Barron's : How the Bank of Japan Favors the Nikkei 225

How the Bank of Japan Favors the Nikkei 225

The BoJ is buying ETFs to boost demand for stocks. The trouble: The program tilts toward stocks with a big presence on the Nikkei rather than the Topix index.

The Bank of Japan has long been criticized for cornering the Japanese government-bond market with its annual 80 trillion yen ($800 billion) purchase. The smaller, equity exchange-traded fund purchase program, first launched in 2013 to boost demand for risk assets, also distorts Japan’s stock markets and disproportionately benefits Nikkei 225 heavyweights such as Fast Retailing and SoftBank Group .

The BOJ, which started the ETF program in 2013 and has expanded it three times since, is currently buying JPY6 trillion of ETFs a year. By July, its ETF holdings already accounted for 1.9% of the market cap of stocks listed on the Tokyo Stock Exchange. After its July 29 policy meeting, the BOJ became even more active, buying on every trading day.

The BOJ favors the Nikkei 225 over the Topix Index. The Nikkei has more ETFs tracking it than the Topix does, and so the BOJ tends to buy more Nikkei component stocks. CLSA’s Japan equity strategist Nicholas Smith estimates that 55% of the BOJ’s ETF purchases went into Nikkei 225 stocks, versus only 41% into the Topix. Since the BOJ started buying in the spring of 2013, the Nikkei has returned 33%, outperforming the Topix by eight percentage points.

The construction of the Nikkei 225 creates a divergence in the treatment of individual stocks. The Nikkei is a price-weighted index, like the Dow Jones Industrial Average, whereas Topix is market-cap-weighted, like the Standard & Poor’s 500 index.

As a result, Fast Retailing (ticker: 9983.Japan), owner of apparel chain Uniqlo, has gotten a major lift from the BOJ, which owns about 12% of the company. Trading at JPY35,460 a share, Fast Retailing has an 8.1% weight on the Nikkei 225, versus only 0.3% on the Topix. Fast Retailing hasn’t done a stock split since April 2002, and has little incentive to do one now that its price gives it such heft in the Nikkei.

THE BOJ ALSO ISN’T TARGETING the companies it probably wants to protect, notably banks and export-oriented automobile companies whose stocks have been slammed by negative interest rates and a soaring yen. These companies aren’t prominent on the Nikkei. Toyota Motor (7203.Japan), the biggest stock on the Topix with a 4% weight, is only 1.4% of the Nikkei.

CLSA’s Smith recently reshuffled his Japan portfolio, replacing Toyota and Hulic (3003.Japan) with Fast Retailing and SoftBank (9984.Japan). SoftBank, which is 4% of the Nikkei but only 0.3% of the Topix, has also gotten a lift from the BOJ; Hulic isn’t even included in the Nikkei. “It is disappointing to be forced to invest in such a nonfundamental way,” says Smith.

BOJ’s tilt towards Nikkei stocks adversely affects Japanese households. Nikkei is for big money, often foreign institutional investors. To buy Fast Retailing, the minimum trading lot is 100 shares; households would have to hand over at least $35,460 for one lot. CLSA’s Smith estimates that, on average, investors need to pay 78% more for Nikkei than Topix stocks. The average price and lot size are a third larger than on the Topix. It isn’t surprising that foreigners own 29% of Nikkei companies, and domestic retail only 20%.

The BOJ is undergoing a comprehensive review of its monetary policies and will make an announcement in September. Will it fix this bug?

Barron's : Assa Abloy Quietly Unlocks Tech-Driven Profits

Assa Abloy Quietly Unlocks Tech-Driven Profits

The once-staid lock manufacturer has used acquisitions and savvy to transform itself from a capital-goods maker to a tech company.

Swedish lockmaker Assa Abloy has used a mix of savvy deal making and technical innovation to transform itself into a leading player in a once staid and fragmented market, something some investors believe will open the door to much more growth.

Bill Cram, principal and senior global research analyst with fund manager Aristotle Capital, says the company remains an underappreciated gem. “On the surface it looks like a capital-goods company that just makes locks. That’s kind of the misnomer. Over the years, [it] has morphed into more of a technology company,” he says.

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Assa Abloy (ticker: ASSA-B.Sweden), created from the merger of Sweden’s Assa and Finland’s Abloy in 1994, has made great strides under the remarkable stewardship of Johan Molin, president and chief executive, since 2005. Molin has turned the company into a market-leading consolidator with a particular skill for adding value through mergers and acquisitions.

By 2014, on the 20th anniversary of its founding merger, the company had racked up an impressive 200 acquisitions. “Most companies aren’t very good at M&A and roll-ups and they tend to be value-destructive. [Assa Abloy is] one of the anomalies in that they have added a tremendous amount of value over the years through M&A,” Cram says.

At the same time, the company has been pushing into new technology, earning it a place in the Forbes index of the 100 most innovative companies.

Its technology-driven devices include virtual keys that allow people to use their smartphones to open doors. The system was supplied to U.S.-based Starwood Hotels & Resorts Worldwide, which manages or franchises more than 1,000 properties. New technology can also help boost security in public buildings such as hospitals, controlling who goes where.

Cram reckons this drive toward smart electromechanical technology will be the company’s main catalyst for future share growth. He says door-related electromechanical sales now count for around 25% of Assa Abloy’s revenue, with a 5% to 10% penetration into that market—a figure the company expects to hit 20% in coming years.

“We believe that’s still being conservative,” Cram says. “Over the next five or 10 years we think the number’s going to be meaningfully higher.”

New technology carries bigger margins than Assa Abloy’s traditional locks business, meaning its expansion in that area boosts profitability and reinforces its already solid cash flow. Cram says this feeds into a virtuous cycle of more M&A and investment in R&D, enhancing the company’s market-share lead.

“Typically good things happen to those leaders in consolidating industries, so they’ve done a great job of that. We think they’re going to continue to build out so that they can offer a more integrated solution, further differentiating them from their competitors,” he says.

Those competitors are a long way behind. Its nearest challengers are Dorma + Kaba Holding (DOKA.Switzerland), itself the product of a Swiss-German merger, and Allegion (ALLE). Respectively, they generate less than a third of Assa Abloy’s roughly $8 billion in annual sales.

The shift toward technology is pushing Assa Abloy into a lucrative aftermarket, creating shorter product cycles where it can offer ongoing services and more-frequent upgrades, especially in the commercial sector.

ITS CHANGING PROFILE has also helped distance Assa Abloy from the cyclical ups and downs that afflict more typical capital-goods companies.

Cram says the company has failed only once to report organic growth in the last 13 years, and that was at the height of the financial crisis in 2009.

“It’s a remarkably consistent business and we like that, to own those sort of companies, because then we can focus our efforts on what differentiates and makes it a quality business, rather than short-term cyclical events or what’s going on with Brexit,” Cram says.

The company beat analyst expectations last month when it reported second-quarter earnings, helped mostly by a solid performance in the largely developed markets in Europe and the Americas. Net profit rose 7.3% to 2.03 billion Swedish kronor ($240 million) on sales that were up 5% at SEK17.9 billion. Second-quarter operating cash flow jumped 27% to SEK2.52 billion.

Its stock has grown along with its earnings, rising 14% over the last 12 months compared with the Stoxx Europe 600 index’s relatively modest 4.13% growth.

Morgan Stanley analyst Ben Maslen has Assa Abloy at Overweight with a SEK199 price target and estimates its 2016 price/earnings ratio at 25.1. “We think Assa Abloy will continue to deliver superior earnings growth, given the steady recovery in construction markets, fast growth in electromechanical locks and bolt-on M&A,” he says.

The stock closed Friday at SEK182.30.

>>> Weekly update

Weekly Market Update: Sideways Markets Slip on Friday After Hawkish Fed

Markets drifted sideways most of the week as they anticipated a key policy speech from Fed Chair Yellen at Jackson Hole on Friday. Volumes were light and ranges remained narrow despite relatively heavy news flow including economic data releases and late season earnings reports. Healthcare stocks were in crosshairs for much of the week as several headlines affected trading. Pfizer's acquisition of Medivation pushed up oncology stocks early, but renewed drug price gouging concerns from Washington D.C. weighed on a swath of names competing within the US pharmacy market. After ending last week near $50/bbl, oil prices backed off early in the week exaggerated by a roll in the front month futures contract. Press reports continued to focus on the September meeting of energy producers in Algeria and the potential for coordinated action, but the likelihood of a meaningful agreement still seems low.

Friday's Jackson Hole meeting did induce some broader market volatility, but the trading flows only picked up after Fed Vice Chair Fischer came on TV to offer his explanation of what Chair Yellen attempted to lay out in her speech earlier. The US Dollar firmed and interest rates backed up while stocks came under modest pressure after the two highest ranking Fed officials illustrated their view that the economy continues to improve at a pace that has strengthened the case for at least one rate hike this year. The US benchmark 10-year yield has broken out to a three month high to close above 1.60%. In the wake of the Jackson Hole comments, the Dow swung more than 230 points, its biggest one-day move since late June. For the week, the DJIA lost 0.9%, the Nasdaq fell 0.4%, and the S&P500 dropped 0.7%.

Monday
- (UK) UK govt said to be readying multi-billion-pound post-Brexit housing stimulus - press
- MDVN: To be acquired by Pfizer for $81.50/shr in cash, valued at ~$14B

Tuesday
*(FR) FRANCE AUG PRELIMINARY MANUFACTURING PMI: 48.5 V 48.8E (6th straight contraction)
*(DE) GERMANY AUG PRELIMINARY MANUFACTURING PMI: 53.6 V 53.6E (21st month of expansion)
*(EU) EURO ZONE AUG PRELIMINARY MANUFACTURING PMI: 51.8 V 52.0E (38th month of expansion)
*(UK) AUG CBI INDUSTRIAL TRENDS TOTAL ORDERS: -5 V -10E
- BBY: Reports Q2 $0.57 v $0.42e, R$8.53B v $8.40Be; Raises FY17 guidance
*(TR) TURKEY CENTRAL BANK (CBRT) LEAVES BENCHMARK REPURCHASE RATE UNCHANGED AT 7.50%; AS EXPECTED; again narrows rate corridor
*(HU) HUNGARY CENTRAL BANK (NBH) LEAVES BASE RATE UNCHANGED AT 0.90%; AS EXPECTED
*(US) AUG PRELIMINARY MARKIT MANUFACTURING PMI: 52.1 V 52.6E
*(US) AUG RICHMOND FED MANUFACTURING INDEX: -11 V +6E
*(US) JULY NEW HOME SALES: 654K V 580KE (highest since Oct 2007)
- (IR) OPEC sources see positive signals from Iran on support for joint action to boost oil prices - press
* (US) NORTH AMERICA JULY SEMI BOOK/BILL RATIO: 1.05 V 1.00 prior

Wednesday
*(DE) GERMANY Q2 FINAL GDP Q/Q: 0.4% V 0.4%E; Y/Y: 1.8% V 1.8%E; GDP NSA Y/Y: 3.1% V 3.1%E
- GLEN.UK: Reports H1 Adj Net $300M v $254Me, Adj EBITDA $4.02B v $3.87Be, R$69.4B v $74.8Be
*(UK) JULY BBA LOANS FOR HOUSE PURCHASE: 37.7K V 38.0KE (lowest since Jan 2015)
*(US) JULY EXISTING HOME SALES: 5.39M V 5.51ME
- MYL: US Democratic Presidential candidate Hillary Clinton calls Epipen price hike 'outrageous', calls for Mylan to immediately cut price - press

Thursday
*(DE) GERMANY AUG IFO BUSINESS CLIMATE: 106.2 V 108.5E; CURRENT ASSESSMENT: 112.8 V 114.9E
- 494.HK: Reports H1 Net $72M v $149M y/y, Op $156M v $182M y/y, Rev $8.07B v $8.63B y/y
- 3328.HK: Reports H1 Net CNY37.6B v CNY37.3B y/y, NII CNY68.1B v CNY71.1B y/y
- MYL: Plans to cut patient Epipen cost through use of savings card; Reducing patient cost by 50% off Mylan list price
- 939.HK: Reports H1 Net CNY133.4B v CNY132.5Be
- (IR) Iran Oil Min Zanganeh plans to attend the OPEC meeting in Algeria on Sept 26th
*(US) INITIAL JOBLESS CLAIMS: 261K V 265KE; CONTINUING CLAIMS: 2.15M V 2.16ME
*(US) JULY PRELIMINARY DURABLE GOODS ORDERS: 4.4% V 3.4%E; DURABLES EX TRANSPORTATION: 1.5% V 0.4%E
- (US) Atlanta Fed GDPNow: lowers Q3 GDP forecast to 3.4% from 3.6% on Aug 16th
- (SA) Saudi Energy Minister: Have not discussed specific action regarding a production freeze; Has been no discussions of substance on OPEC production levels - press interview
*(JP) JAPAN JULY NATIONAL CPI Y/Y: -0.4% V -0.4%E; CPI EX FRESH FOOD (CORE) Y/Y: -0.5% V -0.4%E

Friday
*(DE) GERMANY SEPT GFK CONSUMER CONFIDENCE: 10.2 V 10.0E (matches highest level since Oct 2001)
*(EU) EURO ZONE JULY M3 MONEY SUPPLY Y/Y: 4.8% V 5.0%E
*(UK) Q2 PRELIMINARY GDP Q/Q: 0.6% V 0.6%E; Y/Y: 2.2% V 2.2%E
*(US) Q2 PRELIMINARY GDP ANNUALIZED Q/Q: 1.1% V 1.1%E; PERSONAL CONSUMPTION: 4.4% V 4.2%E
- RAX: Agrees to be taken private by Apollo Global at $32.00/shr all cash in $4.3B deal
*(US) AUGUST FINAL UNIVERSITY OF MICHIGAN CONFIDENCE: 89.8 V 90.4 PRELIM
- (US) Fed Chair Yellen: case for rate hike has strengthened in recent months - Jackson Hole speech
- (US) Weekly Baker Hughes Rig Count: 489 v 491 w/w (-0.4%) (breaks streak of 8 weeks of increases)
* (US) Fed Vice Chair Fischer: notes strong job reports recently and seeing more evidence the economy has strengthened; emphasizes Fed remains data dependent and thus a rate hike or hikes is possible this year

>>> US Close Dow-0.29% S&P -0.16% Nasdaq +0.13% Russell-0.16%


Closing Market Summary: Stocks Lower as Investors Examine Rate Commentary

The stock market ended a downbeat week on a flat note as commentary from the Jackson Hole Symposium boosted U.S. rate hike expectations and weighed on the major averages. The Dow Jones Industrial Average (-0.3%) settled behind the S&P 500 (-0.2%) and the Nasdaq Composite (+0.1%).

Equity indices enjoyed a modest bid at the start of the session as investors pored over a less-hawkish-than-feared interpretation of Fed Chair Yellen's seminal address. Chair Yellen indicated that the case for a rate hike had improved in recent months, but she also acknowledged that monetary policy is not on a preset course.

Investors initially shrugged off the commentary, evidenced by a transitory decline in the fed funds futures market. The implied probability of a rate hike at the September meeting briefly fell to 18.0%, slipping from the prior session's estimate of 21.0%. Additionally, equities and Treasuries rallied to session highs while the U.S. Dollar Index (95.49, +0.72, 0.76%) carved out a session low.

The broader market shifted gears near midday when Federal Reserve Vice Chairman Stanley Fischer resuscitated concerns regarding the speed and path of interest rate normalization. In a CNBC interview, Mr. Fischer indicated that more than one rate hike could take place before the end of the year. However, the Fed Vice Chair conditioned the potential hikes on a steady improvement in economic data. In response, the implied probability of a rate hike at the September meeting rose to 36.0% while the odds of an interest rate hike at the December meeting moved to 63.7%.

The S&P 500 (-0.2%) pared losses in the final hour, reclaiming technical support near the 2168/2171 price level. Despite the rebound, seven sectors ended in the red with the defensively-oriented telecom services (-1.1%) and utilities (-2.1%) sectors rounding out the leaderboard. On the flipside, heavily-weighted financials (+0.1%), technology (+0.1%), and health care (+0.4%) outperformed.

The countercyclical health care sector (+0.4%) ended in front of the pack, narrowing its week-to-date loss to 1.8%. Biotechnology displayed relative strength as the iShares Nasdaq Biotechnology ETF (IBB 285.14, +2.27) rebounded 0.8%. In the group, Amgen (AMGN 171.97, +1.74) outperformed while Mylan Labs (MYL 43.03, +0.18) recovered 0.4%. Mylan was under pressure this week as investors weighed criticisms regarding the price of its EpiPen device. Conversely, St. Jude Medical (STJ 78.01, +0.19) ended higher by 0.2% after responding to yesterday's bearish commentary from Muddy Waters Capital.

In the technology sector (+0.1%), the high-beta chipmakers outperformed, evidenced by the 0.5% gain in the PHLX Semiconductor Index. Micron (MU 16.51, +0.31) rallied 1.9%, sporting a week-to-date gain to 1.6%. This compares to a gain of 0.5% in the price-weighted index. Separately, large cap component Facebook (FB 124.96, +1.07) outperformed.

The consumer discretionary space (-0.3%) demonstrated relative weakness as retail names underperformed. The SPDR S&P Retail ETF (XRT 45.02, -0.34) ended lower by 0.8%, extending its week-to-date loss to 2.0%. Dow component Nike (NKE 59.00, -0.24) settled lower by 0.4% after being downgraded to "Neutral" from "Buy" at B. Riley & Company. Separately, Big Lots (BIG 50.57, -2.37) underperformed as investors evaluated mixed quarterly results. 

Treasuries ended on a lower note as yields rose through the curve. The yield on the benchmark 10-yr note finished higher by four basis points (1.62%) while the yield on the 2-yr note finished at 0.84% (+5 bps).

Today's participation was above the recent average as more than 797 million shares changed hands on the NYSE floor.

Today's economic data included the second estimate of Q2 GDP, July International Trade in Goods, and the final reading of the University of Michigan Consumer Sentiment Survey for August: 

  • Second quarter GDP was revised down to 1.1% from 1.2%, as expected, while the GDP Price Deflator was revised up to 2.3% (consensus 2.2%) from 2.2%.
    • There was no real change to second quarter GDP, which everyone had already realized was quite disappointing despite the strong pickup in consumer spending.
  • July International Trade in Goods showed a deficit of $59.32 billion, compared to the June deficit of $64.5 billion.
  • The final reading for the University of Michigan Consumer Sentiment Survey for August dipped to 89.8 (consensus 90.6) from the preliminary reading of 90.4.
    • The reading checked in just below the final reading of 90.0 for July.

For further details on these economic releases, be sure to visit  Economic Calendar page.

Monday's economic data will include July Personal Income (consensus 0.4%), Personal Spending (consensus 0.3%), and Core PCE Prices (consensus 0.1%), which will each be released at 8:30 ET. 

  • Russell 2000 +9.0% YTD
  • S&P 500 +6.1% YTD
  • Dow Jones +5.6% YTD
  • Nasdaq Composite +4.2% YTD 

(Tech.pinions) Rights and the Evolution of Music Streaming

Rights and the Evolution of Music Streaming
ANALYSIS THE DAILY TECHPINION
JAN DAWSON / August 25th, 2016
https://techpinions.com/rights-and-the-evolution-of-music-streaming/46946

This past week has seen headlines about three different companies each seeking new rights agreements with major music labels. Spotify is reportedly trying to lock in longer-term deals with the major labels ahead of its IPO, Amazon is apparently trying to secure rights to offer a cheaper subscription service that will only work on its Echo devices, and Pandora is trying to sign US and international rights in order to launch an on-demand streaming service. Each of these stories tells us something about the state of the music streaming market and, taken together, they highlight some interesting trends.
On-demand streaming has won
One thing has become obvious over the last couple of years — on-demand streaming has won. Pandora did well for a number of years with its personalized radio experience but after a certain point, it arguably just created demand for a truly personalized service where users could control exactly what they wanted to listen to. Apparently, having an algorithm guess at what you might like to hear next is not quite as good as allowing the user to make more granular decisions. In addition, Pandora benefited from the unique royalty model in the US but that also made it hard to export its business model elsewhere. Meanwhile, Spotify has eclipsed Pandora’s user numbers and, adding in Apple Music, Deezer, Rhapsody and others, makes clear which way the wind is blowing – Pandora’s model has stalled, while on-demand streaming is the future. Hence, Pandora’s acquisition of Rdio and the pursuit of rights for on-demand streaming.
Differentiation in on-demand streaming is tough
The problem is differentiation in on-demand streaming is tough because the basic concept is so simple. Once you get into the tens of millions of available tracks and you make your service available on every major platform, you’ve checked most of the boxes people care about at a basic level. Differentiation then shifts to the edges, into things like curation, recommendations, and the user interface. Spotify has done well here with its algorithm-driven Discover Weekly feature and others, while Apple has taken a more human-centric approach, but it was Pandora that pioneered algorithm-driven taste-matching and they could have an interesting advantage here.
Amazon is clearly trying something new. Apple was reportedly looking for a better deal from labels in order to offer a slightly cheaper service, but failed and ended up at the same classic $10-per-month price point. Amazon, on the other hand, is taking a different tack – offering an Echo-only service for half the price of most on-demand services. That’s a hook to hang its plea for lower rates on but it’s questionable whether it will provide enough value for users. Perhaps, like Amazon’s recently introduced monthly and video-only Prime options, it’s mostly intended as a funnel for full annual Prime subscriptions and its lack of utility outside the home is actually a deliberate ploy to up-sell users. I wonder whether the labels will be willing to supply their content at lower rates to support such an experiment.
Ad-based streaming dominates and the labels don’t like it
Whether the labels support Amazon’s bid for differentiation depends, to a great extent, on how they view its proposed service. One thing the labels have made very clear is they don’t like ad-supported streaming and they want to push the industry towards paid streaming. Amazon’s service could be viewed in the same light as ad-supported streaming because it offers less than the usual $10 per month or it could be viewed as just another flavor of on-demand streaming and therefore a good thing.
All of which brings us to Spotify, whose 100-odd million subscribers are dominated by the free, ad-supported variety. That in turn is making its negotiations with the labels challenging, because the labels want it to up its contribution. Spotify, for its part, needs to reduce the cut rights owners take because over 80% of its revenues pay those bills today, leaving very little wiggle room for its other operating costs, let alone profit. That’s starting to feel like an increasingly intractable tension that’s going to be hard to resolve. On the one hand, Spotify needs to lock down long-term rights to get the valuation it wants at IPO and, on the other hand, it needs its rights costs to come down for exactly the same reason. Something has to give.
Advantage Apple?
One interesting thing about this market is there are two major sets of players – those who make their money solely from these music services and those who make the vast majority of their money elsewhere. Spotify and Pandora can’t afford to keep losing money in this business because it’s the only business they have. Amazon, Apple, Google, and others, however, can afford to subsidize these offerings or run them at low margins because they feed the other parts of their businesses and generate additional revenues indirectly. Apple may be in the strongest position of all here because it has a user base willing to pay for content and they can afford to run the music business at a relatively low margin, while Amazon’s customer base is highly driven by saving money and Google’s true customer base is its advertisers, not its users. Much has been made of Spotify’s lead over Apple in on-demand streaming, but Apple offers the flavor of streaming the labels like and has already signed up half as many paid subs as Spotify. That’s the key number to watch – the labels have a stake in Spotify but would arguably benefit much more in the long-term from an industry that takes a dramatic turn toward paid streaming, a goal which Apple seems a lot more likely to help them achieve.

WSJ : Fed Chairwoman Janet Yellen Sees Stronger Case for Interest-Rate Increase

Fed Chairwoman Janet Yellen Sees Stronger Case for Interest-Rate Increase

Central banker said, ‘I believe the case for an increase in the federal funds rate has strengthened in recent months’

By JON HILSENRATH and HARRIET TORRY

JACKSON HOLE, WYO.—Federal Reserve Chairwoman Janet Yellen signaled growing conviction that the central bank will raise short-term interest rates in the weeks or months ahead.

“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” Ms. Yellen said in remarks prepared for delivery here.

The remarks left the door open for a Fed rate increase at its Sept. 20-21 policy meeting, but the chairwoman hedged her comments in ways that give the central bank an out if economic data disappoint in the next few weeks. Most important, the Fed’s decision appears to hinge on whether the Labor Department’s Sept. 2 jobs report shows steady gains in hiring.

“Our decisions always depend on the degree to which incoming data continues to confirm the [Fed’s] outlook,” she said. If the Fed doesn’t move in September, it has two more meetings this year, one in November just before U.S. elections and another in December. Her comments suggest she expects a move at one of these meetings if a September move doesn’t happen.

The Fed pushed rates to near zero in December 2008, kept them there for seven years and then nudged them up a quarter percentage point last December. Officials began the year expecting to raise rates four times in quarter-point increments but have delayed moving them because economic growth disappointed in the first half of the year and because they were uncertain about developments overseas and about the strength of the U.S. job market after some soft reports.


Ms. Yellen said her worries had dissipated.

“While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market,” Ms. Yellen said. Broad measures of labor market slack are improving, even though the unemployment rate has been steady most of the year near 5%, she added.

The Fed leader suggested that internal forecasts for the outlook have been steady since officials at the central bank last wrote down their projections for growth, unemployment and inflation. The evolution of these forecasts helps drive Fed decisions about rates. If the forecasts were deteriorating, the Fed would be more likely to stand pat on rates or to look for new ways to support growth.

“The [Fed] expects moderate growth in real gross domestic product, additional strengthening in the labor market, and inflation rising to 2% over the next few years,” Ms. Yellen said. “Based on this economic outlook, the [Fed] continues to anticipate gradual increases in the federal funds rate will be appropriate over time.”

The Fed leader sought to place new emphasis on her own uncertainty about the longer-run outlook for rates.

Fed officials make projections every three months about where they expect short-term rates to be at year-end. As of June, for example, the median estimate among them for the federal-funds rate at the end of 2017 was 1.625% and the median estimate for 2018 was 2.375%.

Instead of focusing on these point estimates, Ms. Yellen highlighted the range of possibilities for rates in the years ahead, noting there is a 70% probability rates could be between zero and 3.25% at the end of 2017 and between zero and 4.25% at the end of 2018.

“The reason for the wide range is that the economy is frequently buffeted by shocks and thus rarely evolves as predicted,” she said.

She dedicated much of her talk to examining how the Fed might behave in future downturns.

Traditionally, the Fed cuts rates in a downturn to spur borrowing, investing and spending. With rates so low, the Fed has little room to cut them if the economy sinks now.

Ms. Yellen said the Fed in some hypothetical future downturn might need to return to tools used in the recent past—purchases of bonds to bring down long-term interest rates and promises of low rates far into the future. Other tools developed by the Fed—including payments it makes to banks on the reserves they deposit with the central bank—could be another long-run feature of Fed policy.