Federal Reserve press conference, 2018-12-19 — Chair Jerome Powell

Question (Sam Fleming, Financial Times): Thanks very much. Sam Fleming from the Financial Times. One of the recent surprises has been fairly tepid inflation data. I wonder, first of all, if you could explain why you think, despite the extremely tight labor market, we’re still not seeing much in the way of inflationary pressures. And in the context of a more data-dependent Fed, how will the Fed respond to further undershoots of inflation moving into next year? Thanks.
Answer: Well, you’re right, Sam. Inflation has come in just a touch below where we expected it to be—not by a big amount, but by a small amount. More broadly, 2018 has been the strongest year since the recov—since the financial crisis. And during that period we’ve had low unemployment and strong growth, and inflation has still remained just a touch below 2 percent. So I do think that gives the Committee the ability to be patient in moving forward. As I mentioned, there’s significant uncertainty about the—both the path and the ultimate destination of any further rate increases.

Question (Heather Long, Washington Post): Hi, Heather Long from the Washington Post. Today, the Fed lowered its expectations for interest rate increases. Given that, I’m wondering if the Fed has had any discussion of altering the course of balance sheet normalization and if you could give us any insight on what might lead the FOMC to alter that balance sheet normalization in 2019.
Answer: Sure. If you go back some years, I think we—people who were working at the Fed in 2013 and ’14 took away the lesson that the markets could be very sensitive to news about the size of the balance sheet, the pace of asset purchases, the pace of runoff, and things like that. So we thought carefully about this, on how to normalize policy, and came to the view that we would effectively have the balance sheet runoff on automatic pilot and use monetary policy, rate policy, to adjust to incoming data. And I think that has been a good decision. I think that the runoff of the balance sheet has been smooth and has served its purpose. And I don’t see us changing that. And I do think that we will continue to use monetary policy, which is to say rate policy, as the active tool of monetary policy.

Question (Nick Timiraos, Wall Street Journal): Thanks. Nick Timiraos of the Wall Street Journal. Chairman Powell, you talked a little bit earlier about the ability to be patient. And so as you think about your next policy moves, are you inclined to go at the current recent pace to a slightly different destination that’s laid out in the projections today? Or does the current environment of restrained inflation maybe allow you to space out your next few moves and take more time to get there?
Answer: So, as background, I would just point to 2018 being a very strong year and the Committee looking forward to 2019 and still having what amounts to a positive forecast. We still are forecasting, individually, growth a bit above its longer-run potential—2.3 percent is what we’re forecasting. We’re forecasting that growth will be strong enough that unemployment will drop still further and inflation will remain right near our target. So I’d say that’s a reasonably positive forecast. Going forward, you know, I will be looking, in particular, to see whether incoming data tell us that we’re, in fact, on that path, that development of the economy is in line with that expectation. That will be the main thing. More broadly, though, I think we’ve reached the bottom end of the range of Committee estimates of what might be neutral. I think, from this point forward, we’re going to be letting the data speak to us and form the outlook and inform our understanding of what would be appropriate policy. So there’s a fairly high degree of uncertainty about both the path and the ultimate destination of any further increases.

Question (Binyamin Appelbaum, New York Times): Binya Appelbaum, the New York Times. You’re about to undershoot your inflation target for the seventh straight year. Your new forecasts say that you’re going to undershoot it for the eighth straight year. Should we interpret the dot plot as suggesting that some members of your Committee believe that policy should be in a restrictive range by the end of next year? If so, can you help us to understand why people would be advocating restrictive monetary policy at a time of persistent inflation undershoots?
Answer: Well, we—as a Committee, we do not desire inflation undershoots. And you’re right, inflation has continued to surprise to the downside—not by a lot, though. I think we’re very close to 2 percent, and, you know, we do believe it’s a symmetric goal for us. Inflation is symmetric around 2 percent, and that’s how we’re going to look at it. We’re not trying to be under 2 percent. We’re trying to be symmetrically around 2 percent. And I don’t—you know, I’ve never said that I feel like we’ve achieved that goal yet. The only way to achieve inflation symmetrically around 2 percent is to have inflation symmetrically around 2 percent, and we’ve been close to that but we haven’t gotten there yet, and we have not declared victory on that. So that remains to be accomplished.

Question (Martin Crutsinger, Associated Press): Mr. Chairman, Marty Crutsinger with the AP. You’ve established for this coming year a communications panel to look at how the Fed communicates. Could you talk a little bit about what you expect to get from that panel, and will the dot plot be involved in that at all? How do you think the dot plot is working? Are we dealing with it the way that you want us to be handling the dot plot, or is it something that you might tweak a bit?
Answer: So this review, what it really is—it’s coming at a time when the economy is strong, and it’s a good time to take a step back, we think, and ask whether our strategy and our tools and our communications around monetary policy are doing the job that Congress has assigned us to do on behalf of the American people. And what we’re going to do is, we’re going to open ourselves up and have a discussion with many outside groups of all different parts of the economy, including, you know, an academic conference in June in Chicago. And, again, the idea is to, you know, listen to new ideas, better ideas, old ideas—many of them have been around—and try to assess whether there are better ways we can do things. One of the overarching facts is that rates have been really coming down overall for more than three decades now. We may be in a world where interest rates are just lower for the time being, and, therefore, we’ll have less policy space to react to economic downturns. And we’d want to be evaluating ideas for—again, for better achieving the goals that Congress has given us. We’re not looking at law changes at all, and we’re not looking at changing the inflation target, for example. We are looking for better ways to achieve the inflation goal—for example, on a symmetric basis. So that’s the sense of that. As I mentioned, on the dot plot—you asked about the dot plot. I think the dot plot generally does provide useful information about the reaction function of Committee participants—sometimes more useful than others, I’ll admit. But, in general, I think people sort of have it figured out and understand what it is and what it isn’t. But that doesn’t mean we don’t like to repeat what it isn’t, which—it’s not a consensus forecast. It’s not something that we vote on. It’s something that each of us writes down, and we always update it as—you know, as data come in and as we update our outlooks.

Question (Michael McKee, Bloomberg): Michael McKee from Bloomberg Radio and Television. The balance sheet reduction—how much additional tightening do you think has come from that? We know in the markets that the cost of credit rising, commercial paper, repo rates, the TED spread widening—do you see any concerns about the availability or the price of credit that could slow the markets? And if, in 2019, we see the economy start to slow, would you, if you don’t adjust the balance sheet, be risking too much tightening?
Answer: So we do watch all of that, but the amount of—the amount of runoff that we’ve had so far is pretty small. And if you just run the quantitative easing models in reverse, you would get a pretty small adjustment in economic growth and real outcomes. So we don’t think, you know, things that are happening at the short run—at the short end—are driven by many other factors other than the balance sheet runoff. For example, just—very large bill supply has pushed up short-term rates, has pushed up repo rates. Tightening of the federal funds rate has raised short-term borrowing costs. So, you know, we’re alert to these issues. We’re watching them carefully. But we don’t see, you know, the balance sheet runoff as creating significant problems.

Question (Victoria Guida, Politico): Hi, Mr. Chairman. I wanted to ask, first of all, whether you’re worried that President Trump’s tweeting and statements might interfere with your ability to communicate with markets and why you’re doing what you’re doing. And then, also, I was wondering if you could comment on—Governor Brainard gave a speech recently where she laid out the case for the countercyclical capital buffer being activated. Do you disagree with her analysis? Is that something that you think the Fed should look at doing?
Answer: I’m not worried, because—about—on the first question— because I know, and everyone who works at the Fed knows, that we’re going to do our jobs the way we’ve always done them. And that involves, you know, I think getting the best thinking together, diverse perspectives. We—every business—every FOMC cycle, we talk to hundreds of people in all different parts of society, not just business people or market people, but people from community development organizations. We get survey data from thousands of people, and so we really do have a pretty broad exposure to what’s going on in all different parts of the country. And we’re going to take all that information, and we’re going to make the best decisions we can, and nothing will cause us to deviate from that. In terms of the CCyB, so the CCyB is—the countercyclical capital buffer is a tool that allows us to build capital at a time when vulnerabilities—financial stability vulnerabilities—are meaningfully above normal. And so that’s a tool I’d be absolutely willing to use and happy to use at such time as that test is met. We meet and discuss that and evaluate it on roughly an annual basis. We haven’t done it since early this year. I think we’ll be doing it early next year, and we’ll be reaching that judgment then. I will tell you, I recently gave a speech saying that I believe that financial stability vulnerabilities were roughly at a moderate level. So, for me, that—but I would want to leave open—my mind open on that and have that discussion with my Board colleagues when the issue arises.

Question (Ann Saphir, Reuters): Ann Saphir with Reuters. You said that policy does not need, at this point, to be accommodative. But does it need to be restrictive, as the dots seem to suggest that it will be?
Answer: Does it currently need to be restrictive? No. And I don’t believe that it is. I don’t believe that policy is restrictive.

Question (Ann Saphir, Reuters): Next year. The dots suggest it will be restrictive next year. Should it be?
Answer: Yeah, I—I’ve discussed this a couple of times. It’s a very good question. And I guess I would just go back to this: The individual forecasts are not something that the Committee votes on. They’re out in the future. We vote on the rate increase, and we write down our—you know, our own personal paths. So people have disparate views on what the endpoint could be. Ultimately, it’s going to depend on what the circumstances are. There would be circumstances in which it would be appropriate to go past neutral, and there would be circumstances in which it would be wholly inappropriate to do so. So I don’t—I wouldn’t put too much on—it does inform you, the way people are thinking about things. But don’t—I wouldn’t take it as a signal about current policy or about near-term policy.

Question (Greg Robb, MarketWatch): Greg Robb from MarketWatch. Just following up on Paul’s question— President Trump said recently that you should feel the markets. So when you see the markets, you know, what are the markets telling you?
Answer: You know, financial conditions—broadly speaking, we don’t look at any one market. We look at a really big range of financial conditions. And what matters for the broader economy is material changes in a broad range of financial conditions that are sustained for a period of time. A little bit of volatility—speaking in the abstract—some volatility doesn’t probably leave a mark on the economy. So we look for that. And, you know, what we’ve seen here is a tightening. There’s been a tightening since right around after—a week or so after the September meeting. And, you know, that—we tried to factor that into our models of the economy and to the results that come out of those models. That’s how we think about it. So we do, you know—we follow markets really carefully. But, remember, from a macroeconomic standpoint, no one market is the single dominant indicator and it really matters if changes are sustained over time.

Question (Nancy Marshall-Genzer, Marketplace): Nancy Marshall-Genzer with Marketplace. Do you still think core PCE is a good measure of whether the economy is overheating? What do you think of other measures like setting a target for economic growth and relying more on that?
Answer: Well, I think we look at both, but core PCE is a good indicator. It has—what’s happened over, really, 50 years is that inflation has become much less reactive to changes in growth. There was a time when inflation reacted really quickly to changes in growth and changes in unemployment, and that time is behind us. And that is often attributed to the success of central banks in anchoring inflation expectations so that people believe that inflation will come back to the target or around the target so it doesn’t go down as much—inflation doesn’t go down as much in a downturn and doesn’t go up as much when the—you know, when the economy is strong. It’s really true, though, that inflation has not reacted a lot on a road from 10 percent unemployment to now 3.7 percent unemployment. Now, it did move up last year. But in terms of just targeting growth, you know, I think—I actually think our dual mandate works very well, which is maximum employment and stable prices. Most of the time, those two things work together. When they work temporarily in different ways, we take a balanced approach. But I think that approach has served us well, and I think we can work well with it.

Question (Donna Borak, CNN): Chairman Powell, Donna Borak with CNN. Next year, every meeting will be a live meeting. So, presumably, there will be some adjustment in how the market anticipates when a rate hike is coming. How has the Committee thought through communicating those potential policy moves, especially in light of the fact of the tremendous amount of uncertainty going into next year?
Answer: I think having regular press conferences will be a big gain for communication. I certainly hope it will. That’s the plan. And so, being able to come out after each meeting and explain the Committee’s thinking and relate that to the state of the economy and expectations for policy and global developments, I think it’ll be—the idea is that it’ll be helpful in explaining how we’re thinking and, you know, explaining what we’re thinking about policy going forward. So that’s the plan. I do believe it will be a positive development. I think it’ll also become the case, over time, that there will be no “prior” as to whether we would move at a quarterly meeting or one of the meetings at which we do not file an SEP. As you know, we only update our projections under the current approach quarterly, whereas we have eight—eight meetings. So I think we’ll move to a more—we’ll have the ability to move eight—at eight different meetings. Not eight times, but at eight different meetings on the year.

Question (Donna Borak, CNN): I guess that’s sort of the question that I’m trying to drive at is, in terms of communicating to the market, because we’ve been—the market’s been so adjusted to the fact that these are quarter-end rate hikes, and now you have the potential to move eight times a year—is the Fed thinking through how it’s going to communicate when it plans, especially given the amount of uncertainty?
Answer: Yes. I mean, I think that’s probably pretty straightforward. If we, you know—if we’re—if we want to communicate something about something that’s going to happen in a future meeting, I think we know how to do that in speeches, in press conferences, and such.

Question (Don Lee, Los Angeles Times): Labor slack?
Answer: Labor slack. Yes. So, you know, by most indicators—we look at a very wide range of indicators on the labor market. And, by most indicators, we are at or even above longer-run normal levels. But I would point to one particular pocket, and that is, labor force participation by younger prime-age workers, particularly prime-age males, is still, you know, meaningfully below its pre-crisis level. Most other age groups in both genders have moved back up pretty close to where they were at the last cyclical peak. You know, there’s a question, can we go above that cyclical peak? And—or, or are the problems more structural than cyclical, and that there isn’t—so we’ll have to find that out. I think, given the strong economy, we’ve had the luxury of finding out that labor force participation can be higher than we had thought. And that’s nothing but a good thing.

Question (John Heltman, American Banker): Hi, John Heltman with American Banker. A regulatory question, if I may. So, many of the Fed’s regulatory proposals so far, especially this year, have been primarily focused on banks in the sort of medium-to-small range. That is, a sort of tailoring enhanced prudential standards, particularly for those banks, and I’m thinking of the stress capital buffer as well as the most recent proposal on banks between $100 and $250 billion. G-SIBs and the largest banks seem to be sort of left out in a lot of these proposals, and I’m wondering if that is meant to send a message that the Fed does not really intend to change its regulatory structure for the largest banks going forward, or if you’ll get to that maybe later. And I’m thinking specifically of the G-SIB capital surcharge, which several members of Congress have sent letters to you asking you to revisit and reconsider.
Answer: So you’re right that a big focus of what we have been doing has been tailoring regulations. And the sense of “tailoring” is that we want to look below the level of the G-SIBs at the large regionals and then on down to the community banks at various steps and ask whether we have appropriately tailored regulation and supervision to account for the fact that smaller and less complex organizations present a much less significant threat to the economy and to the community should they fail—should they experience material difficulty. So, in the nature of that, you’re focused more on the smaller institutions. I think, with the larger institutions, we want regulation and supervision to be effective and efficient. I know that the larger institutions tend to be the ones who care about the Volcker rule. That’s something we’re working on. You know, we—we think that things need to be looked at carefully. And, again, I wouldn’t want to materially change capital levels, because, I think, you know, it’s important that the largest financial institutions, the largest and most complex—the systemically important ones be held to the highest standards and higher expectations. And while we may tailor some regulations, those fundamentally high expectations are not going to change.

Question (Courtenay Brown, Axios): Hi, Chairman, Courtenay Brown from Axios. I’m wondering if you could clear up what’s become a little bit of a debate in the financial community. You said in October in an interview with PBS that interest rates were a long way from neutral. A month later you said interest rates were just below neutral. And I think a lot of people interpreted that as a shift in tone from you. Were they right to interpret it that way?
Answer: You know, monetary policy is a forward-looking exercise, and I’m going to—I’m just going to stick with that. It’s—where we are right now is, we’re at the lower end of the range of neutral. We’ve arrived effectively at the bottom end of that range. And, you know, there are implications of that. For that, as I mentioned, going forward, there’s real uncertainty about the path—the pace, rather, and the destination for further rate increases. And we’re going to be letting incoming data inform our thinking about the appropriate path.