Fed Chair Jerome Powell Press Conference Transcript April 28: Market Update

Jerome Powell: (00:00)
… strongly committed to achieving the monetary policy goals that Congress has given us, maximum employment and price stability. Today, my colleagues on the FOMC and I kept interest rates near zero and maintained our sizable asset purchases. These measures, along with our strong guidance on interest rates and on our balance sheet will ensure that monetary policy will continue to deliver powerful support to the economy until the recovery is complete. Widespread vaccinations, along with unprecedented fiscal policy actions are also providing strong support to the recovery. Since the beginning of the year, indicators of economic activity and employment have strengthened. Households spending on goods has risen robustly. The housing sector has more than fully recovered from the downturn, while business investment and manufacturing production have also increased. Spending on services has also picked up, including at restaurants and bars. More generally, the sectors of the economy most adversely affected by the pandemic remain weak, but have shown improvement.

While the recovery has progressed more quickly than generally expected, it remains uneven and far from complete. The path of the economy continues to depend significantly on the course of the virus and the measures undertaken to control its spread. Since March, progress on vaccinations has limited the number of new cases, hospitalizations and deaths. While the level of new cases remains concerning, especially as it reflects the spread of more infectious strains of the virus, continued vaccinations should allow for a return to more normal economic conditions later this year. In the meantime, continued observance of public health and safety guidance will help us reach that goal as soon as possible. As with overall economic activity, conditions in the labor market have continued to improve. Employment rose 916,000 in March as the leisure and hospitality sector posted a notable gain for the second consecutive month.

Nonetheless, employment in this sector is still more than 3 million below its level at the onset of the pandemic. For the economy as a whole, payroll employment is 8.4 million below its pre-pandemic level. The unemployment rate remained elevated at 6% in March, and this figure understates the shortfall in employment, particularly as participation in the labor market remains notably below pre-pandemic levels. The economic downturn has not fallen fully on all Americans, and those least able to shoulder the burden has been the hardest hit. In particular, the high level of joblessness has been especially severe for lower wage workers in the service sector and for African-Americans and Hispanics. The economic dislocation has upended many lives and created great uncertainty about the future.

Readings on inflation have increased and are likely to rise somewhat further before moderating. In the near term, 12 month measures of PCE inflation are expected to move above 2% as the very low readings from early in the pandemic fall out of the calculation, and past increases in oil prices pass through to consumer energy prices. Beyond these effects, we are also likely to see upward pressure on prices from the rebound in spending as the economy continues to reopen, particularly if supply bottlenecks limit how quickly production can respond in the near term. However, these one-time increases in prices are likely to have only transitory effects on inflation. The Fed’s response to this crisis has been guided by our mandate to promote maximum employment and stable prices for the American people, along with our responsibilities to promote the financial stability of the financial system.

As we say, in our statement on longer-run goals and monetary policy strategy, we view maximum employment as a broad-based and inclusive goal. Our ability to achieve maximum employment in the years ahead depends importantly, on having longer term inflation expectations well anchored at 2%. as the committee reiterated in today’s policy statement with inflation running persistently below 2%, we will aim to achieve inflation moderately above 2% for some time so that inflation average is 2% over time and longer term inflation expectations remain well-anchored at 2%. we expect to maintain an accommodative stance of monetary policy until these employment and inflation outcomes are achieved. With regard to interest rates, we continue to expect it will be appropriate to maintain the current zero to 1/4% target range for the federal funds rate until labor market conditions have reached levels consistent with the committee’s assessment of maximum employment, and inflation has risen to 2% and is on track to moderately exceed 2% for some time.

I would note that a transitory rise in inflation above 2% this year would not meet this standard. In addition, we will continue to increase our holdings of treasury securities by at least $80 billion per month, and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward our maximum employment and price stability goals. The increase in our balance sheet since March, 2020, has materially eased financial conditions and is providing substantial support to the economy. The economy is a long way from our goals and it is likely to take some time for substantial, further progress to be achieved. Our guidance for interest rates and asset purchases ties the path of the federal funds rate and the size of the balance sheet to our employment and inflation goals.

This outcome-based guidance will ensure that the stance of monetary policy remains highly accommodative as the recovery progresses. To conclude, we understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We at the Fed will do everything we can to support the economy for as long as it takes to complete the recovery. Thank you. I’ll look forward to your questions.

Speaker 1: (06:22)
Thank you Mr. Chair. First, we’ll go to Paul Kiernan.

Paul Kiernan: (06:26)
Hi, Chairman Powell. Thanks for doing this. I guess, since I’m first, I’ll go ahead and re-up question from the last press conference. Is it time to start talking about tapering yet? Have you and your colleagues had any conversations to those effect? Thanks.

Thank you. So, no, it is not time yet. We’ve said that we would let the public know when it is time to have that conversation. We’d said we do that well in advance of any actual decision to taper our asset purchases, and we will do so. In the meantime, we’ll be monitoring progress toward our goals. We first articulated this substantial further progress test at our December meeting. Economic activity and hiring have just recently picked up after slowing over the winter, and it will take some time before we see substantial further progress.

Paul Kiernan: (07:17)
Thank you.

Speaker 1: (07:19)
Thank you. Jonnelle at Reuters.

Jonelle: (07:26)
Okay. Hi, thank you so much. My question is about what’s going on with the virus and what if we don’t reach a level of herd immunity per se. So, in your scenario, thinking about the outlook in the economy, do you have a model where you might start to still normalize policy, even if there’s a baseline of infection still going on, or how can you … talk about how you’re weighing those things?

Yeah. We have to leave questions about herd immunity and what that looks like to the health experts. But, I would certainly say that what matters the most to the economic recovery continues to be controlling the virus. The economy can’t fully recover until people are confident that it’s safe to resume activities involving crowds of people. There may be people who are around the edges of the labor force, who won’t come back in unless they feel really comfortable going back to their old jobs, for example. There may be parts of the economy that will, just won’t be able to really fully re-engage until the pandemic is decisively behind us. But, we’ve articulated particular guidance for tapering our asset purchases and for lifting off and raising interest rates. So, for asset purchases, we’ve said that we would continue with the current pace of asset purchases until we see substantial further progress toward our goals.

So, that is what it is. Substantial, further progress. For interest rates, as I said a moment ago, we want to see labor market conditions consistent with maximum employment. We want to see inflation at 2% and we want to see it on track to exceed 2%. So, those are our tests. We don’t have an independent test to do with the virus. I will say, though, as I started with, the path of the virus is going to have an effect on our ability to achieve both of those tests.

Speaker 1: (09:27)
Great. Thank you. Gina.

Gina: (09:33)
Hi Chair Powell. Thanks for taking our questions. I wonder if you could talk a little bit about that test for raising interest rates that you just elaborated. You’ve obviously made it very clear that you want to see improvements in the real economy and the real data and not in just sort of expectations data before making that move. But, I guess I wonder what happens if inflation expectations were to move up before you see some sort of return to full employment? It seems like a lot of the stability in inflation has been tied to the fact that those have been so low and stable. I guess, I wonder how your reaction would be, how your reaction to that is, how you’re thinking about that.

Right? So, it seems unlikely, frankly, that we would see inflation moving up in a persistent way that would actually move inflation expectations up, while there was still significant slack in the labor market. I won’t say that it’s impossible, but it seems unlikely. It’s much more likely that we would having achieved maximum employment conditions, we’d also be seeing 2% inflation and be on track to see inflation moving above 2%. They tend to move together. So, that’s not to say inflation might not move up, but for inflation to move up in a persistent way, that really starts to move inflation expectations up, that would have to, that would take some time, and you would think that would be quite likely that we’d be in very strong labor markets for that to be happening.

If that actually were to happen, though, there’s a paragraph in the statement on longer-run goals and monetary policy strategy, which says that when the two goals are somewhat in conflict, we weigh various factors, including the time it would take to get back and forth. So, we do have, it doesn’t really tell you what to do, but it tells you that we will weigh those two factors and how far we are away from them, and how long it would take to reach them, where we to reach that sort of pretty unlikely state.

Speaker 1: (11:34)
Thank you. Steve Liesman.

Steve Liesman: (11:36)
Thank you. Mr. Chairman. I want to follow up on Jonnelle’s question and I wonder if you can help us understand better your thinking about how the COVID infection rates and the virus calibrate with monetary policy. As you recall, we had a major resurgence in the virus last fall. I’m wondering, would you need to be assured that there wasn’t such a resurgence coming before you began, I mean, for lack of a better term, thinking about tapering, and what kind of comfort level would you need? Would it be something that would be declared from the CDC or the World Health Organization, for example, downgrading the virus from a pandemic before you have the comfort level to reverse course on policy? Thank you.

We really have just articulated the goals that I’ve just mentioned a couple of times, which is substantial further progress toward our goals before we taper. Now, that’s very likely for us to achieve that. It’s very likely going to be the case that we’ve also made really significant progress on controlling the virus through vaccination and other … Those two things should more or less co-exist. We haven’t articulated a separate test for a state of the virus that we’d like to achieve because we’re not experts in that area. We’re really focused on the economic outcomes. Again, my guess is that we, it’s very likely, it seems to me that for us to achieve the economic outcomes, we would need to taper or to raise interest rates, we would also have to have made very substantial progress in getting the virus under control.

Not necessarily fully under control. There is a possibility of course, that we will we’ll have ongoing outbreaks over the summer in various regional outbreaks, and potentially next winter as well. But, we’ll be looking for substantial progress toward our goals. Substantial, further progress toward our goals, as we think about tapering asset purchases.

Steve Liesman: (13:30)
Thank you.

Speaker 1: (13:31)
Thank you, Victoria.

Victoria: (13:37)
Hi Chair Powell. I wanted to ask, you’ve talked a lot during this crisis about the need to have a lot of help from fiscal policy and monetary policy to make sure that there’s not long-term scarring in the economy. I was just wondering, given all of the policies that have been put in place, do you expect there to still be some long-term scarring? If so, what are you most worried about? Where are you most worried about that showing up?

I would say that-

Speaker 2: (14:03)
… showing up.

So, I would say that we were very worried about scarring, both in the labor market, from people being out of the labor market for an extended period of the time. The evidence is clear that it becomes much more difficult if you’re out for a long time, to get back in and get back to the life that you had. Same thing with these small businesses, many of which are the work of generations. Were we going to wipe out many of those unnecessarily? That was a big concern.

I would say that so far, here we are in late April of 2021, we haven’t experienced that level of scarring either in the labor market, or among smaller businesses. So we’re not living that downside case that we’re very concerned about a year ago. Not withstanding that, we’re a long way from full employment, payroll jobs are 8.4 million below where they were in February of 2020. We’ve got a long ways to go. And also it’s going to be a different economy. So, we’ve been hearing a lot from companies that they’ve been looking at deploying better technology and perhaps fewer people, including in some of the service industries that have been employing a lot of people. It may well be, it seems quite likely, that a number of the people who had those service sector jobs will struggle to find the same job, and may need time to find work and get back to the working life they had. These were people who were working in February of 2020. They clearly want to work. So those people, they’re going to need help.

And so, while I would say we haven’t seen really highly elevated levels of unemployment up in the teens, that we thought we might have for an extended period of time, we’ve still gotten a lot of people who are out of work. We want to get them back to work as quickly as possible. And that’s really one of the things we’re trying to achieve with our policy.

Michelle: (15:52)
Thank you. Rachel Siegel.

Rachel Siegel: (15:56)
Thank you, Michelle. And thank you, Chair Powell for taking our questions. The housing market in many American cities has seen booming prices, bidding wars, and all cash offers well above asking price. And this is happening at the same time that housing is becoming much more expensive for lower income Americans and people who are still struggling from the pandemic. Do you have concerns that there are localized housing bubbles, or that there’s the potential for that? And what is the fed doing to monitor, or address this? Thank you.

So we do monitor the housing market very carefully, of course. And I would say that before the pandemic, it’s a very different housing market than it was before the global financial crisis. And one of the main differences was that households were in very good shape, financially, compared to where they were. In addition, people who got mortgages were people with pretty high credit scores. There wasn’t the subprime… Low doc, no doc lending practices were not there. So we don’t have kind of thing where we have a housing bubble where people are over levered and owning a lot of houses. There’s no question though, that housing prices are going up.

And so we’re watching that carefully. It’s partly because there’s clearly strong demand, and there’s just not a lot of supply right now. So builders are struggling to keep up with the demand, clearly. inventories are tremendously low. We’re all hearing those stories. And if you’re an entry level housing buyer, this is a problem, because it just is going to be that much harder for people to get that first house, and that’s a problem. It’s part of a strong economy with people having money to spend and, and wanting to invest in housing. So in that sense, it’s good. It’s clearly the strongest housing market that we’ve seen since the global financial crisis. And my hope would be that over time, housing builders can react to this demand and come up with more supply and workers will come back to work in that industry.

So, it’s not an unalloyed good to have prices going up this much and we’re watching it very carefully. I don’t see the kind of financial stability concerns, though, that really do reside around the housing sector. So many of the financial crack ups in all countries, all Western countries, that have happened in the last 30 years, have been around housing. We really don’t see that here. We don’t see bad loans and unsustainable prices and that kind of thing.

Michelle: (18:27)
Thank you. Chris Rugaber, Associated Press.

Chris Rugaber: (18:33)
… for taking my question. I wanted to ask about the labor market. You see things, such as in the Beige Book, you saw on the Beige Book, anecdotes about businesses, not able to find workers… back to the labor market for fear of getting sick, childcare concerns and so forth. Do you see these as also just temporary bottlenecks that won’t have much effect on the long-term health of the labor market? How are you thinking about these kinds of issues?

Chris, you were breaking up a little there, but I think I did get your question. So, I think there are a number of a number of things going on there. The tension between a high level of unemployment, and an elevated number of companies saying that they can’t find workers. So what’s really going on there? And it should be a number of different things there. They’re workers who don’t actually have the specific skills that the employers are looking for. There may be geographical differences. It may also be that, for example, one big factor would be schools aren’t open yet, so there’s still people who are at home taking care of their children, and would like to be back in the workforce, but can’t be yet. There are virus fears that are weighing on people, so some people don’t want to go back to work.

There are also a significant number of people who say they’ve retired, a large number of people that say that they’re retired. Now, it’s, it’s hard to say whether they will come back in as the labor market strengthens and as COVID becomes… in the rear view mirror, in the history books, if you will. But clearly there’s something going on out there, as many companies are reporting labor shortages. We don’t see wages moving up yet. And presumably we would see that in a really tight labor market. And we may well start to see that. So what will happen? What we saw during the last expansion, it may be a different expansion, we don’t know, but what we saw was that labor supply generally showed up. In other words, if you were worried about running out of workers, it seemed like we never did. The labor force participation held up. People came in the labor force. They stayed in the labor force longer than expected. So my guess would be that you will see people coming back into the labor force, the labor market will reach equilibrium, maybe pay will go up. And I do think also the unemployment insurance benefits will run out in September, so to the extent that’s a factor, which is not clear, it will no longer be a factor fairly soon. So my guess is that we’ll come back to this economy where we have equilibrium between labor supply and labor demand. It may take some months though.

Michelle: (21:32)
Thank you, Heather Scott.

Chris Rugaber: (21:33)
Can I do a quick follow?

Michelle: (21:34)
I’m sorry, go ahead.

Go ahead, Chris. We lost you, Chris. Let’s go on to Heather.

Heather Scott: (21:56)
Thank you. Good afternoon, Chair Powell. I wanted to ask you, you’ve been hearing, of course, these concerns raised by Larry Summers and others, about inflation, and the fact that they think the fed might let things get out of hand with the new policy stance. So my question is, can you tell us what is different this time, versus previous periods like in the sixties when insulation got out of control, why are you confident with the lags in monetary policy that the fed can get ahead of inflation and make sure it doesn’t go too far above the 2% target?

Good question. So I actually have a couple of things I’d like to say about inflation, including addressing your question. So, let me start with just saying that we’re very strongly committed to achieving our objectives of maximum employment and price stability. Our price stability goal is 2% inflation over the longer run. And we believe that having inflation average 2% over time will help anchor long-term inflation expectations at 2%, with inflation having run persistently below 2% for some time, the committee seeks inflation moderately above 2% for some time.

So, with a little bit of context, we’re making our way through an unprecedented series of events, really, in which a synchronized global shutdown is now giving way to widespread reopening of economies many places around the world. In the United States, fiscal and monetary policy continue to provide strong support, vaccinations are now widespread, and the economy is beginning to move ahead with real momentum. During this time of reopening, we are likely to see some upward pressure on prices and I’ll discuss why. But those pressures are likely to be temporary as they are associated with the reopening process. And an episode of one-time price increases as the economy reopens is not the same thing as, and is not likely to lead to persistently higher year over year inflation into the future. Inflation at levels that are not consistent with our goal of 2% inflation over time.

Indeed, it is the Fed’s job to make sure that that does not happen. If contrary to expectations, inflation were to move persistently and materially above 2%, in a matter that threatened to move longer-term inflation expectations materially above 2%, we would use our tools to bring inflation and expectations down to mandate consistent levels. And I would say, if I may, that is a principle difference from… We’re all very familiar at the fed with the history of the 1960s and seventies, of course. And we know that our job is to achieve 2% inflation over time. We’re committed to that, and we will use our tools to do that. So, that’s a very different situation than you had back in the 1960s, or many, many differences, actually.

So, let me talk quickly about the two reasons, you could say three, but really two main reasons why we think inflation will move up in the near term. The first is the base effects. 12 month measures of inflation are likely to move well above 2% over the next few months, as the very low inflation readings recorded in March and April of last year dropped out of the calculation. That process has already started to show up. You saw it in the March CPI reading, and you’ll see it later this week in the PCE price data. These base effects will contribute about one percentage point to headline inflation, and about seven tenths of a percentage point to core inflation in April and May, so significant increases. And they’ll disappear over over the following months. And there’ll be transitory. They carry no implication for the rate of inflation in later periods. So, that’s base effects.

The other big one I would talk about is bottlenecks. So, this is what we’re seeing in supply chains in various industries. And we’re in close touch with all of these industries. The fed has a network of contacts that is unequaled in businesses, and in nonprofits for that matter too. So what do we mean by a bottleneck? A bottleneck really is a temporary blockage, or restriction in the supply chain for a particular good or goods. Something that slows down the process of producing goods and delivering them to the market. We think of bottlenecks as things that in their nature will be resolved as workers and businesses adapt. And we think of them as not calling for a change in monetary policy, since they’re temporary and expected to resolve themselves.

We know that the base effects will disappear in a few months. It’s much harder to predict with confidence the amount of time it will take to resolve the bottlenecks, or for that matter, the temporary effects that they will have on prices in the meantime. So, I’ll just sum up and say, we understand our job. We will do our job and we are focused, as you’ve seen for many years. We’ve been focused on inflation deviating below 2%, and we used our tools aggressively to keep it back up at 2%. If we see inflation moving materially above 2% in a persistent way, that risks, inflation expectations drifting up, then we will use our tools to guide inflation and expectations back down to 2%. No one should doubt that we will do that. This is not what we expect, but no one should doubt that in the event, we will be prepared to use our tools.

Michelle: (27:11)
Thank you. James Politi.

James Politi: (27:22)
Thank you, Chair Powell. You said a few weeks ago that it would take a string of months of job creation, of about a million, to achieve progress towards your goal. Can you define what your definition of a string of months is, more specifically. And on inflation, the FRC said the rise in inflation we’re beginning to see, largely reflects transitory factors as you just described. But why use the word largely? And what are the factors driving higher prices that may not be transitory based on the initial data that you’re seeing?

Speaker 2: (27:55)
So, what is a string, what do I mean by a string? Well, I would say what we have right now is one really good… I can tell you what it’s not. It’s not one really good…

Really good. I can tell you what it’s not. It’s not one really good employment rating, which is what we got in March. We got close to a million jobs in March and a very strong labor market reading. And I was just suggesting that we’d want to see more like that. We’re eight and a half million jobs below where we were in February of 2020, and that doesn’t account for growth in the labor force and growth in the economy, that trend we were on. So we’re a long way from our goals. And we don’t have to get all the way to our goals to taper asset purchases. We just need to make substantial, further progress. It’s going to take some time.

On largely, there are a bunch of factors. I was really thinking, we were thinking of the base effects and also the energy effects. I wasn’t meaning to say there are some real effects. I mean, they’re always relative prices going up and down within inflation. You know, there’s a basket for CPI or PCE. There are many, many, many factors that go into it. Relative prices are always moving up and down. This, we think it’s very fair to say that the increases we see and frankly are about to see later this week are largely due to base effects. It would have been more contentious to say entirely due to base effects because there are some things that are always going up. And so we just said largely.

Speaker 3: (29:30)
Hi Chair Powell, thanks for taking our questions. Over the past decade, the Fed has invested significant resources in large scale bank supervision. It has completely overhauled that approach and it’s even created a special committee that looks horizontally across the largest banks to find common risks. Did the Fed not see that multiple banks have large exposures to Arkagos? If not, why not? And then what regulatory changes would you like to see implemented to change that going forward?

Yeah, we supervise banks to make sure that they have risk management systems in place so that they can spot these things. We don’t manage their companies for them or try to manage individual risks. In the grand scheme of these large institutions, the Arkagos risks were not systemically important or were not of the size that they would have really created trouble for any of those institutions.

What was troubling though, was that this could happen in a business for a number of firms that is thought to carry relatively well-understood risks. The prime brokerage business is a well-understood business. And so it was surprising that a number of them would have had this. And it was essentially, I believe the fact that they had the same big risk position on with a number of firms and some of the firms were not aware that there were other firms that had those things.

I wouldn’t say it’s in any way, an indictment of our supervision of these firms. In some cases, it seems as though they were risk management breakdowns at some of the firms, not all of them. And that’s what we’re looking into.

Speaker 4: (31:19)
Thank you. Nancy Marshall Genzer.

Nancy Marshall Genzer: (31:26)
Hi Chair Powell. I’m wondering, are you planning to visit the homeless encampment that’s near the Fed in Washington, that you drive by? Have you been invited? And if you went, what would you be looking to learn there?

You know, frankly, yes, I have not had a chance to do it yet, I’ve been very busy. But I will visit. I don’t want to visit at a time of a lot of media attention because I don’t want that to be part of the story. But I will go visit when it’s no longer a news story. I’ve met with homeless people many times, number of times, anyway, let’s say, and I think it’s always good to talk to people and hear what’s going on in their lives. What you find out is, they’re you, they’re just us. I mean, these are people who in many cases had jobs and they have lives and they’ve just found themselves in this place. It’s a difficult problem though. There are many, many facets of it, and I’m well aware that this is not something that the Fed has all the tools for or anything like that. But I will do that when the need arises and when it’s not so much in the public eye.

Nancy Marshall Genzer: (32:36)
And is there anything specifically that you would be looking to learn there?

Not really. I mean, I think I know what I’ll find there. I think you connect with these people and again, what you find is, they’re like you. That could be you. I mean, that could be your sister. That could be your kid. You always feel that way in that sort of an encounter. And it’s an important thing to engage in, I think. And I think we bring that understanding into our lives and frankly, into our work, the work that we do as well.

Speaker 4: (33:13)
Thank you. Hannah Ling.

Hannah Ling: (33:20)
Hi. I wanted to ask about digital currency. You’ve previously said a few times that you think it’s important for the US to get central bank digital currency right rather than be first. But with countries like China moving very quickly on CBDC, I was wondering what you think the risks are of moving too slow on digital currency.

Right. So I think the first thing to say is that we feel an obligation to understand the technology and all of the policy issues very, very well. Central bank digital currencies are now possible, and we’re going to see some of them around the world. And we need to understand whether that’s something that would be a good thing for the people that we serve. How would it work in our system? And there are some very, very difficult questions to answer, and we are engaged in a serious program to understand both the technology and the policy issues.

I would say this. We’re the world’s reserve currency. And that means that the dollar is used in transactions all around the world, far more than any other currency. And that’s because of our rule of law, our democratic institutions, which are the best in the world, our economy, our industrious people, all the things that make the United States the United States. That’s why we’re the reserve currency. And of course we have open capital accounts, which is essential if you’re going to be the reserve currency.

So those are the factors that make us the reserve currency. I’m less concerned that someone, that another country might have a digital currency first. You know, ask yourself the question. Does that mean that if you were a company that’s doing international business, would you then suddenly start to use that currency to do your international transactions? Or would you still do them in dollars, which is what everyone does? And I’m not so concerned about that.

I am really concerned about getting it right. It is a tricky set of questions that we have to navigate in a world where we already have, remember, a highly evolved payment system. We have FedNow and other immediately available funds. Pretty soon everybody will be able to do what people do in other parts of the world, which is just use their phone to make immediately available payments all the time. It’ll be normal. And what would be the role of a central bank digital currency in that kind of an environment? Far more important to get it right than it is to do it fast or feel that we need to rush to reach conclusions because other countries are moving ahead.

I mean, the currency that’s being used in China is not one that would work here. It’s one that really allows the government to see every payment for which it is used, in real time. It’s much more to do with things that are happening within their own financial system than it is, I think to do with the sort of global competition.

Speaker 4: (36:33)
Thank you. Michael Derby.

Michael Derby: (36:35)
Thank you for taking my question. I wanted to ask you another question about inflation and it has to do with inflation expectations. A number of different surveys and market indicators are showing multi-year highs in inflation expectations ratings. So I wondered if that was something that you saw as consistent with your inflation outlook. Is that something that worries you, or do you see that as maybe the success of the Fed’s new inflation framework, making it out to the broader public?

Right. Inflation expectations before the pandemic hit, and here we think of survey, market-based, survey being either households or economists and market base. You look at all of those. And I would say that they were at the low end of what would have been consistent with a 2% inflation target, particularly our 2% inflation target, which calls for 2% average inflation. So there was the low end.

Inflation expectations actually went down a bit at the beginning of the pandemic. And now they’ve just moved back up to levels broadly that are where they were in 2018, or in some cases, 2014, and I would say more consistent with our mandate. And we want them to be. We want them to be higher on a persistent basis. We want inflation to run a little bit higher than it has been running for the last quarter of a century. We want it to average 2%, not 1.7%. And for that, we need to see inflation expectations that are consistent with that, really well-anchored at 2%.

We don’t really see that yet, but I would say that breakevens have moved up in a way. Breakevens are based on CPI, of course. But they’re now at levels that are pretty close to mandate consistent, whereas before they were below. We monitor inflation expectations very, very carefully, as you would obviously know. So that’s where I would say it is.

One small follow-up? Do you have any red lines on inflation readings, where if you hit like a certain number on say, core PC, that would be a trigger response from the Fed?

It doesn’t work that way. Inflation measures are always going to be a bit volatile. We expect, as I mentioned, we expect core and headline PCE to move up because of base effects, and we expect that to go away. We also expect these bottleneck effects to come in. We don’t know how persistent there’ll be. We think it’s a matter of when they will pass through, not whether they will pass through. But we can’t be confident about the exact timing of that or the size of them. They don’t seem especially large at the moment, but we don’t know.

This is all about the reopening of the economy. That’s what’s happening. We were in a deep, deep hole a year ago, and now with a lot of help from fiscal policy, some additional help from monetary policy, and a great deal of help from vaccination, we’re seeing a strong rebound in activity. And what’s happening is demand can be spurred with fiscal transfers and the saved up fiscal transfers, and people going back to work and things like that. The supply will take a little bit of time to adapt. New restaurants will have to be opened. The supply of various inputs into the goods part of the economy will have to be brought back up to speed. And you’re seeing some of that. That’ll happen over a period of time over coming quarters. You’ll see some of the bottlenecks resolved, but the last one may not be resolved for some time.

Thank you.

Speaker 4: (40:19)
Thank you. Brian Chung.

Brian Chung: (40:24)
Hi Chairman Powell, Brian Chung with Yahoo Finance. I wanted to ask about financial stability, which is a part of the Fed’s reaction function here. It seems like to people on the outside who might not follow finance daily, they’re paying attention to things like GameStop, now Dogecoin. And it seems like there’s interesting reach for yield in this market, to some extent also Arkagos. So does the Fed see a relationship between low rates and easy policy to those things? And is there a financial stability concern from the Fed’s perspective at this time?

Right. Financial stability for us is really, we have a broad framework. So we don’t just jump from one thing to another. I know many people just look at asset prices and they look at some of the things that are going on in the equity markets, which I think do reflect froth in the equity markets. But really, we try to stick to a framework for financial stability so we can talk about it the same way each time, and so we can be held accountable for it.

So one of the areas is asset prices. And I would say some of the asset prices are high. You are seeing things in the capital markets that are a bit frothy. That’s a fact. I won’t say it has nothing to do with monetary policy, but it also has tremendous amount to do with vaccination and reopening of the economy. That’s really what has been moving markets a lot in the last few months, is this turn away from what was a pretty dark winter to now, a much faster vaccination process and a faster reopening. So that’s part of what’s going on.

The other things though, leveraging the financial system is not a problem. That was one of the four pillars. Asset prices was one. Leveraging the financial-

… the four pillars. Asset prices was one. Leveraging the financial system is not an issue. We have very well capitalized, large banks. We have funding risks for our largest financial institutions are also very low. We do have some funding risk issues around money market funds, but I would say they’re not systemic right now. And the household sector is actually in pretty good shape. It was in very good shape as a relative matter before the financial crisis, sorry, the pandemic crisis hit. There were real concerns, of course, with high levels of unemployment, and loss of wages and all that the household sector would weaken dramatically. That hasn’t happened.

So with the fiscal transfers, money that’s on household balance sheets, they’re in good shape. You see relatively low defaults and that kind of thing. So the overall financial stability picture is mixed, but on balance it’s manageable, I would say. And by the way, I think it’s appropriate and important for financial conditions to remain accommodative to support economic activity. Again, eight and a half million people who had jobs in February don’t have them now. And there’s a long way to go till we reach our goal. So that’s what I would say.

Brian Chung: (43:16)
As a follow-up, you mentioned money market pressures, the fed didn’t make changes to interest on reserves or excess reserves. What was the logic behind that? It seems like so far has been drifting closer to zero. So just hoping for clarification on that.

Right. So the federal funds rate has been well within target range and money market conditions are fine. We have the ability to use our administrative tools to make sure that that remains the case. We do expect further downward pressure on rates through asset purchases and also the runoff in the treasury general account. But at this point we didn’t see a need to deploy our tools to support rates. And of course, we will do so if the need does arise.

Speaker 5: (44:06)
Thank you. Jean Young.

Jean Young: (44:10)
Hi, Chair Powell. I wanted to ask a similar question. We are seeing elevated market valuations, and some economists are concerned that the economy might overheat, at least for a period of time. So should the fed and other regulators be thinking about tightening capital requirements or extending oversight to the non-bank sector so that financial stability risks stays as low as they have been? Thank you.

So I think capital requirements for banks are, to me, went up tremendously really over the course of the 10 years between the financial crisis and the arrival of the pandemic. And the banks really made it through a real stress test very well, and past two of our stress tests, and then there’s another one that’s pending. So capital is in a good place as far as I’m concerned in the banking system. But to your point, what we saw was, so what kind of happened during the pandemic crisis that that requires attention. And number one is, is money market funds and corporate bond funds where we saw run dynamics again? And we’re looking at that. So we’re looking at ways and people around the world are looking at ways to make those vehicles resilient so that they don’t have to be supported by the government whenever there’s severely stressed market conditions.

It’s a private business. They need to have the wherewithal to stay in business and not just count on the fed and others around the world to come in. So that was that. The other one is treasury market structure. Dealers are committing less capital to that activity now than they were 10 or 15 years ago. And the need for capital is higher because there’s so much more supply of treasuries. And so there are some questions about treasury market structure, and there’s a lot of careful work going on to understand whether there is something we can do about this, because the U.S. Treasury market is probably the single most important market in the economy in the world. It needs to be liquid. It needs to function well for the good of our economy and the good of our citizens.

So it’s not clear where that takes you, but we are taking a careful look, and the Treasury Department is really going to be leading this at treasury market structure and all of the various aspects of that to make sure that we do have a resilient, strong treasury market that can work even in difficult times. As you know, at the very beginning of this recent crisis, there was such a demand for selling treasuries, including by foreign central banks, that really the dealers couldn’t handle the volume. And so what was happening was the market was really starting to lose function. And that was a really serious problem, which we had to solve through really massive asset purchases. And so we’d like to see if there isn’t something we can do to … Do we need to build against that kind of an extreme tail risk? And if so, what would that look like?

Speaker 5: (47:47)
Thank you. Edward Lawrence.

Edward Lawrence: (47:50)
Thank you, Fed Chairman, for the question. So I’m interested in your thoughts. There’s so much fiscal help and accommodation from the Federal Reserve. You said today that vaccinations will follow the normal economic conditions or lead to more normal economic conditions later this year. When do you see the economy being able to stand on its own feet, so to speak? And along those lines, with the fiscal spending and the accommodation you talked about with transitory inflation, does more spending need to be injected into the system over that effect, that transitory nature of the inflation? Thank you.

When will the economy be able to stand on its own feet? I’m not sure what the exact nature of that question is.

Well, what I’m saying is, is when do we need to lower the amount of treasuries you’re buying, sort of taper off a little bit? When can it stand without having that support from the monetary policy side and then for the transitory?

Okay. Sorry. So we’ve articulated our test for that, as you know, and that is just, we’ll continue asset purchases at this pace until we see substantial, further progress. And we’re going to communicate well in advance of any decision. We’re going to let the public know that that’s what we’re thinking. And so there’ll be a lot of warning and that kind of thing. But it’s about substantial, further progress toward our goals. That’s really all it is. It doesn’t have any external virus related specific requirement. Although again, I do think that the virus will need to continue to be controlled for us to achieve those economic goals, but it’s really the economic goals. Now, your second question, sorry, just say again, I didn’t quite get that question.

Sure. With all the fiscal spending that’s happened in the accommodation in it, does the system need more spending from the fiscal side or accommodation, or would more spending affect the transitory nature of the inflation and put those upward pressures on inflation long-term?

It’s really up to Congress. We’re not an advisor to Congress. We don’t weigh in on specific fiscal bills or proposals. That’s really between elected parties. Basically fiscal policy is the province of people who stand for democratic election and win, and they get to make those very difficult decisions and they get to be accountable to the voters. We didn’t do any of that, and we don’t have a seat at that table. We don’t seek a seat at that table. So that’s really something for Congress and the administration to deal with.

Speaker 5: (50:23)
Thank you. Greg Rob.

Greb Rob: (50:32)
Hi, Greg Rob from Market Watch. Thank you. Thank you so much for the opportunity. I’m going to circle back to the housing market. It’s just kind of confusing, the question and your answer. The housing market is strong. Prices are up, and yet the Fed is buying $40 billion per month in mortgage related assets. Why is that? And are those purchases playing a role at all in pushing up prices? Thank you.

Yeah. I mean, we started buying MBS because the mortgage back security market was really experiencing severe disfunction. And we’ve sort of articulated what our exit path is from that. It’s not meant to provide direct assistance to the housing market. That was never the intent. It was really just to keep that it’s a very close relation to the treasury market and a very important market on its own. And so that’s why we bought, as we did during the global financial crisis, we bought MBS too. Again, not intention to send help to the housing market, which was really not a problem this time at all. And it’s a situation where we will taper asset purchases when the time comes to do that, and those purchases will come to zero over time. And that time is not yet.

Speaker 5: (52:01)
Thank you. And for the last question, we’ll go to Mike McKee.

Mike McKee: (52:06)
Thank you, Mr. Chairman. Since I am last, let me go back to Paul’s question, the first question, and ask you not whether you’re thinking about thinking of tapering, but why you’re not? We’re seeing bank lending fall, the markets seem to be operating well. Are you afraid of a taper tantrum? Or is it as one money manager put it, if you get out of the markets, there aren’t enough buyers for all of the treasury debt, and so rates would have to go way up? Bottom line question is, what do we get for $120 billion a month that we couldn’t get for less?

So it’s really not more complicated than this. We articulated the substantial, further progress test at our December meeting. And really for the next couple of months, we made relatively little progress toward our goals. And remember, substantial, further progress from December, from our December meeting. And then vaccination started to get more widespread. The economy reopened. We got a really nice job report for March. It doesn’t constitute substantial, further progress. It’s not close to substantial, further progress. We’re hopeful that we will see along this path a way to that goal. And we believe we will, just is a question of when? And so when the time comes for us to talk about talking about it, we’ll do that. But that time is not now. We’re not that far. We’ve had one great jobs report. It’s not enough. We’re going to act on actual data, not on a forecast, and we’re just going to need to see more data. It’s no more complicated than that.

Mike McKee: (53:46)
[inaudible 00:53:46] … leave rates where they are doesn’t change anything, but does it change anything if you [inaudible 00:53:53] tapered a bit? If you spent less, would you still get the same effect on the economy?

If we bought less? You’re very faint. So if someone has the volume, maybe turn it up. But if we bought less, no. I mean, I think the effect is proportional to the amount we buy. It’s really part of overall accommodated financial conditions. We have tried to create accommodated financial conditions to support economic activity, and we did that and we articulated the tests for withdrawing that accommodation. And we think, so we’re waiting to see those tests to be fulfilled, both for asset purchases and for liftoff of rates. And when the tests are fulfilled, we’ll go ahead. We’ve done this before. We did it after the last crisis, and as those tests are satisfied, we’ll do it. And the only thing that will guide us is, are the tests met? That’s what we focused on is, have the macro economic conditions that we’ve articulated, have they been realized? That will be the test for tapering asset purchases and for raising interest rates.

Speaker 5: (55:11)
Thank you very much.

Thank you.

Fed Chair Jerome Powell Press Conference Transcript April 28: Market Update

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