter of 2015.

So, between October of this year and the third quarter of 2015, what are the main tools that the Fed anticipates using to exit from its monetary stimulus?

YELLEN: Well, thank you.

As I indicated, if the committee continues to see improvement in the labor market and continues to forecast ongoing progress in the labor market over time, and inflation moving back toward 2 percent, it is our intention to wind down our asset purchases, to conclude them after the October meeting.

Beyond that, we would maintain the zero to quarter percent range for the Federal funds rate that we have maintained now for many years. And eventually, as the economy makes further progress, we'd begin to raise our target for short term interest rates.

And while we've not laid out a specific timeline for doing that, we have given a general principle, which is we will be assessing what our actual progress is and then our expected future progress is toward obtaining the two objectives of maximum employment and price stability.

So, we will be looking at how far are we from our objectives, and how rapidly are those gaps closing? Now that's a matter that we can't be certain about. We make forecasts, but incoming data causes us, over time, to change those forecasts so, I can't be specific about what the timing of it ultimate increase in our target for short term interest rates would be, but we will be assessing incoming information.

Now, we do give participants in the FOMC, these are not FOMC policy statements, but we have provided in the monetary policy report and we provide every three months, information about each FOMC participant's assessment of both the economic outlook and their views on the likely path of monetary policy.

So, again, this is each individual's view walking in to our June meeting. As a committee we have to transform that into a single policy. But it gives some indication, I think. And given their expectations for progress in the labor market and inflation, at the beginning of our June meeting, FOMC participants, almost all of them, saw it appropriate to begin raising our target for the Federal funds rate sometime during 2015.

The median participant saw the Federal funds rate, by the end of that year, standing around 1 percent. So, while there's no exact timing of obviously in 2015, it's not -- it is in some sense roughly consistent with what you said. But market expectations are -- but again, I want to emphasize that the actual progress we see in the labor market and inflation and our general assessment of the labor market could change that over time.

So, there's no mechanical formula, and no clear date.

MALONEY: Will the Fed start changing the interest rate on excess reserves held at the Fed during this time?

YELLEN: We -- when we decide to raise our target for short-term interest rates, a key tool will be to raise the interest rate we pay on excess reserves. So, we would only raise the interest rate on excess reserves when we have determined that the time has come to begin raising short-term interest rates more generally, that will be a key tool that we will use.