Summary: Trump’s unexpected election forced changes in the forecasts and plans of the Fed’s leaders. Today’s decision to raise rates is their first result. Janet Yellen was quite candid about this. The implications of the rate rise are complex. The effects might prove calamitous.
Janet Yellen’s remarks at the press conference
She clearly pointed to Trump’s plans for a combination of tax cuts plus large increases in infrastructure and military spending. The Fed’s leaders have obviously been thinking about the effects of the resulting massive deficits — and decided to preemptively strike against them.
“…We’re operating under a cloud of uncertainty at the moment, and we have to wait and see what changes occur and factor those into our decision-making as we gain more clarity,”
“…Changes in fiscal policy or other economic policies could potentially affect the economic outlook. Of course it is far too early to know how these policies will unfold. Moreover, changes in fiscal policy are only one of the many factors that can influence the outlook in the appropriate course of monetary policy.”
“…There may be some additional slack in labor markets, but I would judge that the degree of slack has diminished. So I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment. But nevertheless let me be careful that I am not trying to provide advice to the new administration or to Congress as to what is the appropriate stance for policy. There are many considerations that Congress needs to take account of and many bases for justifying changing fiscal policy.”
“…Our decision to raise rates should certainly be understood as a reflection of the confidence we have in the progress the economy has made and our judgment that that progress will continue. …It is a vote of confidence in the economy.”
“…We want to feel that if the economy were to suffer an adverse shock that we have some scope through traditional means of interest rate cuts to be able to respond to that.”