Federal Reserve press conference, 2018-09-26 — Chair Jerome Powell

Question (Binyamin Appelbaum, New York Times): The second question was, do you think you’re going to end up in a restrictive posture? Governor Brainard, for example, has said that she expects that you will need to do that. Do you agree with that?
Answer: It’s possible. It’s very possible. It happens often. And, as I mentioned, many of the participants have written that down, and they’ve written down really modest overshoots, you know, amounting to one rate hike kind of thing, which wouldn’t have a big effect on the economy. You know, it—I would just say, you know, it really depends on what happens. It depends on if we keep going—you can think of it different ways. Maybe we’ve underestimated the neutral rate. Maybe we’ll be raising our estimate of the neutral rate and we’ll just go to that, or maybe we’ll keep our neutral rate here and then go one or two rate increases beyond it. I think it’s very possible, but I mean, ultimately, isn’t really the question we’re answering. The question we’re answering is, how do we provide the economy just the right amount of support— not too much, not too little—to sustain the recovery and achieve our statutory goals?

Question (Steven Beckner, NPR): Steve Beckner, freelance journalist filing for NPR. Mr. Chairman, following up on the neutral rate issue—and you touched on this—but, you know, you and your colleagues slightly lifted the longer-run estimate, the neutral funds rate estimate to 3 percent, but that’s still, I believe, like 125 basis points below where it was six years ago. What are the odds that productivity, you know, investment, productivity, labor market, other developments could further push up the longer-run estimate and possibly make the projected funds rate levels less restrictive than they now seem?
Answer: So, in principle, the—these starred variables—the long-run growth rate of the economy, the neutral rate of interest, the natural rate of unemployment—don’t move quickly. They move very gradually. They’re pinned down by longer-run forces, like demographics. In the case of the funds rate, it’s more—it’s productivity—it’s appetite for safe assets and demographics and other things, too. So they move quite slowly through time. I think we all look at them—those of us who file SEPs every quarter will look at that every quarter and not make a change every quarter but, every now and again, make a change. And you’re right—we actually—the median ticked up a tenth. It’s a tenth we’re talking about here, so—but still, I think it’s a positive thing that people could be raising their estimates of the longer-run neutral rate and potentially the longer-run growth rate. Who knows? And maybe reducing their level of the natural rate of unemployment, which has been the trend. It’s just that you change those estimates over time. They’re informed by incoming data. They don’t change a lot, though, although they did—it’s interesting that the neutral rate changed quite sharply after the financial crisis in many different models, and it’s been slow to recover. I don’t expect a dramatic recovery there, but, you know, we—we’re so bad at forecasting productivity. It’s just very hard to know when productivity is going to arrive and in what quantity. So I think we have to be humble about how little we really know about where these starred value variables either are or are going.

Question (Courtenay Brown, Axios): Hi, Chairman. Courtenay Brown from Axios. Last month, the CEA outlined a different way to calculate wage growth. Has the Fed looked at that at all, and what are you seeing in terms of nonwage-based compensation?
Answer: So I wouldn’t comment on a CEA paper, and I would imagine they probably wouldn’t comment on our stuff, either, but I would just say this. So I am familiar with the question and the work. You know, we look—we look at a range of indicators of wages, and I think the broader, the better. You really—in a perfect—a perfect wage measure would also include benefits, because a lot of compensation these days shows up in the form of benefits rather than wages, so I think it’s right to choose those broader ones. But they’re kind of all telling the same story right now. If you look at the principal four that we look at—we look at a whole range of wage and benefit cost indicators—they are all now showing wages and benefits around 3 percent growth, right? Clustered around 3 percent. That’s a full percentage point higher than it was five years ago. That’s a good thing. Then the question—the other question is, what about inflation? You know, if you’re—if you’re looking for real wage increases, you’ve got to ask inflation, and there, you have to pick an inflation measure. Some people pick CPI. We, of course, pick personal consumption expenditures because we think it’s a little better measure. It’s a little broader, and it tends to run a little bit lower as well, but that’s not why we pick it. We just think it’s more accurate. And that—the trend there is running around 2 percent, so if wages are running at rough—wages and benefits running at roughly 3 percent and inflation running at around 2 percent. PCE headline inflation is at 2.3 percent. PCE core is at about 2, and I think we see that, you know, the temporary increase in headline inflation as being a function of oil prices probably, and we expect inflation to go back down to 2 percent. So we think of that as 2 percent. That’s how we think about it. Is that—I hope that helps.