Federal Reserve press conference, 2022-07-27 — Chair Jerome Powell

Question (Christopher Rugaber, Associated Press): Hi. Thank you. Chris Rugaber, Associated Press. I wanted to ask about right now, there’s a sort of growing gap between the Fed’s preferred measure of inflation, the PCE, PCE index, and the one that’s followed by the public, the CPI, of course. How do you expect to handle this divergence if the PCE starts to come down enough for you to consider slowing rate hikes, even if the public is still seeing much higher CPI ratings? Thank you.
Answer: So it’s an interesting, interesting situation. Of course, we’ve, we’ve long used PCE because we think it’s just better at capturing the inflation that people actually face in their lives. And I think that that view is pretty widely understood. That said, the public really reads about CPI. And the difference really is because the CPI has higher weights on things like food, gasoline, motor vehicles, and housing than the PCE index does. And so that accounts for a lot of the difference. However, over time, they tend to come together. You know, we—given the importance in the public eye of CPI, we are calling it out and noticing it and everything like that. But remember, we do target PCE. That is because we think it’s a better measure. They will come together eventually. The typical gap was really about 25 basis points for a very long time. And if it went—if it got to 40 basis points, that would be very noticeable. And now it’s—now it’s much larger than that because of the things I mentioned. So we’ll be watching both, but, again, the one that we think is the best measure always has been PCE, at least since I think we—some 20 plus years ago—moved to PCE.

Question (Jean Yung, MNI): Thank you, Mr. Chairman. Jean Yung with Market News. I wanted to ask about the balance sheet reduction program. It’s been working for a couple months now and in a different environment than the last time the Fed did it. What are you learning about how it’s working and how markets are reacting? And is reaching the minimum level of reserves needed in the system still several years away at the current pace?
Answer: So we think it’s working fine. As you know, we, we tapered up into it. And, and in September, we’ll go to full strength. And the markets seem to have accepted it. By all assessments, the markets should be able to absorb this. And we expect that’ll be the case. So I would say the plan is broadly on track. It’s a little bit slow to get going because some of these trades don’t settle until—for a bit of time. But it’ll be picking up steam. So I guess your second question was getting—the process of getting back down to the new equilibrium will take a while. And that time, it’s hard to be precise, but, you know, the model would suggest that it could be between two, two and a half years, that kind of thing. And this is a much faster pace than the last time. Balance sheet’s much, much bigger than it was. But we looked at this carefully, and we thought that this, this was the sensible pace. And we have no reason to think it’s not.