Federal Reserve press conference, 2020-01-29 — Chair Jerome Powell

Question (Christopher Condon, Bloomberg): Thank you. Chris Condon, Bloomberg News. Mr. Chairman, I would like you to comment in a little bit more depth about one small change I’ve noted in the statement. It notes that policy will be appropriate to bring—the Committee believes—inflation back to the Committee’s 2 percent symmetric inflation objective. That’s a slight change from the last time, when you were expecting it to bring inflation outcomes back near the objective. And I would put this also in the context of a comment you made at the last press conference where you drew attention to the fact that a number of policymakers had projected inflation overshoots two or three years out under appropriate monetary policy. Should we take all of this together to mean simply that the Committee is more confident that a 2 percent outcome for inflation is already baked in the cake, or that this is a signal that the Committee has a stronger resolution to bring inflation at least to the 2 percent objective and put—bring into play an informal makeup strategy for inflation?
Answer: Yes. So, in making that change, our goal was, really—that was, changing “near” to “returning to”—was to avoid possible misinterpretation. So you may remember, in the December minutes we noted that a few Committee members suggested that the language that stated that monetary policy would support inflation near 2 percent could be misinterpreted as suggesting that policymakers were comfortable with inflation running below that level. So we thought about that in the intermeeting period and concluded that it would be appropriate to adjust that language to send a clearer signal that we’re not comfortable with inflation rising persistently—running persistently below our 2 percent symmetric objective. So, yes, there is something in that. It’s just that we wanted to underscore our commitment to 2 percent not being a ceiling to inflation running around—symmetrically around 2 percent, and that we’re not satisfied with inflation running below 2 percent, particularly at a time such as now where we’re a long way into an expansion and a long way into a period of very low unemployment when, in theory, inflation should be moving up.

Question (Nick Timiraos, Wall Street Journal): Thank you. Nick Timiraos of the Wall Street Journal. I want to ask about the balance sheet. How many reserves are “ample”? How many reserves does the Fed now think it will need to conduct policy in its current framework? And can you walk me through how you and your colleagues are arriving at that answer?
Answer: Sure. So, thanks for that question. Why don’t I say a few things about repos, since I know that’ll be of interest. So, just to bring you back, after last September’s brief turmoil, we took prompt and decisive action, and a result—as a result, money markets have been operating smoothly since then. Just to review, those two adjustments were Treasury bill purchases of at least—of $60 billion—sorry—at least into the second quarter, and term and overnight repo at least through April. And I will get to your specific question. The purpose of the adjustments has been to assure that our policy is transmitted smoothly to the federal funds rate, which requires well-functioning money markets. It doesn’t mean we’re trying to eliminate all volatility in the repo markets. We know that some volatility is normal and expected in well-functioning markets. And, as I mentioned, these adjustments have been successful in supplying an ample quantity of reserves. Money markets operated smoothly, including right through year-end, and the fed funds rate has remained in our target range. So we know—we will know when these adjustments have run their course when reserves are durably at a level that enables us to control the federal funds rate using our administered rates, the interest on reserves and reverse repo, without the need for frequent use of open market operations. Based on current projections, we expect that the bill purchases will durably bring the underlying level of reserves to the ample level sometime in the second quarter of this year. And when we see that we’ve reached that level, we’ll begin to gradually reduce our asset purchases to the level of the underlying trend growth of demand for our liabilities. As our bill purchases bring the underlying level of reserves up to an ample level on a sustained basis, the necessary quantity of overnight and term repo will gradually decline. We’ve already begun the gradual reduction in the quantity of repo, and we’ll continue to reduce those offering amounts gradually as conditions permit. At some point, we’ll also raise the minimum bid rate. Even after we reach an ample level of reserves, it’s possible that repo operations might play a role as a backstop and support effective control of the federal funds rate. And we’ll continue to discuss that issue and review it under our implementation framework. Coming to your question, in terms of the actually desired reserve level, we know that reserves will continue to move up and down over the course of the calendar year in a wide range depending on volatility in nonreserve liabilities, particularly the Treasury General Account, or TGA. In particular, reserve levels will need to be at a level high enough to remain ample even when the TGA peaks during the April tax season. Effectively, what that means is that we need reserves at all times to be no lower than they were in early September—and, I would say, around $1½ trillion, subject to learning more. Reserves are going to move in a broad range, as I mentioned, and we want to be clear, that will be the bottom end of the range. We want $1½ trillion or thereabouts to be the bottom end of the range. So, most of the time, reserves will be moving in a range substantially higher than that but not going below $1½ trillion. So it’s not an—it’s not something that we’re aiming at all the time. We know that reserves will fluctuate and be substantially higher than that most of the time. We also want interest on excess reserves and the fed funds rate to be well within the FOMC’s target range. And we think that’ll be the case now that we made our technical adjustment. Last points—we’re committed to making this adjustment process a smooth one. We’ll provide more details as we go, and we expect to learn as we go, as we always have. And we’re prepared to adjust the details of the plan as necessary to foster efficient and effective monetary policy implementation.

Question (Michael McKee, Bloomberg): Michael McKee from Bloomberg Radio and Television. In terms of the framework review and a little bit on Chris’s question earlier, there is a general feeling now in the markets and among analysts that you’re basically setting us up for some form of inflation- target averaging where you let the inflation rate run above the 2 percent target for some time to make up for the time that it has spent below that. Is that a fair or reasonable assessment of where you think you’re going to end up? What would you, Chairman Powell, think of that idea personally? And, as long as I’m asking, do you have any more details on when we can expect the results of the review?
Answer: Thanks. I’ll just say that we undertook the review because we felt, and I felt, that it was time to incorporate the realities of what we could call the “new normal” into our policy framework. And some aspects of that new normal would include ongoing powerful global disinflationary trends, which have led to lower-than-target inflation many places in the world; secondly, a flat Phillips curve, by which I mean low levels of sensitivity of inflation to resource utilization—for example, low unemployment; and, thirdly, a much lower neutral real interest rate here and around the world. So those are challenging conditions for monetary policy to deliver on our statutory goals of maximum employment and stable prices, although I would say that, under our existing framework, we’ve been able to succeed or get close to succeeding it for most of the time lately to achieve those goals, although we do struggle, as other central banks do, with the inflation goal. So this is about reviewing our strategy, tools, and communications to assure that they’re the best that we can do to achieve those goals in this environment on a sustained basis. And we continued our discussions at this meeting. I’m very, very pleased at the process so far. It’s included the 14 Fed Listens events around the country, at which we’ve engaged with a full range of people and groups across American society. That was a very, very positive experience, and I think we learned a lot. We’ve now had a series of—a number of FOMC meetings at which we’ve reviewed what we’ve learned and also dug deeply into strategy, tools, and communications. I expect that we will conclude the review and announce our conclusions around the middle of the year. Right now, we are just at the point of coming together to put all that together. So I think I’m not the person who should be telling you my personal preferences right now. I’m trying to—and we were trying to come together as a group around a set of answers. I feel very positive about—that we’re going to come up with some good results, and I’m just going to have to wait until we get to that point to announce them.

Question (Donna Borak, CNN): Donna Borak with CNN. Going back to your outlook for global growth, we’ve seen some significant headwinds, as you mentioned earlier, with the easing—with the partial U.S.–China trade deal, but now that there’s some new concern following the outbreak of the coronavirus—that it might shake global growth. We’re already seeing reports from Ford and Toyota that they’re planning to shut down their assembly plants for an extra week. Apple is rerouting their supply chains. Starbucks is shutting down close to thousands of stores. Are you worried at all about what the impact would be on the U.S. economy, and do you see that as a significant risk—excuse me—to the outlook at this point?
Answer: So let me talk about the coronavirus specifically, and then I’ll turn more to global growth more generally. First, it’s a—it’s a very serious issue, and I want to start by acknowledging the significant and considerable human suffering that the virus is already causing. There is likely to be some disruption to activity in China and possibly globally based on the spread of the virus to date and the travel restrictions and business closures that have already been imposed. Of course, the situation is really in its early stages, and it’s very uncertain about how far it will spread and what the macroeconomic effects will be in China and its immediate trading partners and neighbors and around the world. So, in light of that uncertainty, I’m not going to speculate about it at this point. I will just tell you that, of course, we are very carefully monitoring the situation. And, you know, as you suggested, our framework ultimately is, what are the potential ramifications for the U.S. economy and for the achievement of our dual mandate? More broadly, though, if I can talk about the global economy for a second—and if you look at the backdrop, you know, if you go back to 2017, that was the year of synchronized growth that lasted into the middle of 2018, and then you saw slowing in growth, which lasted right through the end of last year. The fourth-quarter growth globally was quite weak last year, and a number of factors played into that. It wasn’t any one factor. There was trade policy uncertainty, absolutely, but also there was the decision by the Chinese authorities to try to rein in leverage and financial excesses. There was a turn—downturn in the global high-tech manufacturing cycle in global auto production. There were some idiosyncratic strains in some countries like Argentina, Turkey. And then, later, in Hong Kong and Chile, you had social unrest. So, all of those things were playing into that cycle of weakening growth over the course of 2019 and the last half of ’18. I would say, now there are grounds for what I would call “cautious optimism” about the outlook now for the global economy. Many analysts are predicting a pickup in growth this year, although still to relatively modest growth rates. And I would—people are pointing to, and we would point to, supportive financial conditions, the easing of trade tensions, the lower odds of a hard Brexit. The high-tech manufacturing industry does appear to be rebounding well in Asia, including in China. The latest indicators—manufacturing PMIs, for example—suggest that manufacturing may have bottomed out, that they’re still below 50 in many jurisdictions, but they have moved up off of their lows. I would—I would just say, none of this is assured. As I mentioned, we saw the fourth quarter of last year came in quite weak—weaker than expected. We are not at all assured of a global rebound, but there are signs and reasons to expect it. And then comes the coronavirus, which, again, it’s too early to say what the effects will be. Of course, we’re, as I mentioned, monitoring it carefully. There will clearly be implications, at least in the near term, for Chinese output and, I would guess, for some of their close-in neighbors, and we’ll just have to see what the effect is globally.

Question (Brendan Greeley, Financial Times): Brendan Greeley with the Financial Times. As recently as 2018, interest on excess reserves was at the top of the band, sort of dragging the fed funds rate up. Over the course of the adjustments since last year, it’s moved steadily down, closer to the bottom of the band. So, if you’re moving it back up, how high do you want to get it? Are we looking to get interest on excess reserves at the top of the band again as the fed funds rate moves to the middle of the band? And should we see movements in IOER as an indicator that we’re approaching “ample”?
Answer: So our stated goal is to keep IOER and the federal funds rate well within the range. That’s it. Well within the range. And that, clearly, you know—5 basis points from the bottom or from the top isn’t that. So that’s why we moved back up. You’re right. Last year we were—we saw some tightness as reserves were draining out of the system. We saw the—gradually moving up. And, in hindsight, we know what was happening. With ample reserves, we see—we see that it’s possible to bring the interest on reserves rate up to 10 basis points. So now we’re—now we are well within the range, I would say.

Question (Brendan Greeley, Financial Times): We are. So you don’t think that, as the fed funds goes back up towards the center of the range, that IOER is going to end up at the top?
Answer: Don’t know that. We want it to be well within the range. I think we’ll continue to adjust it to the extent it’s appropriate. Ultimately, what we’re trying to do is deliver a federal funds rate that’s well within the range. IOER is just a tool to do that. If we—if we need to make changes to keep it well within the range, we’ll do that. It just means—I mean, the thing that matters for the economy is that we keep the federal funds rate—which is the rate that, of course, transmits into other money market rates, which ultimately transmit into all kinds of financial conditions—that’s what we care about. So, ultimately, we will—we will use that tool to keep it well within the range.

Question (Howard Schneider, Reuters): Where do the discussions stand on standing repo? [Aside] That was great. And the other thing is, on the, you know, on the standing repo facility and on the purchases—Treasury bill purchases, as you enter this new regime later in the second quarter or later in the year, will that be preannounced by amounts? Will there be preset amounts like you’re doing now, or will that just be something that people will have to sort of intuit and figure out as you go along?
Answer: So I’ll go in reverse order. When we—when we make decisions about the steps we’re going to be taking in that adjustment process that I described at some length, we’ll be making them as early as we can and as transparently as we can—and specifically. But we’re not at that stage. It’s January, and we’re several months away from— from that. In terms of the standing repo facility, as I mentioned in, I guess, in my answer to an earlier question, there may well be a role for repo in this system even after we’re at an ample- reserves level. Now, we haven’t decided what that role is, we have not decided—we haven’t at all made a decision on a standing repo facility. We haven’t. We’ve had a couple of discussions about it, as you know, back in, I guess, June and October. And there’s a range of views. We’re going to return, I would say, fairly soon to this question. And I think it was wise to wait, because we’re still getting a better sense of what that— what that world looks like. And, you know, it’s really going to be a question of, how useful will it be? What will be the costs and benefits? And my thinking is, we will return to that fairly soon, and I wouldn’t assume a decision one way or the other. Really, we haven’t made one, because we haven’t had to. And I think you—when you delay, you get more information by waiting. It’s good to wait. We don’t have any urgency in making that decision, because we’re still trying to find that sort of stable equilibrium where we’re in an ample-reserves regime.

Question (Heather Long, Washington Post): And if I could follow up, can you clarify why the Fed hasn’t signed on to the Network for Greening the Financial System like 40 other central banks have?
Answer: So we’ve attended all of their meetings and taken part in them, and we’ve been looking at joining in one form or another and talking to them about that. We probably will do that at some point. So that’s—that’s an ongoing question. But we’re very much attending those meetings and taking part in them.

Question (Michael Derby, Dow Jones Newswires): Hi, Mike Derby with Dow Jones. Do you have any greater sense of what—what was going wrong with the repo market starting in September? There seemed to be, you know—whether it was a one-off event, you know, too tight around tax payments and debt settlement, or whether there’s a more enduring issue going on with the market, more structural forces that are basically gumming up the repo sector.
Answer: Yes. As for those forces, so, as we indicated, we would undertake a, you know, serious review of that question and look at both our regulations and also supervisory practices. And we’d be prepared to adjust those in ways that might encourage liquidity to flow more easily in the system as long as it didn’t undermine safety and soundness. And so we’ve undertaken that, and we’ve done a ton of work, actually. We don’t have anything to announce here today, but I feel good about the—what we’ve learned there. I think—you mentioned other factors. We will be announcing our findings. I’m not going to give you a time, but we’re— we’re well along in that assessment at this time. I think we also found out, though, that the level of reserves that we need in the system to conduct our operations without frequent resort to open market operations was higher than we had thought and was higher than others had thought, too. We learned that we can’t let reserves—we shouldn’t let reserves go below $1½ trillion—roughly, the level of early September—at any point. And that means that reserves will move through in a range over the course of the year that will be substantially higher than $1½ [trillion], but they won’t ever go below. So $1½ [trillion] is not a target level. It is the bottom of a range in which reserves will be expected to move.

Question (Nancy Marshall-Genzer, Marketplace): Nancy Marshall-Genzer with Marketplace. Chair Powell, is the Fed going to vote tomorrow on changes to the Volcker rule restrictions on banks investing in venture capital funds? What can you tell us about what the Fed is considering? And why make those changes?
Answer: Sure. So we will be looking tomorrow and voting on a—a new part of—part of the existing Volcker rule, and that is the covered fund provisions of the rule. And we’ll be making a bunch of proposed revisions that we believe are faithful to both the letter and the spirit of the law. We’re going to put those proposals out for public discussion, and we’re going to listen carefully, as we always do, to public comments on those proposals. Again, we believe that they will be—and you’ll see them tomorrow—will be public—you know, will be publicly—we have a Board meeting tomorrow to do that.

Question (Nancy Marshall-Genzer, Marketplace): Now, is this just the venture capital funds, or are also you changing the rules for hedge funds and private equity funds?
Answer: It’s covered funds. It’s—so it’s that covered—so it’s not the proprietary trading part of Volcker. It’s the covered funds part.

Question (Greg Robb, MarketWatch): Thank you. Thank you, Chairman Powell. I’d like to turn your attention back to China and the health of its financial sector in particular. And I guess I’m basing my question on reading the transcripts from 2014 that came out earlier this month. Just—in March of that year, there was concern about the Chinese economy, and one of your colleagues on the FOMC at that time asked the staff about how the Chinese economy would hurt—hit the U.S. economy. And the staffer said that there was a—what they were worried about was that not only was the Chinese economy slowing down, but there was the financial sector. And the quote was: “There’s a tremendous amount of dodgy loans in China.” Now, I was wondering if you could give us an update on these problems in the Chinese financial sector. And how do you think it might impact the economy, particularly now that they’ve been hit by this unexpected shock?
Answer: Well, China has had a problem for some years, including from that period—2014 up until, I guess, ’17 or ’18, and I thought—which was essentially just a lot of debt for an emerging market. For an economy at the—at the stage of evolution of the Chinese economy, they had very high levels of debt—not sovereign debt the way we think of it, but more business debt—debt of state-owned enterprises and also just private businesses. And a couple of years ago the authorities decided to try to get that under control—to stop the growth and to control it. And that—as I mentioned, that’s one of the reasons why Chinese growth slowed, and it’s one of the reasons why global growth slowed, because we felt that. And they’ve actually stuck to that even during this difficult period when they were experiencing, you know, strains from trade negotiations and that kind of thing. The authorities have stuck to that and have, again, continued to try to do that, so—to try to control the growth of debt. And that’s important that they do that. We don’t think that—that there’s any imminent risk there, although you—as you point out, the coronavirus thing is a significant thing, which will—will have some effects on the Chinese economy, at least in the short term. The Chinese economy is very important in the global economy now. And, you know, we—when China’s economy slows down, we do feel that—not as much as countries, though, that are near China or that trade more actively with China, like some of the Western European countries. We still have—you know, 85 percent of our economy is domestic. And we have a much smaller external sector, trade sector, than other economies just because of our physical location.

Question (Brian Cheung, Yahoo Finance): Hi. Brian Cheung here, Yahoo Finance. So the combination of T-bill purchases and repo operations have been described colloquially as “liquidity.” I’m just wondering if you semantically agree with that description—then, secondly, what the impact of that has been on risk assets. I don’t know if that’s something that, you know, the Board or Reserve Banks are formally looking into or just looking at what the effect of it has been. How are you kind of thinking about that going forward? Thanks.
Answer: Well, so, two questions. I mean, in terms of liquidity, I think what we’re doing is what I said: We’re trying to raise the level of reserves back up to a level so that banks can meet their reserve requirements, and that there’s enough reserves in the system that we don’t see reserve scarcity, and we don’t have to use repo operations to provide additional reserves. So I think, as I mentioned, we believe we can get to that state at the current pace sometime in the second quarter. In terms of effects on risk assets, as I said earlier, it’s very hard to say what is affecting financial markets with any precision or confidence at a given time. It’s not our intention to change the stance of monetary policy. These were designed to provide more reserves and, really, to do that in order to enable better transmission of our—of our rate decisions into the economy under our chosen framework. That’s really the purpose of what we’re doing.

Question (Jean Yung, MNI): Hi. Jean Yung with MNI. I wanted to ask about the framework review again. Would a shift of focus to inflation over an average period—would that call for a different policy stance if you made that shift? And whether or not we know the answer to that question, would the Fed consider changing the stance of monetary policy for that reason even if there was no change to the economic outlook?
Answer: Well, as you know, we’re comfortable with our current policy stance. We think it’s appropriate. We think it’ll remain appropriate as long as data coming in are broadly in keeping with our outlook. Over time—over time, though—let me take a step back. Over time, an average inflation-targeting framework would be different than our current framework, in the sense that it wouldn’t be a—there would be some aspect of trying to make inflation average 2 percent over time, which means, if it runs below 2 percent for a time, it has to run above to bring the average up. So that is a different framework. Our current framework is one where we say—or we’d be equally concerned with deviations of inflation from target on either side. But that isn’t—that doesn’t suggest an intention specifically to have those deviations be symmetric. In other words, that would— consistent with that would be having all the deviations be on one side, which is what we’ve had, actually. So I think it is a change in framework, and over time it would lead to a different approach to policy. Again, I’m not trying to—I don’t want to comment on the current stance of policy, which we do think is appropriate.

Question (Don Lee, Los Angeles Times): Don Lee with the L.A. Times. I wanted to ask you about the stock market. By historical comparisons, as you know, valuations are considerably high. And I just wonder how much discussion and concern you and your colleagues have about that and what risks you see for the economy.
Answer: So we—we look at a very broad range of financial conditions where—there isn’t any one financial condition that we—that we look at. And when we look at financial conditions, what matters for the real economy is substantial changes in—or, material changes in financial conditions that are sustained over a period of time. If I can, maybe I’ll—maybe I’ll answer that in the context of our overall financial stability framework. That’s one way to look at it. So we look at—when we look at financial stability, we look at—really, we’ve got four pillars to that, the first of which is leverage in the financial system that is at a comfortable level. Our banks, particularly our large banks, have high levels of capital. The second is leverage in the nonfinancial sector, and that divides into households and businesses. Households’ debt to GDP is—has been coming down since the financial crisis. It’s not moving up. It’s at low—low levels compared to what it was before the crisis. So not every household—but, in the aggregate, household debt is in a good place, a very good place. Business debt has been moving up. We’ve been calling that out for more than a year—substantially more than a year, and it’s something we’re focused on. And we’ve taken appropriate measures and are monitoring carefully. But we think it’s not something that would threaten financial stability, but more be an amplifier. The other one is asset purchases, getting to your—sorry, asset prices, getting to your question. We do see asset valuations as being somewhat elevated—I do—somewhat elevated. If you look at risk spreads, they’re narrow. If you look at P/Es, they’re high. I think the way to think about—a good way—one way to think about equity prices, though, is, what’s the premium you’re getting paid to own equities rather than risk-free debt? And that’s also at fairly low levels, but not extremely low levels. So valuations are high, but not at extremes. The final factor is funding risk. Are big financial institutions and other players in the financial system funded with stable funding, or is there a lot of run risk? And the answer is, very stable funding, for the most part. So if you look at, overall—what you see, in my view, is, vulnerabilities to the financial—to financial stability are moderate overall.

Question (Katy O’Donnell, nan): Hi. Katy O’Donnell, Politico. I wanted to know, do you support Governor Brainard’s vision for the Community Reinvestment Act reform? And is this something that we could see the Fed formally propose at some point?
Answer: So let me say that I think this is a good time to do—to update CRA, really, in a way that is a win–win both for the intended beneficiaries—low- and moderate- income communities—and also for banks that would like to have more certainty about—about what does and doesn’t qualify and that sort of thing. The law can both be more effective and more efficient is—it comes down to. And we think this is a good way. It’s also just a good time to take on board the way the delivery of banking services has changed through technology and demographic change as well. We worked very hard to try to get on the same page with the other two agencies. We think that an interagency final rule together would be the best outcome. We’re sorry we haven’t been able to get there, and we still hold out some hope that we will be able to. We spent a lot of time on research and analysis and looking at meaningful reform. You saw Governor Brainard’s recent speech presenting some of the thinking and the analysis. And we haven’t made any decisions about what we’re going to do, about whether we’ll propose—I mean, our focus has been entirely on trying to get to agreement with the OCC, really. So we haven’t made any decisions about what we’re going to do going forward. In terms of, you know—Governor Brainard led our oversight committee over these activities for many years, and I asked her to take the lead on CRA modernization, which is a high priority for us. I was comfortable with her speech, and I’m comfortable with the work we’ve done and with the Fed’s position on this. As I said, we haven’t chosen to bring a proposal forward. We haven’t decided what to do, whether—going forward. And we’re not going to comment on the other proposal. It’s just not appropriate to do. It’s not about us. It’s not about our views. It’s about the views of the interested parties.