Im Brian Sullivan and power lunch begins right now. Welcome to power lunch. Im melissa lee. Stocks are Holding Steady right now, struggling to hold on to gains. The ruffle 2,000 hit another record intraday high s p, reversing yesterdays big losses financials are lagging today check out some of the movers were watching disney is lower. The Company Testing a revamp of its retail store format for the first since 2010 as well as launching a new shopping website today. And red hat shares are rallying. The company raising earnings estimates and its outlook. Darden taking a hit, expecting the hit from Hurricane Irma to be about double that of Hurricane Harvey brian . Mel, thank you very much. We begin today with fed chair janet yellen speaking in front of economists in cleveland, ohio we will go to that event live once she begins taking questions. Steve liesman, though, is here with highlights from Janet Yellens speech. An important speech fed chair janet yellen going further than she has in the past and acknowledging that the fed may not understand the dynamic and may have policy wonks. She doesnt quite concede that and essentially ends up concluding, supporting the feds current gradual rate hike policy, but leaves open the chance of easier policy in the future if inflation doesnt cooperate, moving back towards the first degrees 2 goals. She says, quote, persistently Lower Health Care costs continue, achieving our 2 inflation grow over the medium term may require a more accommodative stance of Monetary Policy than might otherwise be appropriate. She said policy could be easier than anticipated in the future the fed is already on. And the fed should also be wary of moving too gradually and sources of low inflation should fade over time guys, ill just conclude there and say its a speculative speech that goes further than it has in the past that says, there could be stuff at work, globalization, technology, other things at work that are keeping prices low the fed may have to adjust but because there are risks on the other side, shes onboard with this continual policy of gradual adjustments to the rate hike when she comes down to it, does she sound more dovish or hawkish . I think she sound a little more dovish and she will have sounded more dovish in the future today if the inflation data doesnt cooperate if it doesnt cooperate and they change policy down the road, if he becomes convinced that there are underlying issues at the fed, theyre not temporary, then this will be the time when she said, you know what, that path by the way, the path has already come down. Right . We were looking at a 3 terminal rate for the fed its now 2. 75. The outlook for higher rates has come down. This is not 2001. Technology, the internet, productivity, this is not new. Why did it take so long for them to acknowledge this . Have you followed economists for a long time . I get your point no, no, whats happening now is the expectation for higher inflation that comes from easy Monetary Policy, low unemployment, is not showing up in the dynamic they expected this idea of low unemployment, you should get higher wage growth, and you should get inflation its not working that way and the question is, is it temporary or permanent and if its permanent, it may require a change in Monetary Policy steve, thank you. Steve liesman. Were also standing by for a joint News Conference at the white house. President trump and the president of the Spanish Government expected to speak and make headlines eamon javers is live at the white house. Hi, eamon. Reporter thats right, melissa. We expect to hear from the president at about 1 45 east coast time, but already, as you say, hes been making some news today on a couple of fronts. He says hes going to puerto rico as early as tuesday he says thats the soonest he can get there without being too disruptive to the situation on the ground he might also visit the Virgin Islands as well on that trip the president laying out some of the proposals hes got for tax reform well have the official announcement tomorrow in a major speech from the president. But he said there are four Core Principles here at stake for tax reform he said those are simplification of the overall tax code. He wants most americans to be able to do their taxes on one page, lower rates on business, lower rates on the middle class. He says he wants to nearly double the standard deduction for middle class folks and he also wants to raise the Child Tax Credit and also, he wants to see repatriation of overseas profits for cooperations he says that could be trillions of dollars brought back into the u. S. Economy the president also saying on health care that he wants to go back and see if he can repeal and replace obamacare. This is a promise on the campaign trail that the president s really not letting up on here, despite the legislative frustration that hes had up on capitol hill, time and time again, as hes tried to do that, including this week, where the current proposal seems nearly dead on capitol hill heres how the president expressed some of that frustration earlier today. At some point, there will be a repeal and replace but well see whether or not that point is now or will it be shortly thereafter but we are disappointed in certain socalled republicans. So the president saying at some point, there will be repeal and replace. He also said that there were socalled republicans who betrayed him, in essence, on this, and called into question their loyalty to the republican party, in effect with his comments there well hear from him at about 1 45 hell have the opportunity to answer a couple of questions then eamon javers, thank you very much lets go right now to janet yellen who is beginning to take question questions. Also on Overall Economic growth and the labor market. So, as i indicated, i think my main message about what were seeing is that 2017, the shortfall in the inflation is a mystery. As of february of this year, inflation was running just under 2 , core inflation, and then we had a string of several months in which inflation was unexpectedly low so my expectation is that inflation data in the coming months on a monthly basis will move up somewhat, closer to our 2 objective but again, remember, inflation data is very noisy month to month. Hopefully this isnt too much in the weeds, but there is residual seasonality yes, there is in inflation and inflation data that will tend to result, i believe, in lower inflation readings in the second half of the year that also makes an interpretation of monthly data difficult. Finally, we have devastating hurricanes that have wreaked so much havoc for so many families and so many communities in our country. And that may be pushing inflation up, at least for a couple of months, weve seen it has an effect on gas prices. So, yes, we will be looking at inflation data very carefully, and trying to see what it tells us, but there is no easy read, i thi think. And as all of you know, we look very carefully at a wide range of statistics, but the data is noisy and its not going to be a magic bullet thats going to tell us the answer, clearly. But wehll be looking at it but let me just say, so a string of unusually low numbers would push in the direction of making us worry more about inflation. But the labor market is also relevant so weve been running at about 175,000 jobs a month for this entire year, which is well above the 100 or 120,000 pace that would be consistent with a staple, say, Unemployment Rate or labor utilization so were on a path, intentionally so this is consistent with the fomcs projection, in which the labor market is getting tighter. Unemployment is likely to drift and you can see that in our forecasts, below the level that we think is sustainable in the longer run, which, thats good thats a force that will tend to push inflation back to 2 , but there were also risks of a significant inflation overture that could leave us behind the curve and having to tighten policy faster than would be ideal. So well also be looking at labor market data. Is it surprising in some way, for example, if it were surprising in terms of more strength than we had anticipated, that would tend to add a bit to the risks on the side of waiting too long so im sorry i cant give you a clear answer, but those are some of the things well be thinking about. Staying on the topic of inflation, youve mentioned that stld be dangerous to see a material decline in Inflation Expectations and given that then, how do you view the possible of an inflation overshoot . We think its extremely important that the public understand, we have a symmetric inflation objective. We would ideally like to be at 2 , but inflation is variable. And sometimes inflation is going to be below 2 and sometimes its going above 2 and we feel identitically about overshoots and undershoots of inflation. Weve had an overshoot it would not be a tragedy to see an overshoot in fact, its something that we are to expect. And did change our statement of longrun goals, where we articulated our inflation objective back in 2012 about two years ago, we added the word symmetric to the language about our inflation objective to emphasize, 2 is not a ceiling. Sometimes people think, well, wed be willing to live with anything up to 2 inflation, but anything above that is absolutely terrible. No, thats not right 2 is our goal and its symmetric. So just as we dont want shortfalls, we also dont want overshoots, was regard them as the same thank you should the fed differentiate between inflation caused by positive supply shocks versus negative demand shocks . I guess my basic answer would be no. We have the 2 inflation objective, and even if low inflation is caused by supply shocks, whether back in the second half of the 1990s, we had a marked acceleration in productivity and other positive supply shocks. If its caused by supply shocks, we should still want to get back to 2 inflation. And part of the reason is that depending on the average level of nominal Interest Rates in an economy, depends on the average level of inflation if we accept ed accepted lower n as an ongoing objective in our 2 objective, we would see a corresponding lower level of shortterm Interest Rates. And that would be a dangerous phenomenon, i believe, especially in this these times when the real level of neutral shortterm Interest Rates is regarded as low, because if we were to experience a negative demand shock, the scope for easing Monetary Policy depends on the average level of shortterm Interest Rates. And of course, we have other tools that we deployed when we were faced with a socalled zero lower band, back in 2008, when we effectively lowered shortterm rates to zero, so there are tools available to be used but nevertheless we do see this scope for using our standard tools of Monetary Policy is not something i would like to see happen and simply allowing for whatever reason inflation to chronically run below 2 , i think would be a bad idea so thats a good segue. And given the number of questions that ive seen in the stack here, is the 2 inflation target too low should it be higher . Well, this is a matter that quite a few academic and business economists are opining about. I should say that it is not something that the fmoc is currently considering or that we have on our agenda the reason that this idea is getting so much attention is one that thing is important for the public to understand and that is the evidence suggests that not just in the United States, but globally. And i would say largely due to slow productivity growth, which weve seen not just here, but in many parts of the world, as well as demographics, aging populations, it looks like, in some sense, the strength of underlying aggregate demand is weaker than its been historically or lets say, there is a lot of intended savings, relative to investment and thats pushed down the level of the equilibrium real Interest Rate and in a world where equilibrium level of real Interest Rates are low, thats something that tends to mean the average level of shortterm Interest Rates will be low well, with higher inflation, you would be raising the average level of shortterm Interest Rates point for point. So its a reason, namely, to give more scope for Monetary Policy to address adverse shocks thats something people argue could be accomplished with a higher level of inflation. But i guess i would simply say that in analyzing that, which i hope there will be research looking at it, we need to consider not only the benefits, but also the costs of a harg level of inflation and for a variety of reasons, higher inflation may distort price signals, may lead to more variable and volatile inflation and impose costs on people who have a variety of reasons to take it into account and planning so its not a straight forward decision, its something committee considered carefully years ago when we adopted 2 , but it would also need a serious reconsideration of cost and benefits okay. Next question alludes to what maybe could be called a renewed global savings glut thats holding the down Interest Rates globally and thats also perhaps reflected in a very narrow term premium. Can you comment on what factors you think are causing the narrowness of the premium and how that may evolve Going Forward . I guess, partly the term premium, youre talking about the United States or globally . U. S. So it is estimated the term premiums are quite narrow. Partly the fifth large Balance Sheet was when we acquired those assets was consciously an attempt by removing duration from the markets and taking it on to our Balance Sheet. The conscious reason for that was to drive down longer term Interest Rates by driving down term premium as you know, were gbeginning, weve announced the beginning of a very gradual and cautious process of beginning to shrunk our Balance Sheet again. But believe that our Balance Sheet is exerting and will for some time, some downward pressure in addition, i think there are significant spillovers from foreign monetary policies, globally, into u. S. Interest rates. So the substantial asset purchases by the bank of japan and the ecb, i think are impacting, making our yields look attractive in comparison with theirs and capital inflows that have pushed those down. Related to that, what would you give us a as a range of estimates, say, as we run off per, say, hundred billion of treasury securities, how much upward pressure would that put on the premium well, i guess i dont have a 100 billion metric for you, but i would say that according to a recent study, our program of asset purchases may have lowered term premium or longterm Interest Rates by around 100 basis points now, that does not mean that shrinking our Balance Sheet is going to raise them by 100 basis points for one thing, our Balance Sheet is sure to end up substantially smaller than it is now, at around 4. 5 trillion its likely it will almost surely end up substantially larger than it was before the financial crisis and there will be some upward pressure, i believe, on the term premium. I think it will be something gradual. And it will take place over many, many years so, you know, even by the time our Balance Sheet is normalized in size, the maturities of our Balance Sheet will probably remain longer than they used to be before the financial crisis so i think will be some upward pressure on term premiums, as our Balance Sheet shrinks, but nothing like the 800 basis points they cited. And last question, so the part of Monetary Policy thats im not going to use the term, auto pilot, but that is, so, as boring as watching paint dry, lets say, weve gotta taken care of. And then the policy rate normalization, you know, is expected to be reasonably predictable. Do you think there are any downsized to that predictability, were there lessons to be drawn from the quarter point increase meeting after meeting after meeting at the time when you first joined the board . Are there any downsides to that degree of predictability so i want to be careful im not sure that our path of rate increases will be predictable. The economy is capable of generating many surprises. And we will calibrate Monetary Policy, as ive tried to emphasize to unfolding developments in our reassessment of them. This has been a problem for us when we began to publish the committees rate forecasts we thought that was something that was helpful, and we even drew in the median in our socalled dot plot with our rate forecast, because we thought it would be helpful to the public in getting a sense of what the committee thought would be appropriate policy given their view of how economic developments would unfold. And i would characterize the path that you see now and have for a long time as a gradual path but i want to emphasize, that path is subject to a great deal of uncertainty and there is nothing set in stone, not for the committee as a hole and not for any single individual who is writing down their forecast were all looking at incoming data and revising our views. As i mentioned in the talk, our views over the last several years on the sustainable longer run level of unemployment has moved down considerably. The equilibrium real rate of interest, which is an important determinative of what that path looks li