The Fed reasserted in its monetary policy announcement that its bond-buying program and promises to keep short-term rates near zero depend on incoming data about employment, inflation, and financial risks. In her press conference following the announcement, Yellen clarified that neither inflation nor asset prices were high enough to provoke the Fed to start tightening monetary policy earlier.
Inflation rose to 2.1 percent annually in May, as measured by the Consumer Price Index. The Fed's inflation target is 2 percent, but Yellen made it clear that one measure of inflation eclipsing the target for one month after years of low inflation is not sufficient for the Fed to react. Yellen said the "data is noisy," and that broadly speaking inflation was moving in line with the Fed's expectations. The index that the Fed regards as the best shows inflation significantly lower, at 1.4 percent in the latest reading.
Yellen added that "for the moment I don't see any trade-off whatsoever in achieving" the Fed's objectives of 2 percent inflation and full employment. Both, she suggested, recommend more stimulus from the central bank. The possibility that the Fed may have to tolerate inflation above its target to lower the unemployment rate is only something to worry about "somewhere down the road," she explained.
Yellen was similarly dismissive of the possibility that there are any financial bubbles in U.S. markets that would require a change in the Fed's course.
In the past, Yellen has said that she would use the Fed's monetary tools, not just its regulatory powers, to prick a bubble to prevent a damaging financial crisis.
But for now, she does not see "the kinds of broad trends that would suggest to me that the level of financial stability risks has risen above a moderate level."
That doesn't mean the Fed doesn't see any areas of concentrated financial risks. She identified a few areas of concern, including the volume of loans for mergers, acquisitions and buyouts; high prices for junk bonds; and signs of "reach for yield" — that is, investors speculating on riskier assets to get higher returns.
Nevertheless, Yellen said that those concerns are not "shaping monetary policy right now.” And absent from the list were stock prices, which are near record highs, and housing prices, which are at record highs in many regions.