May 5, 2022
Fed Chair Powell holds press conference following FOMC meeting 5/04/22 Transcript
Federal Reserve Chairman Jerome Powell holds a press conference following the highly-anticipated FOMC meeting on 5/04/22. Read the transcript here.
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Jerome Powell: (00:06)
Good afternoon. It’s nice to see everyone in person for the first time in a couple of years. Before I go into the details of today’s meeting, I’d like to take this opportunity to speak directly to the American people. Inflation is much too high, and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down. We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses. The economy and the country have been through a lot over the past two years and have proved resilient. It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all.
Jerome Powell: (00:52)
From the standpoint of our congressional mandate to promote maximum employment and price stability, the current picture is plain to see. The labor market is extremely tight and inflation is much too high. Against this backdrop, today the FOMC raised its policy interest rate by a half percentage point, and anticipates that ongoing increases in the target rate for the federal funds rate will be appropriate. In addition, we are beginning the process of significantly reducing the size of our balance sheet. I’ll have more to say about today’s monetary policy actions after briefly reviewing economic developments. After expanding at a robust 5.5% pace last year, overall economic activity edged down in the first quarter. Underlying momentum remains strong, however, as the decline largely reflected swings in inventories and net exports, two volatile categories whose movements last quarter likely carry little signal for future growth. Indeed, household spending and business fixed investment continued to expand briskly.
Jerome Powell: (01:56)
The labor market has continued to strengthen and is extremely tight. Over the first three months of the year, employment rose by nearly 1.7 million jobs. In March, the unemployment rate hit a post-pandemic and near five decade low of 3.6%. Improvements in labor market conditions have been widespread, including for workers at the lower end of the wage distribution, as well as for African Americans and Hispanics. Labor demand is very strong, and while labor force participation has increased somewhat, labor supply remains subdued. Employers are having difficulties filling job openings, and wages are rising at the fastest pace in many years. Inflation remains well above our longer run goal of 2%. Over the 12 months ending in March, total PCE prices rose 6.6%. Excluding the volatile food and energy categories, core PCE prices rose 5.2%.
Jerome Powell: (02:54)
Aggregate demand is strong, and bottlenecks in supply constraints are limiting how quickly production can respond. Disruptions to supply have been larger and longer lasting than anticipated, and price pressures have spread to a broader range of goods and services. The surge in prices of crude oil and other commodities that resulted from Russia’s invasion of Ukraine is creating additional upward pressure on inflation. And COVID related lockdowns in China are likely to further exacerbate supply chain disruptions as well. Russia’s invasion of Ukraine is causing tremendous loss and hardship, and our thoughts and sympathies are with the people of Ukraine. Our job is to consider the implications for the US economy, which remain highly uncertain. In addition to the effects on inflation, the invasion and related events are likely to restrain economic activity abroad and further disrupt supply chains, creating spillovers to the US economy through trade and other channels.
Jerome Powell: (03:55)
The Fed’s monetary policy actions are guided by our mandate to promote maximum employment and stable prices for the American people. My colleagues and I are acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation. We are highly attentive to the risks that high inflation poses to both sides of our mandate, and we’re strongly committed to restoring price stability.
Jerome Powell: (04:24)
Against the backdrop of the rapidly evolving economic environment, our policy has been adapting, and it will continue to do so. At today’s meeting, the committee raised the target range for the federal funds rate by a half percentage point, and stated that it anticipates that ongoing increases in the target range will be appropriate. We also decided to begin the process of reducing the size of our balance sheet, which will play an important role in firming the stance of monetary policy. We are on a path to move our policy rate expeditiously to more normal levels, assuming that economic and financial conditions evolve in line with expectations. There is a broad sense on the committee that additional 50 basis point increases should be on the table at the next couple of meetings. We’ll make our decisions meeting by meeting as we learn from incoming data and the evolving outlook for the economy, and we will continue to communicate our thinking as clearly as possible. Our overarching focus is using our tools to bring inflation back down to our 2% goal. With regard to our balance sheet, we also issued our specific plans for reducing our securities holdings. Consistent with the principles we issued in January, we intend to significantly reduce the size of our balance sheet over time in a predictable manner, by allowing the principle payments from our securities holdings to roll off the balance sheet, up to monthly cap amounts. For treasury securities, the cap will be $30 billion per month for three months, and will then increase to $60 billion per month. The decline in holdings of treasury securities under this monthly cap will include treasury coupon securities, and to the extent that coupon securities are less than a monthly cap, treasury bills. For agency mortgage back securities, the cap will be 17.5 billion per month for three months, and will then increase the $35 billion per month. At the current level of mortgage rates, the actual pace of agency MBS runoff would likely be less than this monthly cap amount.
Jerome Powell: (06:28)
Our balance sheet decisions are guided by our maximum employment and price stability goals, and in that regard, we’ll be prepared to adjust any of the details of our approach in light of economic and financial developments. Making appropriate monetary policy in this uncertain environment requires a recognition that the economy often evolves in unexpected ways. Inflation has obviously surprised that the upside over the past year, and further surprises could be in store. We therefore will need to be nimble in responding to incoming data and the evolving outlook, and we will strive to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain time. We are highly attentive to inflation risks. The committee is determined to take the measures necessary to restore price stability. The American economy is very strong and well positioned to handle tighter monetary policy. 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 achieve our maximum employment and price stability goals. Thank you. And I look forward to your questions.
Speaker 1: (07:42)
Good. And Nick Timiraos [inaudible 00:07:44].
Nick Timiraos : (07:50)
Nick Timiraos of The Wall Street Journal. Chair Powell, the unemployment rate at 3.6% in March is now essentially at the level that the committee had expected would prevail over the next three years, and at the bottom end of FOMC participant’s projections for the longer run rate that you submitted in the projections at the last meeting. How has your outlook for further declines in the unemployment rate changed since March? What does this imply for your inflation forecast, and how has your level of confidence changed with regard to the feasibility of slowing hiring without pushing the economy into recession? Thanks.
Jerome Powell: (08:31)
Thank you. So you’re right, 3.6% unemployment is just about as low as it’s been at 50 years. And I would say that I expect, and committee members generally expect, that we’ll get some additional participation. So people will be coming back into the labor force, we’ve seen that particularly among prime age people. And that will, of course, tend to hold the unemployment rate up a little bit. I would also expect though that job creation will slow, job creation has been at more than a half a million per month in recent months, very, very strong, particularly for this stage of the economy. And so we think with fiscal policy less supportive, with monetary policy less supportive, we think that job creation will slow as well. So it is certainly possible that the unemployment would go down further, so I would expect those to be relatively limited because of the additional supply, and also just the slowing in job creation.
Jerome Powell: (09:33)
Implications for inflation, really the wages matter a fair amount for companies, particularly in the service sector. Wages are running high, the highest they’ve run in quite some time, and they are one good illustration, really, of how tight the labor market really is, the fact that wages are running at the highest level in many decades, and that’s because of an imbalance between supply and demand in the labor market. So we think through our policies, through further healing in the labor market, higher rates, for example, of vacancy filling and things like that, and more people coming back in, we like to think that supply and demand will come back into balance and that therefore wage inflation will moderate to still high levels of wage increases, but ones that are more consistent with 2% inflation. That’s our expectation. Your third question was…
Nick Timiraos : (10:24)
Your level of confidence that you can slow hiring, without pushing the economy into a downturn.
Jerome Powell: (10:29)
So I guess I would say it this way, there’s a path by which we would be able to have demand moderate in the labor market, and therefore have vacancies come down without unemployment going up. Because vacancies are at such an extraordinarily high level, there are 1.9 vacancies for every unemployed person, 11 and a half million vacancies, 6 million unemployed people. And we haven’t been in that place, even sort of the vacancy, unemployed curve, the Beveridge curve, we haven’t been at that sort of level of a ratio in the modern era.
Jerome Powell: (11:12)
So in principle, it seems as though by moderating demand we could see vacancies come down, and they could come down fairly significantly, and I think put supply and demand at least closer together than they are. And that would give us a chance to get wages down, and then get inflation down without having to slow the economy and have a recession and have unemployment rise materially. So there’s a path to that. Now, I would say, I think we have a good chance to have a soft or soft-ish landing, or outcome, if you will. And I’ll give you a couple reasons for that. One is, households and businesses are in very strong financial shape. You’re looking at excess savings on balance sheets, excess in the sense that they’re substantially larger than the prior trend-
Jerome Powell: (12:02)
Excess in the sense that they’re substantially larger than the prior trend. Businesses are in good financial shape. The labor market is, as I mentioned, very, very strong. And so it doesn’t seem to be anywhere close to a downturn. Therefore the economy is strong and is well positioned to handle tighter monetary policy. So, but I’ll say, I do expect that this will be very challenging. It’s not going to be easy. And it may well depend of course, on events that are not under our control. But our job is to use our tools to try to achieve that outcome. And that’s what we’re going to do.
Steve Liesman: (12:38)
Steve Liesman, CNBC. Thanks for taking my question, Mr. Chairman. You talked about using 50 basis point rate hikes or the possibility of them in coming meetings. Might there be something larger than 50? Is 75 or a percentage point possible? And perhaps you could walk us through your calibration. Why one month should we … or one meeting, should we expected? 50? Why something bigger? Why something smaller? What is the reasoning for the level of the amount of tightening? Thank you.
Jerome Powell: (13:07)
Sure. So 75 basis point in increase is not something the committee is actively considering. What we are doing is we raised 50 basis points today. And we’ve said that again, assuming that economic and financial conditions evolve in ways that are consistent with our expectations, there’s a broad sense on the committee that additional 50 basis increases should be on, 50 basis point increase should be on the table for the next couple of meetings.
Jerome Powell: (13:32)
So we’re going to make those decisions at the meetings, of course. And we’ll be paying close attention to the incoming data and the evolving outlook, as well as to financial conditions. And finally, of course, we will be communicating to the public about what our expectations will be as they evolve. So the test is really just as I laid it out, economic and financial conditions evolving broadly in line with expectations.
Jerome Powell: (13:54)
And I think expectations are that we’ll start to see inflation flattening out and not necessarily declining yet, but we’ll see more evidence. We’ve seen some evidence that core PCE inflation is perhaps either reaching a peak or flattening out. We’ll want to know more than just some evidence. We want to really feel like we’re making some progress there. And, but I mean, we’re going to make these decisions and there’ll be a lot more information. I just think we want to see that information as we get there.
Jerome Powell: (14:26)
It’s a very difficult environment to try to give forward guidance, 60, 90 days in advance. There are just so many things that can happen in the economy and around the world. So we’re leaving ourselves room to look at the data and make a decision as we get there.
Steve Liesman: (14:41)
I’m sorry, but if inflation is lower one month and the unemployment rate higher, would that be something that we would calibrate towards a lower increase in the funds rate or [crosstalk 00:14:53].
Jerome Powell: (14:53)
I don’t think a one month … one month is not, no, no. One month’s reading would not … doesn’t tell us much. We’d want to see evidence that inflation is moving in a direction that gives us more comfort. As I said, we’ve got two months now where core inflation is a little lower, but we’re not looking at that as a reason to take some comfort. I think we need to really see that our expectation is being fulfilled.
Jerome Powell: (15:18)
That inflation in fact, is under control and starting to come down. But again, it’s not like we would stop. We would just go back to 25 basis point increases. It’ll be a judgment call when these meetings arrive. But my, again, our expectation is if we see what we expect to see, then we would have 50 basis point increases on the table at the next two meetings.
Speaker 2: (15:42)
Okay, let’s go to Colby.
Colby Smith: (15:46)
Thank you, Colby Smith from the Financial Times. Given the expectation that inflation will remain well above the Fed’s target at year end, what constitutes a neutral policy setting, in terms of the fed funds rate. And to what extent is it appropriate for policy to move beyond that level at some point this year?
Jerome Powell: (16:08)
So neutral. When we talk about the neutral rate, we’re really talking about the rate that neither pushes economic activity higher nor slows it down. So it’s a concept really. It’s not something we can identify with any precision. So we estimate it within broad bands of uncertainty. And the current estimates on the committee are sort of two to 3%. And also that’s a longer run estimate. That’s an estimate for an economy that’s at full employment and 2% inflation.
Jerome Powell: (16:37)
So really the way, really what we’re doing, is we’re raising rates expeditiously to what we see as the broad range of plausible levels of neutral. But we know that there’s not a bright line drawn on the road that tells us when we get there. So we’re going to be looking at financial conditions, right?
Jerome Powell: (16:56)
Our policy affects financial conditions and financial conditions affect the economy. So we’re going to be looking at the effect of our policy moves on financial conditions. Are they tightening appropriately? And then we’re going to be looking at the effects on the economy. And we’re going to be making a judgment about whether we’ve done enough to get us on a path to restore price stability. It’s that.
Jerome Powell: (17:16)
So if that path happens to evolve levels that are higher than estimates of neutral, then we will not hesitate to go to those levels. We won’t. But again, there’s a sort of false precision in the discussion, that we as policy makers don’t really feel. It’s you’re going to raise rates and you’re going to be kind of inquiring how that is affecting the economy through financial conditions. And of course, if higher rates are required, then we won’t hesitate to deliver them.
Speaker 2: (17:49)
Neil Irwin: (17:52)
Thanks [inaudible 00:17:54]. Neil Irwin with Axios. Do you see evidence that inflationary psychology is changing, that in the areas like worker’s wage demands, businesses willingness to raise prices. Do you see evidence that there is a psychological shift going on, on inflation? Thanks.
Jerome Powell: (18:07)
So don’t really see strong evidence of that yet, but that does not in any way make us comfortable. I think if you see, look at short term inflation expectations, they’re quite elevated and you can look at that and say, “Well that’s because people expect inflation to come down.” And in fact, inflation expectations come down fairly sharply. Longer term inflation expectations have been reasonably stable, but have moved up to … but only to levels where they were in 2014 by some measures.
Jerome Powell: (18:37)
So you can look at that. And I think that’s a fair description of the picture, but it’s really about the risks. We don’t see a wage price spiral. We see that companies have the ability to raise prices and they’re doing that, but there have been price shocks. So I just think it takes you back to the basic point, was that we know we need to expeditiously move our policy rate up to ranges of more normal, neutral levels.
Jerome Powell: (19:06)
And we need to look around and keep going. If we don’t see that financial conditions have tightened adequately or that the economy is behaving in ways that suggest that we’re not where we need to be. So again, you don’t see those things yet, but I would say there’s no basis for feeling comfortable about that. It’s a risk that we simply can’t, we can’t run that risk. We can’t allow a wage price spiral to happen, and we can’t allow inflation expectations to become unanchored. It’s just something that we can’t allow to happen. And so we’ll look at it that way.
Speaker 2: (19:38)
Jeanna Smialek: (19:45)
Great. Thanks [inaudible 00:19:46]. Jeanna Smialek with the New York Times. You mentioned in the statement both the upside risks to inflation from Russia and China. Obviously those are very much supply shocks rather than demand side. And I wonder what you meant to convey by adding them. I wonder what you meant to convey by adding those?
Jerome Powell: (20:03)
Well. So our tools don’t really work on supply shocks. Our tools work on demand. And to the extent, we can’t affect really oil prices, or other commodity prices, or food prices and things like that. So we can’t affect those, but there’s a job to do on demand. And you can see that in the labor market, where demand is substantially in excess of supply of workers. And you can see it in the product markets as well. But I guess I’m just pointing out that a couple of things. For both the situation in Ukraine and the situation in China, they’re likely to both add to headline inflation and people are going to be suffering from that. People almost suffer more from food and energy shocks than, but even though they don’t actually tell us much about the future path. So, but the second thing is, that they’re both capable of preventing further progress in supply chain, in supply chains healing. And so, or even making supply chains temporarily worse. So they’re going to weigh on the process of global supply chain healing, which is going to affect broader inflation too. So they’re, in a way there are two further negative shocks that have hit really in the last 60 days, 90 days.
Speaker 2: (21:26)
Victoria Guido: (21:32)
Hi, Victoria Guido from Politico. I want to follow up on that, because you all have obviously highlighted that there are both supply and demand issues at play in inflation. And I’m just wondering if these supply chain issues continue because of Russia, because of China, or just because these things take a while to work out? Does getting back down to your 2% mandate require that these supply chain issues get resolved, since you can only handle the demand side, as you said? Or will you have to crimp demand maybe even further if the supply chain issues don’t resolve themselves, in order to try and get inflation back down to where you want it to be?
Jerome Powell: (22:11)
So, I’ll just say, for now, we’re focused on doing the job we need to do on demand. And there’s plenty to be done there. Again, if you look at it, it’s essentially almost two to one vacant, job vacancies to unemployed people. There’s a lot of excess demand. There are more than five million more employed plus job openings, then there are the size of the labor force. So there’s an imbalance there that we have to do our work on.
Jerome Powell: (22:35)
A very difficult situation. If you can’t … you would look at core inflation, which wouldn’t include the commodity price shocks. And we would … that’s one of the reasons we would tend to focus on that, because we can have more of an effect on that. But it would be a very difficult situation. We have to be sure that inflation expectations remain anchored. And that’s part of our job too. So we’d be watching that carefully and that does … it puts any central bank in a very difficult situation.
Speaker 2: (23:05)
Howard Schneider: (23:11)
Howard Schneider with Reuters. And thanks and nice to be back. So two questions. One quick one. You cited the 1.9 to one figure. So often now I got to ask you, what would be a good figure there? What would you like to see that come down to, to think that you’re at sort of a non-inflationary vacancy to unemployed rate? And secondly, on help from inflation, how much are you counting on wealth effects through stock market channels? Equity markets broadly down quite a bit since late fall, first of the year. How are you mapping that into household consumption? Have they come down enough? Do you need another leg down in equity values, to think that households are going to stop spending at the rate, you need them to stop spending?
Jerome Powell: (23:51)
Okay. So in terms of the vacancies to unemployment ratio. We don’t have a goal in mind. There’s no specific number that we’re saying, “We got to get to that.” It’s really, you’ve got to get to a place where the labor market appears to-
Jerome Powell: (24:03)
… It’s really, you’ve got to get to a place where the labor market appears to be more in balance. And that depends not only on the level of those things. It also depends on how well the matching function in the labor markets are working. Because the longer these expansions go on, you can get very efficient with all of that and the beverage curve shifts out, and that also tends to help. So there isn’t a specific number. I will say we were at… I think when we got to one to one in the late teens, we thought that was a pretty good number. But again, we’re not shooting for any particular number.
Jerome Powell: (24:33)
What we’d like to see is progress, but we’re not really looking at that, that’s an intermediate variable. We’re looking at wages and we’re looking at ultimately inflation. So there are a bunch of channels through which policy works. You can think of it as intra sensitive spending. And then you can think of another big one as asset values broadly. And there are big models with a lot of different channels that are related to that. We don’t focus on any one market, the equity market or the housing market. We focus on financial conditions broadly. So we wouldn’t be targeting any one market, as you suggest, for going up or down, or taking a view on whether it’s at a good level or a bad level. We just would be looking at very broad measures of financial conditions, all the different financial conditions, indexes for example, which include equity, but they also include debt and many other things, credit spreads, things like that too.
Speaker 3: (25:32)
Rachel Siegel: (25:39)
Hi Chair Powell, Rachel Siegel here from the Washington Post. To follow up from your message from the very beginning, what is your message to the American people about when they will start to feel the effects of say a 50 basis point rate hikes or multiple hikes? How do you explain to them what that does to their grocery bill, or their rent, or their gas bill? Thank you.
Jerome Powell: (25:59)
So the first thing to say is that we understand, and some of us are old enough to have lived through high inflation and many aren’t. But it’s very unpleasant. It’s just something people don’t… When they experience it for the first time, you’re paying more for the same thing. If you’re a normal economic person, then you probably don’t have that much extra to spend. And it’s immediately hitting your spending on groceries, on gasoline, on energy and things like that. So we understand the pain involved. So how do you get out of that? It’s our job to make sure that inflation of that unpleasant, high nature doesn’t get entrenched in the economy. That’s what we’re here for. One of the main things we’re here for, perhaps the most fundamental thing we’re here for.
Jerome Powell: (26:51)
And the way we do that is we try to get supply and demand back in sync with each other, back in balance, so that the economy’s under less stress and inflation will go down. Now the process of getting there involves higher rates, so higher mortgage rates, higher borrowing rates and things like that. So it’s not going to be pleasant either, but in the end, everyone is better off, everyone. Particularly people on fixed incomes and at the lower part of the income distribution are better off with stable prices. And so we need to do everything we can to restore stable prices. We’ll do it as quickly and effectively as we can. We think we have a good chance to do it without a significant increase in unemployment or a really sharp slowdown. But ultimately we think about the medium and longer term, and everyone will be better off if we can get this job done the sooner, the better.
Speaker 3: (27:47)
Thank you. Edward.
Edward Lawrence: (27:52)
Thank you Chair Powell. Edward Lawrence with Fox Business Network. So you’ve talked in the past about consumer spending and how that drives the economy. Are you concerned with this high level of inflation that the consumer will stop spending, pushing us into… And what’s the level of your concern, pushing us into a recession?
Jerome Powell: (28:11)
So, the economy is doing fairly well. We expect growth to be solid this year. And we see household spending and business investment as fairly strong, even in the first quarter, which was relatively slow on some other fronts. And the labor market, if you look at the labor market for people who are out of work and looking, there are lots of job opportunities. Wages are moving up at rates that haven’t been seen in quite a long time. So it’s a good time to be a worker, looking to either change jobs or get a wage increase in your current job. So it’s a strong economy and nothing about it suggests that it’s close to or vulnerable to a recession. Now, of course, given events around the world and fading fiscal policy effects and higher rates, you could see some slower economic activity. Certainly it will not be… Last year was an extraordinarily strong growth year as we recovered from the pandemic, as I mentioned, growth over 5%. But most forecasters have growth this year at a solid pace, above 2%.
Edward Lawrence: (29:26)
But we’ve talked with economists who have advised Democrats and Republican Presidents who both said that the fed is so far behind the curve on inflation, that a recession is inevitable.
Jerome Powell: (29:40)
And as I said, I think we have a good chance to restore price stability without a recession, without a severe downturn and without materially higher unemployment. And I mentioned the reasons for that. So I see a strong economy now, I see a very strong labor market for example. Businesses can’t find the people to hire. They can’t find them. So typically in a recession, you would have unemployment, now you have surplus demand. So there should be room in principle to reduce that surplus demand without putting people out of work. The issue will come that we don’t have precision surgical tools. We have essentially interest rates, the balance sheet and forward guidance. And they’re famously blunt tools, they’re not capable of surgical precision. So I would agree, no one thinks this will be easy, no one thinks it’s straightforward. But there’s certainly a plausible path to this, and I do think we’ve got a good chance to do that. And our job is not to rate the chances, it is to try to achieve it. So that’s what we’re doing. There are a range of opinions though, and that’s only appropriate.
Speaker 3: (30:48)
Steve Dorsey: (30:51)
Thanks, Steve Dorsey, CBS. You mentioned earlier, just now, fading fiscal policy. Do you feel that the fed has been supported enough from policies at The White House and in Congress, in combating inflation?
Jerome Powell: (31:08)
It’s really the fed that has responsibility for price stability. And whatever arrives at the fed in terms of fiscal activity, we take it as a given and we don’t evaluate it, it’s not our job really. We don’t have an oversight function there. And we look at it as our job, given all the factors that are happening, to try to sustain maximum employment and price stability. So if the Congress or the administration has ways to help with inflation, I would encourage that. But I’m not going to get into making recommendations or anything like that. It’s really not our role. We need to stay in our lane and do our job. When we get inflation back under control, then maybe I can give other people advice. Right now we need to just focus on doing our job and I’ll stick to that, stick in our lane.
Speaker 3: (32:00)
Steve Matthews: (32:07)
Steve Matthews with Bloomberg News. A number of your colleagues have said that rates will need to go above neutral into a restrictive territory to bring down inflation. One, do you agree with that? And two, you recently spoke in great praise of Paul Volcker who had the courage to bring inflation down with recessions in the 1980s. And while it’s certainly not your desire, and the soft landing is the big hope of everyone, would this FMC have the courage to endure recessions to bring inflation down, if that were the only way necessary?
Jerome Powell: (32:48)
So I think it’s certainly possible that we’ll need to move policy to levels that we see as restrictive, as opposed to just neutral. We can’t know that today, that decision’s not in front of us today. If we do conclude that we need to do that, then we won’t hesitate to do it. I’ll say again, there’s no bright line that you’re stepping over. You’re really looking at what our policy stance is and what the market is forecasting for it. You’re looking at financial conditions and how that’s affecting the economy and making a judgment. We won’t be arguing about whose model of the neutral rate is better than the other one. It’s much more about a practical application of our policy tools. And we’re absolutely prepared to do that, wouldn’t hesitate if that’s what is taken.
Jerome Powell: (33:33)
So I am… Of course, who isn’t an admirer of Paul Volcker, I shouldn’t be singled out in this respect. But I knew him just a little bit and have tremendous admiration for him. But I would phrase it this way, he had the courage to do what he thought was the right thing. That’s what it was. It wasn’t any particular thing, it was that he always did, he always did what he thought was the right thing. If you read his last autobiography that really comes through. So that’s the test is, it isn’t will we do one particular thing? I would say, we do see though, we see restoring price stability as absolutely essential for the country over in coming years.
Jerome Powell: (34:12)
Without price stability, the economy doesn’t work for anybody really. And so it’s really essential, particularly for the labor market. If you think about it, if you look at the last cycle, we had a very, very… Longest expansion cycle in our recorded history. And in the last two, three years, you had the benefits of this tight labor market going to people in the lower quartiles. And it was racial wealth and income, not wealth, but income gaps were coming down, wage gaps. So it’s a really great thing. We’d all love to get back to that place. But to get back to anything like that place, you need price stability. So basically, we’ve been hit by historically large inflationary shocks since the pandemic. This isn’t anything like regular business. This is we, have a pandemic, we have the highest unemployment since the depression, then we have this outsized response from fiscal policy and monetary policy.
Jerome Powell: (35:09)
Then we have inflation. Then we have a war in Ukraine, which is cutting the commodity patch in half. And now we have these shutdowns in China. So it’s been a series of inflationary shocks that are really different from anything people have seen in 40 years. So we have to look through that and look at the economy that’s coming out the other side and we need to somehow find price stability out of this. And it’s obviously going to be very challenging, I think, because you do have numerous supply shocks, which are famously difficult to deal with. So I guess that’s how I think about it.
Speaker 3: (35:51)
Chris Rugaber: (35:52)
Thank you, Chris Rugaber at Associated Press. Earlier you just said that if necessary, I think were the words, or if it turned out to be necessary, or you said it’s possible that we’ll need to move policy.
Speaker 4: (36:03)
If it turned out to be necessary, or you said it’s possible that we’ll need to move policy to restrictive levels, given where inflation is and the hot economy, or certainly the hot labor market as you described it, why still the hesitation? What else do you need to see in order to determine that? Wouldn’t the Fed naturally be looking to go to a restrictive level at this point? Thank you.
Jerome Powell: (36:24)
If I said necessary, I meant to say appropriate. We’re not going to be erecting a high barrier for this. It’s more, if we think it’s appropriate. The point is, we’re a very long way from neutral now. We’re moving there expeditiously, and we’ll continue to do so. And we don’t have to make… We can’t make that decision really today. The decision about how high to go will be on the table to be made when we reach neutral, and I expect we’ll get there expeditiously, as I’ve mentioned. Making that decision today wouldn’t really mean anything. But I’ll say again, if we do believe that it’s appropriate to go to those levels, we won’t hesitate.
Speaker 5: (37:11)
Next, Mike McKee.
Mike McKee: (37:16)
Mike McKee from Bloomberg Television and Radio. The balance sheet, why did you decide to wait until June 1st to begin letting securities roll off and not start immediately start in the middle of this month, say? And do you have another, a newer or a better estimate for the monetary policy impact of letting the balance sheet decline? And then finally, I’m just curious why you felt the need to address the American people at the top of your remarks. Are you concerned about Fed credibility with the American people?
Jerome Powell: (37:50)
So why June 1. It was just pick a date and that happened to be the date that we picked. It was nothing magic about it. It’s not going to have any macroeconomic significance over time. We just picked that. Sometimes we publish these calendars on the first day of the month, and that’s what we’re doing. I wouldn’t read anything into it. In terms of the effect, I would just stress how uncertain the effect is of shrinking the balance sheet. We run these models, and everyone does in this field, and make estimates of what will be the… How do you measure a certain quantum of balance sheet shrinkage compared to quantitative easing, and these are very uncertain. I really can’t be any clearer, there won’t be any clearer. People estimate that broadly on the path we’re on, and this will be taken probably too seriously, but one quarter percent, one rate increase over the course of a year at this pace, but I would just say with very wide uncertainty bands, very wide. We don’t really know.
Jerome Powell: (39:01)
There are other estimates that are much smaller than that, by the way. And some of you may have read about that. That’s a mainstream estimate. We know that it is part of returning to more normal and more neutral financial conditions, and our strategy is to set up a plan and have it operate and really have the interest rate be the active tool of monetary policy.
Jerome Powell: (39:29)
In terms of speaking to the American people, so I feel like sometimes I want to remind us, really, that’s who we work for, and that it’s inflation that people are feeling all over the country. And it’s very important that they know that we know how painful it is and that we are working hard on fixing it. I thought it was quite important to do that, and so that was really the thinking behind that.
Mike McKee: (39:58)
Do you think the Fed has a credibility problem?
Jerome Powell: (40:02)
No, I don’t, and a good example of why it would be that, so in the fourth quarter of last year, as we started talking about tapering sooner and then raising rates this year, you saw financial markets reacting very appropriately. Not to bless any particular day’s measure, but the way financial markets, the forward rate curve has tightened in response to our guidance and our actions really amplifies our policy. Monetary policy is working through expectations now to a very large extent. We’ve only done two rate increases, but if you look at financial conditions, the two years at 280 now, in September, I think, it was at 20 basis points, and that’s all through the economy. People are feeling those higher rates already. And so that shows that the markets think that our forward guidance is credible, and I think we want to keep it that way.
Speaker 5: (41:07)
Scott Horsley, did you have your hand up? Okay, Brian Chung.
Brian Chung: (41:15)
Hi there, Brian Chung with Yahoo Finance. To expand on Steve’s question about Paul Volcker, there was also a great pain that came with that as well, higher interest rates obviously affecting households and businesses, and wondering how you square what might be demand destruction. Are you already seeing that? Is the idea here to incentivize a lack of spending to decrease consumption to perhaps table business investments? Is that essentially what’s happening through the hiking cycle? Thanks.
Jerome Powell: (41:41)
Well, as I mentioned, you can see places where demand is substantially in excess of supply, and what you’re seeing as a result of that is prices going up and at unsustainable level, levels that are not consistent with 2% inflation. And so what our tools do is, as we raise interest rates, demand moderates, and it moves down. Interest rates, businesses will invest a little bit less, consumers will spend a little bit less. That’s how it works. But ultimately, getting supply and demand back in balance is what gives us 2% inflation, which is what gives the economy a footing where people can lead successful economic lives and not worry about inflation. So yes, there may be some pain associated with getting back to that, but the big pain is in not dealing, over time, is in not dealing with inflation and allowing it to become entrenched.
Speaker 5: (42:38)
Greg Robb: (42:42)
Thank you. Thank you, Chair Powell. Greg Robb from MarketWatch. I was wondering if you could take a step back and talk about in March, the dot plot had looked like steady quarter point rate hikes, get the funds rate up to 2% at the end of the year. Now, it seems like you’re much more aggressive. So could you talk about the thinking that’s behind that? Thank you.
Jerome Powell: (43:08)
So look, I think you’ve what you’ve seen is, really, I would say last fall, in the middle of last fall, there was a time when our policy stance was still pretty much in sync with what the data were saying. If you remember, there were a couple of weak job reports, and month-by-month inflation had come down till September, a few months in a row, stayed low. And then around the end of October, we got three or four really strong readings that just said, no, this is a much stronger economy. And by the way, then with the restatement of the jobs numbers, it looked like the job market was much more even and stronger in the second half of the year, but that hadn’t happened yet.
Jerome Powell: (43:57)
Anyway, we got an ECI reading, employment compensation index reading, the Friday before the November meeting. Then we got a really strong jobs report, then we got a really high CPI report. And so I think it became clear to the committee that we needed to adjust and adapt, and we have. Ever since then, we’ve been adapting. The committee moved by the time of the December meeting to a meeting of three rate increases, then to a meeting of seven increases at the March meeting, and that process is going on and it’s clearly continuing. And that’s why I say, and I actually mentioned this at the March meeting, that no one should look at any single SEP as a real resting place for 90 days because we’re in a fast evolving situation, and that’s what’s happened. You can see unanimous vote today, of course, and I told you the guidance that broad support on the committee to have 50 basis point hikes on the table at the next couple of meetings. So you’re right. And by the way, other forecasters have been doing the same thing, and it’s just us adapting to the data and to the situation and using our tools to deal with it.
Speaker 5: (45:09)
Thanks, we’ll go to Nancy for the last question.
Nancy Marshall-Genzer: (45:12)
Hi, Nancy Marshall-Genzer with Marketplace. Chair Powell, I want to ask how you’re able to balance your dual mandate, stable prices and maximum employment, especially when the unemployment rate for black workers is still roughly double, roughly twice the rate for white workers.
Jerome Powell: (45:33)
So unemployment rates for all racial groups have come down a lot and are now much closer to where they were before the pandemic hit. So that’s one thing I would say, and that’s important. But the bigger point is this. I do not, at this time, see the two sides of the mandate as intention. I don’t, because you can see that the labor market is out of balance. You can see that there’s a labor shortage. There aren’t enough people to fill these job openings, and companies can’t hire and wages are moving up at levels that would not, over time, be consistent with 2% inflation over time. And of course, everyone loves to see wages go up and it’s a great thing, but you want them to go up at a sustainable level because these wages are, to some extent, being eaten up by inflation.
Jerome Powell: (46:27)
So, what that really means is, to get the kind of labor market we really want to get, if we really want to have a labor market that serves all Americans, especially the people in the lower income part of the distribution, especially them, to do that you’ve got to have price stability. And we’ve got to get back to price stability so that we can have a labor market where people’s wages aren’t being eaten up by inflation and where we can have a long expansion, too. That’s the good thing is you can have, as we’ve have, we’ve had… Several of the longest expansions in U.S. history have been in the last 40 years, and that’s because it’s been a time of low inflation. And long expansions are good for people and good for the labor market.
Jerome Powell: (47:08)
So that’s the way I think about it. I think our tools work. We have to think in the medium and longer term, and I do think that the best thing for everyone is for us to get back to price stability, to support, really, a sustained period of strong labor market conditions. Thanks very much.