Press conference exchange between STEVE LIESMAN and Fed Chair Jerome Powell:

user: Steve Liesman, CNBC. Mr. Chairman, the SEP has the PCE inflation rate in 2023 at 3.1 percent. Meanwhile, the three-month annualized PCE is 2.1 percent, and you’ve achieved this without going to your 5.1 percent funds rate, which is what you have penciled in for this year. And you’ve also achieved it without the 1 percentage point increase in the unemployment rate, which you have penciled in for this year. I’m wondering if you’ve considered the idea of whether or not your understanding of the inflation dynamic may be wrong, and it’s possible to achieve these things without raising rates that high and also without the surge in unemployment. And, specifically, I wonder if you might comment on the speech given by Vice Chair Lael Brainard, who said, “To the extent that inputs other than wages may be responsible in part for important price increases for some nonhousing services, an unwinding of these factors.” In other words, it may not be wages. The idea that it may not require unemployment rising to get this sector of inflation under control. Thanks.

assistant: So a couple of things. First, on the forecast, if—you’re right—if you take very short-term three-month, say, measures of PCE—core PCE inflation, they’re quite low right now. But that’s because that’s driven by, you know, significantly negative readings from goods inflation. Most forecasters would think that the significantly negative readings will be transitory and that goods inflation will move up fairly soon, back up to its longer-run trend of something around zero, something like that. So a lot of forecasts would call for core PCE to go back up to 4 percent by the middle of the year, for example. So that’s really where the sustainable level is. It’s more like at 4 percent. So that would suggest there’s work left to do. You know, let’s say inflation does come down much faster than we expect, which is possible. As I mentioned, you know, obviously our policy is data dependent. We would take that into account. In terms of the non—sorry, the core nonhousing services, as I mentioned earlier, it’s a very diverse sector, six or seven sectors. And so sectors that represent 55 or 60 percent of that— subsectors of that sector are—we think are sensitive to slack in the economy, sensitive to the labor market in a way, but some of the other sectors are not. And, for example, you know, financial services is a big sector that’s really not driven by labor markets—wages. So that’s why I said there are a number of things that will affect—take restaurants, right? So, clearly, labor is important for restaurants but so are food prices. And, you know, transportation services is going to be driven by fuel prices, for example. So there are lots of things in that mix that will drive inflation. I would say overall, though, my own view would be that you’re not going to have, you know, a sustainable return to 2 percent inflation in that sector without a better balance in the labor market. And I don’t know what that will require in terms of increased unemployment, your question. I do think there are a number of dimensions through which the labor market can soften. And so far, we’ve got—as I mentioned, in goods, we have inflation moving down without the softening in the labor market. I think most forecasters would say that unemployment will probably rise a bit from here. But I still think—I continue to think that there’s a path to getting inflation back down to 2 percent without a really significant economic decline or a significant increase in unemployment. And that’s because the—you know, the setting we’re in is quite different. The inflation that we originally got was very much a collision between very strong demand and hard supply constraints, not something that you really have seen in prior— you know, in prior business cycles. And so now we see goods inflation coming down for the reasons we thought, and we understand why housing inflation will come down. And I think will—a story will emerge on the nonhousing services sector soon enough. But I think there is— there’s ongoing disinflation, and we don’t yet see weakening in the labor market. So we’ll have to see.

user: Can we get there with 5 percent?

assistant: Certainly possible. Yeah. Absolutely it’s possible. You know, it’s a question—no one really knows. I think it’s because this is not like the other business cycles in so many ways. It may well be that as—yeah, as—that it will take more slowing than we expect—than I expect to get inflation down to 2 percent. But I don’t—that’s not my base case. My base case is that the economy can return to 2 percent inflation without a really significant downturn or a really big increase in unemployment. I think that’s a possible outcome. I think many, many forecasters would say it’s not the most likely outcome. But I would say there’s a chance of it.