Federal Reserve press conference, 2023-12-13 — Chair Jerome Powell

Question (Rachel Siegel, Washington Post): Hi, Chair Powell. Rachel Siegel from the Washington Post. Thanks for taking our questions. At this point, can you confidently say that the economy has avoided a recession and isn’t heading for one now? And if the answer is “no,” I’m curious about what you’d still be looking for. Thanks.
Answer: I think you can say that there’s little basis for thinking that the economy is in a recession now. I would say that. I think there’s, there’s always a probability that, that there will be a recession in the next year, and it’s a meaningful probability no matter what the economy is doing. So it’s always a real possibility. The question is, is it—so it’s a possibility here. I have always felt, since the beginning, that there was a possibility, because of the unusual situation, that the economy could cool off in a way that enabled inflation to come down without the kind of large job losses that have often been associated with high inflation and tightening cycles. So far, that’s what we’re seeing. That’s what many forecasters, on and off the Committee, are seeing. This result is not guaranteed. It is—it is far too early to declare victory. And there are certainly risks. It’s certainly possible that, that the economy will behave in an unexpected way. It has done that repeatedly through the post—in the post-pandemic period. Nonetheless, where we are is, is we see the things that I—that I mentioned.

Question (Rachel Siegel, Washington Post): I’m curious, if you’re looking back on the past year, you talked about “navigating by the stars under cloudy skies.” Can you talk about some of the ways in which the economy surprised you most this year, where you thought it would behave in one way and had to pivot to respond? Thanks.
Answer: So I think forecasters generally, if you go back a year, were very broadly forecasting a recession for this year, for 2023. And not only did that not happen—that includes Fed forecasters and really, essentially, all forecasters; a very high proportion of forecasters predicted very weak growth or a recession—not only did that not happen, we actually had a very strong year, and that was a combination of, of strong demand but also of real gains on the supply side. So this was the year when labor force participation picked up, where immigration picked up, where the distortions to supply and demand from the pandemic—you know, the shortages and the bottlenecks—really began to unwind. So we had significant supply-side gains with strong demand, and we got what looks like a 2½ percent-plus, or a little more than that, growth year at a time when potential growth this year might even have been higher than that, just because of the healing on the supply side. So that was a surprise to just about everybody. I think the inflation forecast is roughly, roughly what people wrote down a year ago, but in a very different setting. And I would say the labor market, because of the stronger growth, has also been significantly better. If you look back at the SEP from a year ago, there was a significant increase in, in unemployment. It didn’t really happen. We’re still at 3.7 percent. So we’ve seen, you know, strong growth, still a tight labor market but one that’s coming back into balance with the—with support from the supply side, a greater supply of labor. It’s a—you know, that’s, that’s what we see, and I think that combination was, was not anticipated broadly.

Question (Howard Schneider, Reuters): It sounds like the discussion—if I could follow up—has, has already kind of begun. I’m wondering, just related to, to Steve’s question, how the—how the tactics of this play out given the slowing of inflation and the fact that the deeper you get into 2024, the closer you get to a presidential election. Do you want to front-load this, in other words?
Answer: Yeah. No, we—we’re—we don’t think about political events. We don’t think about politics. We think about what’s the right thing to do for the economy. The minute we start thinking about those things—you know, we just can’t do that. We have to think, what’s the right thing? We’ll do the things that we think are right for the economy at the time we—when we think is the right time. That’s what we’ll always do. So I mentioned we’re moving carefully. One of the things we’re moving carefully about is that decision over—that assessment, really—over whether, whether we’ve done enough, really. And you see that people are not writing down rate hikes. That’s, that’s us thinking that we have done enough but not, not feeling that really strongly, confidently and not wanting to take the possibility of a rate hike off the table. Nonetheless, it’s not the base case anymore, obviously, as it was, you know, 60, 90 days ago. So that’s, that’s how we’re—that’s how we’re approaching things. And, and, you know, as I mentioned, we wrote down this SEP, and it talks about—people have individual assessments of when it will be appropriate to, you know, to start to dial back on, on the tight policy we have in place, and that’s a discussion we’ll be having going forward. But that’s another assessment that we’re going to make very carefully, so as time goes forward.

Question (Jeanna Smialek, New York Times): I guess the—I guess the question I’m asking, if you don’t mind a quick follow-up, I guess the question I’m asking is, is above-trend growth itself a problem?
Answer: It’s only a problem inso—it’s not itself a problem. It’s only a problem insofar as it makes it more difficult for us to achieve our goals. And, you know, if you have—if you have growth that’s robust, what that will mean is probably it will keep the labor market very strong. It probably will, will place some upward pressure on inflation. That could mean that it takes longer to get to 2 percent inflation. That could mean we need to keep rates higher for longer. It could even mean, ultimately, that we would need to hike again. It just is— it’s the way, the way our policy works.

Question (Michael McKee, Bloomberg): If I could follow up: When you begin the cutting cycle, will it be essentially run the same way you do it now with raising rates, where you basically do trial and error, cut and see what happens, or will you tie it to some particular measure of progress?
Answer: We haven’t typically tried to articulate, with one exception, really specific target levels, which was if you—some of you will remember the thresholds that we used in, I guess, 2013. I don’t—the answer is, these are things that we haven’t, you know, really worked out yet. We’re sort of just at the beginning of, of that discussion.

Question (Edward Lawrence, Fox Business): Thank you, Mr. Chairman. Edward Lawrence of Fox Business. So if the Fed cuts rates as the dot plot is, is showing, about 75 basis points, does that signal that there’s a belief of weakness next year in the economy?
Answer: It wouldn’t, if that were to—first of all, let me just say, that isn’t a plan. That’s, that’s just cumulating what people wrote down. So that’s not something—you know this, but allow me to say it again: We don’t debate or discuss what the right, you know, whose SEP is right. We just say what they are, and we tabulate them and publish them. So and it’s, you know, it’s important for people to know that. But it wouldn’t need to be a sign of—it could just be a sign that the economy is normalizing, and it doesn’t need the tight policy. It depends on—the economy can evolve in many different ways, right? So but, but it could be more of what I just described.

Question (Catarina Saraiva, Bloomberg): Okay. And do you see—I mean, how are you, when you think about, you know, starting to think about the rate cuts next year or whenever they come, how do you, you know, how do you think about the economy we’re in now kind of post-pandemic? Do you think that there’s been significant structural shifts, and is that going to change how you look at a rate cut path?
Answer: The question of whether there have been fundamental structural shifts is, is really hard to know the answer and a very interesting one right now. The one that would affect—the one that comes to mind, though, is just the question of where the neutral rate of interest is. And so, for example, if it’s risen, and I’m not saying that it has, but if it were to have risen, that would mean that, that interest rates would need to be a little bit higher to convey the same level of restriction. The thing is, we’re not really going to know that. You know, people will be writing papers about that 10 years from now and still fighting about it. So it’s just that it’s going to be uncertain. So we’re going to be making policy in this, you know, difficult, uncertain, really unprecedented environment. Some—someone once said that you know the—you know the natural rate of interest by its works, and that’s really right, but that’s very difficult because policy operates with a lag. So that’s one of the reasons why we slowed down this year. We started slowing down at this meeting last year, reducing the pace at which we were adding restriction. And, over the course of this year, we really slowed down a lot to give those lags time to work. In terms of demand, has demand shifted more away from services into goods? There’s— you can make a case for that, that the shift back into services has not been complete, and it doesn’t look like it’s ongoing, but I don’t know if that’s right. Maybe people just bought so much stuff that they temporarily don’t want any more stuff. They haven’t got anyplace to put it. [Laughter]