Press conference exchange between NICK TIMIRAOS and Fed Chair Jerome Powell:

user: Nick Timiraos of the Wall Street Journal. Chair Powell, it seems to me you raised rates rapidly over the last two years for two reasons. One was the risk of a wage– price spiral. Two, there were risks of inflation expectations becoming unanchored. This morning’s ECI report for the fourth quarter shows private-sector payroll growth running at a sub–4 percent pace. Inflation expectations are very close to where they were before the inflation emergency of the last three years. And, given that you appear to have substantially cut off these two tail risks and that you’ve judged here today current policy as well into restrictive territory, what good reason is there to keep policy rates above 5 percent? Are you really going to learn more waiting six weeks versus three months from now that you have avoided those two risks?

assistant: So, as you know, almost every participant on the Committee does believe that it will be appropriate to reduce rates and for, for—partly for the reasons that you say. You know, we, we feel like inflation is coming down. Growth has been strong. The labor market is strong. We’re—what we’re trying to do is identify a place where we’re really confident about inflation getting back down to 2 percent so that we can then begin the process of dialing back the restrictive level. So, overall, I think—I think people do believe—and, as you know, the median participant wrote down three rate cuts this year. But I think to get to that place where we feel comfortable starting the process, we need some confirmation that inflation is, in fact, coming down sustainably to 2 percent.

user: If I could ask differently: If, if you hold rates high as inflation moderates, as it—as it has been, target rates will exceed the prescriptions of the Taylor rule or its variants. What would be the reasoning for holding rates higher than the levels recommended by those rules in the current instance?

assistant: Well, I—look, I think, as you know, we consult the range of Taylor rules and, and non-Taylor rules. We consult them regularly. They’re in our, our Tealbook, and, and they’re in all the materials that we look at. But, you know, I don’t think we’ve ever been at a—at a place where we were—where we were setting policy by them. And there—depending on the rule, it will tell you different things. There are many different formulations. Another way to think about it is, implicitly, is—so, in theory, of course, real rates go up if—holding all else equal—as inflation comes down. But that doesn’t mean we can mechanically adjust policy as real rates—sorry—as inflation comes down. It doesn’t mean that at all, because, for one thing, we, we don’t know—we, we look at more than just the fed funds rate. We look at—broadly—financial conditions. But, in addition, we don’t know with great confidence where the neutral rate of interest is at any given time. But that also doesn’t mean that we wait around for—to see, you know, the economy turn down, because that would be too late. So we’re really in a risk-management mode: of managing the risk—as I mentioned in my opening remarks—managing the risk that we move too soon and move too late. And I think to move, which is—which is where almost everyone on the Committee is—is in favor of, of moving rates down this year—but the timing of that is going to be linked to our gaining confidence that inflation is on a sustainable path down to 2 percent.