Federal Reserve press conference, 2021-12-15 — Chair Jerome Powell

Question (Rachel Siegel, Washington Post): Thank you very much, Michelle. And thank you, Chair Powell, for taking our questions. The latest FOMC materials say that the FOMC thinks it will be appropriate to keep rates near zero until labor market conditions reach levels consistent with maximum employment. And there are also three rate hikes penciled in the projections for next year. In order to set up those hikes, what will maximum employment have to look like? When will you know that that threshold has been met? And how will that be communicated? Thank you.
Answer: So maximum employment, if you look at our Statement on Longer- Run Goals and Monetary Policy Strategy, maximum employment is something that we look at a broad range of indicators. And those would include, of course, things like the unemployment rate, the labor force participation rate, job openings, wages, flows in and out of the labor force in various parts of the labor force. We’d also tend to look broadly and inclusively at different demographic groups and not just at the headline and aggregate numbers. So that’s a—that’s a judgment for the Committee to make. The Committee will make a judgment that we’ve achieved labor market conditions consistent with maximum employment when it makes that—it is, admittedly, a judgment call because it’s a range of factors. Unlike inflation, where we have one number that sort of dominates, it’s a broad range of things. So, as I mentioned in my opening remarks, in my view, we are making rapid progress toward maximum employment. And you see that, of course, in some of the factors that I mentioned.

Question (Olivia Rockeman, Bloomberg): Thank you. Good afternoon, Chair Powell, and thank you for taking our questions. I wanted to follow up on some of your earlier comments about labor force participation. And I wondered, what do you think needs to change in the economy to kind of get a meaningful recovery in labor force participation, and also whether running the economy hot, like in the last expansion, is one way of doing that?
Answer: Well, the labor market is, by so many measures, hotter than it ever ran in the last—in the last expansion, if you think about it. You know, the ratio of job openings, for example, to, to vacancies is at all-time highs. Quits, the wages—all those things are, are even hotter. But what would it take for labor force participation to move up more? You know, that’s—really, “Why is it low?” is the question. So there, there are a bunch of answers, and all of them probably have some, you know, some validity. Part of it will be that people—for certain people, they don’t want to go back in the labor force because either they’re medically vulnerable or they’re not comfortable going back while COVID is still everywhere. That’s one thing. The lack of availability of childcare made for caretakers is certainly part of it—not just for children, but for older people. It has been pointed out by many that the stock market is high, people’s portfolios are stronger—they may go back to being a one-income rather than a two-income family. The same thing with people’s houses. People buy—they have a mortgage, you know, with leverage, and the house price increases, the equity they have in their home might have doubled. And they might make—reach the same conclusion. So they’re—and people have savings on their balance sheet because of forced savings because they couldn’t spend on travel and things like that and also because of, you know, because of government transfers. So, for all of those reasons—and it’s hard to know exactly the part each of them plays— we, we have a situation where we’ve had a shock to labor force participation that is not unwinding as quickly as, as many, as expected. And people—in effect, a good part of it is voluntary. You know, people—and this is how they want to maximize their welfare and that’s, that’s their, certainly their choice. In other cases, it’s something that will abate very quickly if and when the pandemic gets under control. And the longer the pandemic goes on, you know, maybe the less likely that people will come back because they’re—you know, they get used to their new life and they lose contact with their old jobs. That’s, that’s what the evidence would say. So it’s a range of things. It isn’t that the economy lacks stimulus. You know, usually, in every other expansion, it’s that there aren’t enough jobs and people can’t find jobs and, you know, we’re stimulating demand and trying to get demand to come up. That’s not the problem here. The problem is a supply-side problem, which—what it would take to work it out, I think it’s going to be time. And the number-one thing would, would really be to have the pandemic get under control. That’s what everyone would really like to see: What does the labor force— what does the labor market look like in a world without COVID? That would be the thing that we’d really like to see but, you know, it doesn’t look like that’s coming anytime soon.

Question (Michael McKee, Bloomberg): Mr. Chairman, the median forecast for inflation in this month’s or this meeting’s economic projections has been revised up significantly for 2021 but barely moved for 2022 and 2023. You’ve said you expect inflation to fall significantly. Is that because you’re going to raise interest rates or because the virus is going to fade and the effects are going to fade? In other words, is it a question of when, not if, you raise interest rates? And does it suggest that maybe your critics are correct and you might be afraid you’re “behind the curve”?
Answer: So, actually, I’m looking at the SEP here, and the median forecasts for core and headline inflation did move up by 4/10 each. So that’s a significant—you know, in an SEP, that’s a pretty significant move up. You know, it’s, it’s based on both of those things, I suppose. I do think there’s a broad expectation among forecasters, including our own, that the bottlenecks will alleviate sometime over the course of this year. If you look at where Blue Chip forecasts are—which is, you know, a group of well-resourced, large forecasting operations with a long track record—they’ll show inflation coming back down significantly toward the back-end of next year. I would say, though, as well that our policy should begin to have an effect. There will be a lag, but it should begin to have an effect on that as well. And, you know, that’s the most likely case. I guess what—the thing I would want to say, though, is we can’t act as though that’s a certainty, and we’re not going to act as though that’s a certainty. There’s a real risk now, we believe, I believe, that inflation may be more persistent and that may be putting inflation expectations under pressure, and that the risk of higher inflation becoming entrenched has increased. It’s certainly increased. I don’t think it’s high at this moment, but I think it’s increased. And I think that’s part of the reason behind our move today. [It] is to put ourselves in a position to be able to deal with that risk. And I think we are in a position to deal with that risk. We need to see more data. We need to see how the inflation data and the—all the data evolve in coming months, but we are prepared to, you know, to use our tools to make sure that higher inflation doesn’t get entrenched. For one reason, as I—as I just mentioned, it’s one of the two big threats, the other being the pandemic itself, to getting back to maximum employment.

Question (Nancy Marshall-Genzer, Marketplace): Chair Powell. Hi, Chair Powell, thanks for the question. Going back to inflation, is the Fed “behind the curve” on getting inflation under control?
Answer: So I would say this. I actually think we are well positioned to deal with, with what’s coming, with the range of plausible outcomes that can come. I do. And I think if you look at how we got here, I do think we’ve, we’ve been adapting to the incoming data, really all the way along, and, you know, noticing and calling out that, that the—both the effects and the persistence of inflation of bottlenecks and labor shortages and things like that. So we’ve been calling out the fact that those were becoming longer, and more persistent, and larger. And now we’re in a position where we’re ending our taper within the next—well, by March, in two meetings, and we’ll be in a position to raise interest rates as and when we think it’s appropriate. And we will, if that—to the extent that’s appropriate. At the same time, we’re going to be seeing a few more months of data. I don’t actually think we’re out of position now. I think this was an important move for us to make. I think that the data that we got toward the end of the fall was a—was a really strong signal that inflation is more persistent and higher—and that the risk of it remaining higher for longer has grown. And I think we’re reacting to that now. And we’ll continue to adapt our policy. So I wouldn’t look at it that we’re “behind the curve.” I would look at it that we’re actually in position now to take the steps that we’ll need to take, you know, in a thoughtful manner to address all of the issues, including that of, of too-high inflation.