Federal Reserve press conference, 2022-11-02 — Chair Jerome Powell

Question (Nick Timiraos, Wall Street Journal): Nick Timiraos of the Wall Street Journal. Chair Powell, core PCE inflation on a 3- or 6-month annualized basis and on a 12-month basis has been running in the high 4s, close to 5 percent. Is there any reason to think you won’t have to raise rates at least above that level to be confident that you are imparting enough restraint to bring inflation down?
Answer: So this is the question of, does the policy rate need to get above the inflation rate? And I would say, there are a range of views on it. That’s the classic “Taylor principle” view. But I would think you’d look more at a forward, a forward-looking measure of inflation to look at that. But I think the answer is, we’ll want to get the policy rate to a level where it is, where the real interest rate is positive. We will want to do that. I do not think of it as the single and only touchstone, though. I think you put some weight on that; you also put some weight on rates across the curve. Very few people borrow at the short end—at the federal funds rate, for example. So households and businesses, if they’re [borrowing]—[there are] very meaningfully positive interest rates all across the curve for them, credit spreads are larger, so borrowing rates are significantly higher, and I think financial conditions have tightened quite a bit. So I would look at that as an important feature. I’d put some weight on it, but I wouldn’t say it’s something that is the single, dominant thing to look at.

Question (Michael McKee, Bloomberg): If I could follow up: You also said several meetings ago that the risk of doing too little outweighed the risk of doing too much. Is what you’re trying to tell us today is that that risk assessment has changed a little bit?
Answer: Well, what’s happened is, time has passed, and we’ve raised interest rates by 375 basis points. I would not—I would not change a word in that statement, though. I think until we get inflation down, you’ll be hearing that from me. Again, if we overtighten—and we don’t want to, we want to get this exactly right—but if we overtighten, then we have the ability with our tools, which are powerful, to, as we showed at the beginning of the pandemic episode, we can support economic activity strongly if that happens, if that’s necessary. On the other hand, if you make the mistake in the other direction and you let this drag on, then it’s a year or two down the road, and you’re realizing, inflation behaving the way it can, you’re realizing you didn’t actually get it, you have to go back in. By then, the risk, really, is that it has become entrenched in people’s thinking. And the record is that the employment costs—the cost to the people that we don’t want to hurt—they go up with the passage of time. That’s really how I look at it. So that isn’t going to change. What has changed, though—you’re right—is, we’re farther along now. And I think as we’re farther along, we’re now focused on that. What’s the place, what’s the level we need to get to rates? And I don’t know what we’ll do when we get there, by the way. It doesn’t—we’ll have to see. There’s been no decision or discussion around exactly what steps we would take at that point. But the first thing is to find your way there.