Press conference exchange between RACHEL SIEGEL and Fed Chair Jerome Powell:

user: Hi, Chair Powell. Thank you for taking our questions. Rachel Siegel from the Washington Post. The statement points to lag times. I’m wondering if you can walk us through how you judge those lag effects, what that timeline looks like over the coming months or even a year, and where you would expect it to show up in different parts of the economy.

assistant: So the way I would think about that is, it’s commonly, for a long time, thought that monetary policy works with “long and variable lags,” and that it works first on financial conditions and then on economic activity and then perhaps later than that even on inflation. So that’s been the thinking for a long time. There was an old literature that made those lags out to be fairly long. There’s newer literature that says that they’re shorter. The truth is, we don’t have a lot of data consisting of inflation of rates this high in what is, now, the modern economy. One big difference now is that it used to be that you would raise the federal funds rate, financial conditions would react, and then that would affect economic activity and inflation. Now financial conditions react well before in expectation of monetary policy actions. That’s the way it has moved for a quarter of a century—in the direction of financial conditions, then monetary policy—because the markets are thinking, what is the central bank going to do? And there are plenty of economists that also think that once financial conditions change, that the effects on the economy are actually faster than they would have been before. We don’t know that. I guess the thing that I would say is: It’s highly uncertain—highly uncertain. And so from a risk-management standpoint—but we do need, it would be irresponsible not to, to ignore them. But you want to consider them but not take them literally. So I think it’s a very difficult place to be, but I would tend to be—want to be in the middle looking carefully at what’s actually happening with the economy and trying to make good decisions from a risk-management standpoint, remembering, of course, that if we were to overtighten, we could then use our tools strongly to support the economy, whereas if we don’t get inflation under control because we don’t tighten enough, now we’re in a situation where inflation will become entrenched and the costs, the employment costs in particular, will be much higher potentially. So from a risk- management standpoint, we want to be sure that we don’t make the mistake of either failing to tighten enough or loosening policy too soon.

user: And if I could follow up: Should we interpret the addition to the statement to mean that more weight is put into those lag effects than they would have been after previous rate hikes?

assistant: I think as we move now into restrictive territory, as we make these ongoing rate hikes and policy becomes more restrictive, it’ll be appropriate now to be thinking more about lags. Of course, we think about lags—the lags are just a basic part of monetary policy. But we will be thinking about them, but we won’t be—I think we’ll be considering them but because it’s appropriate to do so. Let me say this: It is very premature to be thinking about pausing. So people, when they hear lags, they think about a pause. It’s very premature, in my view, to think about or be talking about pausing our rate hike. We have a ways to go. Our policy—we need ongoing rate hikes to get to that level of sufficiently restrictive. And we don’t—of course, we don’t really know exactly where that is. We have a sense, and we’ll write down in September—sorry, in the December meeting, a new Summary of Economic Projections, which updates that. But I would expect us to continue to update it based on what we’re seeing with incoming data.