Federal Reserve press conference, 2022-01-26 — Chair Jerome Powell

Question (Nick Timiraos, Wall Street Journal): So, if I could follow on that, raising rates and reducing the balance sheet both restrain the economy, both tighten monetary policy. How should we think about the relationship between the two? For example, how much passive runoff is equal to every ¼ percentage point increase in your benchmark rate?
Answer: So, again, we think of the balance sheet as, as moving in a predictable manner, sort of in the background, and that the active tool meeting to meeting is not both of them, it’s the federal funds rate. There are—there are rules of thumb—I’m reluctant to land on one of them—that, that equate this. And—but there’s also an element of, of uncertainty around the balance sheet. I think we have a much better sense, frankly, of how rate increases affect financial conditions and, hence, economic conditions. Balance sheet [policy] is, is still a relatively new thing for, for the markets and for us, so we’re less certain about that. So, again, our—I think our—the pattern we’ll follow is to—is to arrive at a, you know, a timing and a pace and composition and all those things and then announce that with advance notice, and, and it will—it will start in the background. And then we’ll look to have that just running in the background and have—and have the interest rates, again, be the active tool of monetary policy. That’s, that’s at least the plan. I can’t tell you much more about any of the— any of the very good issues about size, pace, composition, those sorts of things. But we’ll be turning to all of those at coming meetings.

Question (Neil Irwin, Axios): Thank you, Chair Powell. It’s Neil Irwin from Axios. Glad to be back. Sir, I was wondering if the volatility we’ve seen in financial markets in the last few weeks strikes you as anything alarming or that might affect the trajectory of policy. Conversely, to the degree that financial conditions have tightened some, might that be desirable in some ways in achieving your, your tightening goals?
Answer: So, as you know, the ultimate focus that we have is on the real economy: maximum employment and price stability. And financial conditions matter to the extent that they have implications for achieving the dual mandate. And you also know that we, we look at broader financial conditions, not one or two things, one or two markets. And what we’re always asking ourselves is, are we seeing changes that are both persistent and material enough that—of a change in financial conditions—that they are inconsistent with the achievement of our goals? So that’s how we’re looking at that. And I don’t want to comment on today’s financial conditions broadly, but we’re not looking at any one market or, or so. So that’s how we’re thinking. In terms of what we’ve seen, I would say this. We, you know, we said at our last meeting we published the Summary of Economic Projections, the median of which—the median participant expected three rate increases this year. And, you know, it’s six weeks, seven weeks later now. And you have seen that our communication channel with the markets is working. Markets are, are now pricing in a number of rate increases. Surveys show that market participants are expecting a balance sheet runoff to begin, you know, at the appropriate time, sometime later this year perhaps. We haven’t made that decision yet. So we, we feel like the communications we have with market participants and with the general public are working and that financial conditions are reflecting in advance the decisions that we make. And monetary policy works significantly through expectations. So that, that in and of itself is appropriate.

Question (Steve Liesman, CNBC): Thank you, Michelle. And thank you, Mr. Chairman. Mr. Chairman, I have one sort of technical question and one question on principle. The technical question is, if, if you’re going to discuss balance sheet at the next upcoming meetings and you won’t begin balance sheet reduction until after you begin rate hikes, it seems to technically mean that you won’t or can’t begin balance sheet reduction until the summer. Is that correct? That’s the first thing. Second of all, you suggested that, that the—with balance sheet running in the background—that you would possibly be raising rates and running off the balance sheet at the same time. That’s sort of the technical question part of it. The principal question I have is, you said it’s going to be running in the background. But the statement on the balance sheet principles says “the Committee is prepared to adjust any of the details of its approach” based on “economic and financial developments,” which suggests there’s something of a reaction function associated to the balance sheet and it won’t be running in the background. So can you give us any sense of the discussion or staff presentation on what is the reaction function surrounding the balance sheet? Thanks.
Answer: So let me—let me—let me start by talking about that last paragraph. So you’ll remember during the last cycle that this process of building up and then shrinking the balance sheet is a complicated one, and it involves, inevitably, surprises. And so during, during the years, during the prior cycle, we amended our balance sheet principles a number of times. Now, we didn’t intend to do that. It just—events required us to do so. So we got a pretty robust paragraph there that says we’re free to do this at any time. And it doesn’t mean we’re going to, but if the situation turns out to be different than we had thought, we’re not going to be—we’re not going to stick with something that isn’t working. That’s all that’s saying. It’s meant to be quite a general statement rather than a, a hint. So, I mean, I like to think that our, you know, our philosophy of the balance sheet is, is embodied in these principles. So, you know, the idea that, for example, the federal funds rate is the primary means of adjusting the stance of policy, that we’ll use—determine the timing and pace of reducing the size of the balance sheet to foster the dual mandate, that we’ll begin to reduce the size after we begin the process of raising rates, and on and on like that. I mean, that— those are all the things that, that try to describe how we will proceed. But maybe at a higher level, to try to get at your question: You know, asset purchases were, were enormously important at the beginning of the recovery in terms of restoring market function, as they were at—right after the—in the critical phase of the Global Financial Crisis. And then after [that], they were a macroeconomic tool to support demand. And now the economy no longer needs this, this highly accommodative policy that we put in place. So it’s time to stop asset purchases first and then, at the appropriate time, start to shrink the balance sheet. Now, the balance sheet is, is substantially larger than it needs to be. We’ve identified the end state as—in amounts needed to implement monetary policy efficiently [and] effectively in the ample-reserves regime. So there’s a substantial amount of, of shrinkage in the balance sheet to be done. That’s going to take some time. We want that process to be orderly and predictable. And so those are some of the ways that I would think this, this lays out our, you know, the way we—the way we’re thinking about this. In terms of the timing, I can’t really help you. You know, it just says after, after we get under way. So we’re—I would say we are, we’re going to have another discussion at, at the next meeting. And my guess is, we’ll have at least one other discussion at the meeting after that. And, you know, we’ll, we’ll tell you as we make progress. And we’ll, you know, we’ll start the process of allowing runoff and shrinking the balance sheet at what we find to be the appropriate time. It’s—I wish I could say more. But, honestly, we haven’t made those decisions. And we actually haven’t even really had the, the important discussions on a lot of the details that we will have at coming meetings.

Question (Michael McKee, Bloomberg): I was asking if you’re protecting the employment side of the mandate, whether there’s some sort of circuit breaker there.
Answer: Nothing like that. I mean, I would say you have a tremendously strong labor market. And you have growth this year at—forecast to be well above—well above potential. I mean, people who are forecasting growth think potential growth is around 2 [percent]. Most forecasts [of actual growth] are significantly above that for 2022, and that’s even with, with policy becoming substantially less accommodative. So the labor market’s going to be strong for some time. We’re—ideally, what we’re trying to achieve is inflation getting back down to 2 percent. And we’re trying to do that in a process that, that, that accomplishes—you know, that will also leave the labor market in a very strong position. And no one really knows what that will take. Again, I would say that it isn’t just monetary policy that’s helping inflation get down. It’ll be supply-side improvements, and it’ll be less, less fiscal, you know, less fiscal impulse in all likelihood. So—but monetary policy will do our job. It is our job to get inflation down to 2 percent. And a situation where, where the two goals are—the two goals can be in tension is a difficult one. But I—but I don’t really think they are here, though, because I think a really significant threat to further strengthening in the labor market in the form of higher participation over time is high inflation. And also, high inflation is taking away the benefits of some of these larger wage increases that we’re seeing now. So we do hope to achieve, and our plan is to achieve, both of those goals.