Federal Reserve press conference, 2018-03-21 — Chair Jerome Powell

Question (Steve Liesman, CNBC): Mr. Chairman—right, the microphone. Mr. Chairman, welcome. Interesting changes in the forecast. A higher growth forecast a full point above the long run, lower unemployment seven-tenths below the long run, and yet very little change in inflation. What does that say about what you and the Committee believe about the inflation dynamic? And how is it that, in that context, you justify three rate hikes this year—and I sense there’ll be three next year—and a full $600 billion, I guess, annual rate decline in the balance sheet? Where's your biggest concern here? Is it in overkill when it comes to rates or underkill?
Answer: So, you’re right that the outlook did improve, as I mentioned and as you—as was in your question. The Committee’s estimates of growth went up, the Committee’s estimates of unemployment went down, and there was a very slight increase in inflation. And I think that reflects, essentially—if you think back to the era after the crisis, unemployment was 10 percent. It’s now 4.1 percent. You’ve only seen very gradual upward pressures on inflation and wages despite that very large increase. And that suggests that the relationship between changes in slack and inflation is not so tight. But, it has diminished, but it’s still there. So I think when you see those small changes in unemployment, that simply reflects the, you know, the flatness of the Phillips curve, if you will.

Question (Nick Timiraos, Wall Street Journal): Thanks. I’m Nick Timiraos of the Wall Street Journal. Chair Powell, I want to ask about the symmetric inflation target—what you outlined in your remarks as preventing persistent deviations. I want to understand what symmetry means in the context of inflation being allowed to run above the 2 percent target now that that’s part of the projection for—at least for core PCE next year. How do you define symmetric relative to the experience of the past five years? Would the Fed be willing to accept the type of overshoot of its target as it has seen during the undershoot? And how high above 2 percent is too high to maintain a target that is symmetric? Is it 2¼, 2½, 2¾? And also, for how long?
Answer: You know, so as you noted, the—what we’ve said in the longer-run statement of goals and monetary policy strategy is that we would be concerned with sustained or persistent deviations of inflation either above or below. We’ve also said—in minutes and in speeches and things like that—that that is a symmetric objective. So, that’s how we think of it. And, I think it’s—I wouldn’t characterize what we’ve done over the last five years as tolerating, you know, an undershoot of inflation. We were always pushing toward 2 percent, and I think that is how we look at it. I can’t give you an exact number. It just, you know, it, we haven’t agreed on that. It just is that we’re always going to be seeking 2 percent inflation. And in doing that, we’re going to be considering, by the way, the other side of the mandate. You know, we have to balance that against the deviation of employment from— unemployment from its goal. And—and also, just the duration of it as well.

Question (James Puzzanghera, Los Angeles Times): Hi, Mr. Chairman. Jim Puzzanghera with the L.A. Times. Even with the extra fiscal stimulus of the tax cuts, your median growth projection is just up to 2.7 percent, and then—this year—and then drops back down to 2 percent by 2020. Is the continued talk in Washington about tax cuts bringing growth to 3 percent or higher on a sustained basis overselling their potential impact?
Answer: You know, let me say what that really is. So the Summary of Economic Projections is really a compilation of the individual rate forecasts. The Committee made really one decision at this meeting, and that was to raise the federal funds rate by 25 basis points. The Summary of Economic Projections is individual forecasts compiled and written down. And, you’ve identified the median as 2.7 percent. I would—and that’s an interesting statistic. I would also say that the central tendency is interesting. The full range is interesting. So you have a range of views around the table. One of the great benefits of our system is that we do have Reserve Banks with their own staffs and Governors with different views, and so we discuss these things. So the Committee doesn’t vote or agree upon the medians, so you’re going to have a range of views. That’s really all I can say—2.7 just happens to be the median for ’18, but it doesn’t really say, you know, what we think is possible.

Question (James Puzzanghera, Los Angeles Times): But do you think you can get to 3 percent on a sustained basis?
Answer: You know, I would say it’s hard to say, but it would take—you know, that is well above almost all estimates, current estimates of potential long-run growth. It would take, you know, significant increases in productivity and labor force participation to get there.

Question (Sam Fleming, Financial Times): Thanks very much. Sam Fleming from Financial Times. You and other policymakers have talked about headwinds turning into tailwinds recently. Does that imply that you think now a higher neutral rate of interest is operative in the U.S. economy, and how would you assess the implications for monetary policy? And second question—this is obviously your first press conference, so it’s a little early to ask this question, but would you like to do this more often? Thanks.
Answer: Longer-run values like the neutral rate of interest, the natural rate of unemployment, the potential growth rate of the economy are pinned down by slow- moving forces over time. So they don’t—they don’t move around very much. So I wouldn’t expect the Committee’s, you know, predictions or projections or estimates of those values to move quickly. They’ll move slowly. So is it possible that the neutral rate of interest would move up because of, for example, greater fiscal expansion? There’s literature that says that. There’s—there are reasons that that might be the case. In fact, it did tick up one-tenth, as you all know, in the—in the median at this time. But it’s—I think, generally speaking, the Committee sees the neutral rate of interest as still quite low and is not—is not seeing it as having moved up and is open to the possibility that it will.

Question (Sam Fleming, Financial Times): And press conferences?
Answer: Ah, press conferences. So that’s something that I’m going to be carefully considering. I have not made a decision about it. My colleagues and I are committed to communicating as clearly as possible about what we’re doing and why we’re doing it. I would want to think very carefully about it and make sure that no one would take more frequent press conferences as a signal of the path of policy. And so, it is something that I’ll be thinking about.

Question (Martin Crutsinger, Associated Press): Marty Crutsinger with the Associated Press. You talked about the fact that the Summary of Economic Projections is based on the outlook of all the members of the FOMC. Can you tell us anything, though, about the staff forecast and how that was impacted by the—we had a $1½ trillion tax cut, we’ve had $300 billion in increased government spending—the staff forecast that you’re working with, are those reflected—how were they impacted by that? And how did that impact the discussions?
Answer: So we look at the staff forecasts and the Board forecasts—and, by the way, there are 12 excellent Reserve Bank staffs who have their own views and do their own work—we look at those as informing the decisions of the policymakers. So—and it’s really the policymakers’ views that we talk about in the SEP. We don’t—we don’t, you know, talk about the staff forecast. It’s a particular thing under—done under particular rules and circumstances. And, really, it’s the policymakers that then take that as input and create their forecasts, which are what drive policy.

Question (Martin Crutsinger, Associated Press): That had no impact, though? It’s such a—that’s a major increase in government stimulus that you’re—that had to have had an impact on the discussions, I would think, though.
Answer: Well, the—you’re right. So fiscal stimulus is a, you know, a meaningful input into, you know, into the SEP and particularly in the changes over the course of last year and this year. And individual policymakers went through, with their staffs, a range of estimates, a range of literature, and did their own thinking and came up with their own estimates and submitted those as their Summary of Economic Projections—as their projections. Those are not the staff’s projections. Those are our projections.

Question (Heather Long, Washington Post): Heather Long, Washington Post. I—what will it take to get to four rate hikes this year? It’s clear from the dot plot that many members do think four would be appropriate, but clearly something was holding a number of the FOMC members back. Is it concerns about these potential trade tariffs that are going into effect? Is it just that people want to wait and see a little longer before they raise? Can you give us some more insight into why people didn’t go to four this time—the median—even though the economic projections look very healthy?
Answer: I would go back to the thought that, you know, we made one decision at this meeting, and that decision was to raise the federal funds rate by 25 basis points. The projections are really just individual projections that are submitted and then compiled. And, you know, you’re mentioning the median as being, you know, three and four being close, but, you know, I think, like any set of forecasts, those forecasts will change over time, and they’ll change depending on the way the outlook for the economy changes. So that’s really all I can say. It could change up. It could change down. I wouldn’t want to—for now, these are the best forecasts that people could make, and, you know, it could be that if the economy’s a little bit stronger or a little bit weaker, then the path could be a little less gradual or a little more gradual.

Question (Heather Long, Washington Post): So it wasn’t one factor that was pulling at the heart of the discussion?
Answer: Not, no.

Question (Jim Tankersley, New York Times): Mr. Chairman, a quick follow on the trade question, and then a productivity question. On trade, what would have to happen in policy—and, in particular, in potential retaliation from countries around the world—for trade policy to become a concern for the Committee’s outlook? And then, the second question is, you mentioned productivity growth earlier. What’s your current assessment of the path of productivity growth, and has anything in policy—any policy change in recent months changed that assessment?
Answer: You know, for trade, what I mentioned is that our FOMC participants reported in that they had heard, you know, concerns, which were relatively new, about—about future trade actions, really. And they’re seeing it as a risk-to-the-outlook kind of thing. So—and the kind of things people are talking about would be, you know, more widespread retaliation and more widespread actions back-and-forth kind of thing. I can’t be any more specific than that. In terms of productivity—productivity, as I’m sure you know, has been very weak since the financial crisis. It’s averaged only about 0.5 percent a year for the last six years, I guess. So that’s well below, you know, longer-run averages, and it would certainly be a good thing to see it move up. It has moved up just a little bit but not, kind of, decisively. And, you know, you asked me about fiscal policy and the connection to productivity. I think in the tax bill there’s—there are incentives for—there—a tax cut bill that allows expensing of investments should encourage additional investment that should encourage productivity. In theory, an individual tax bill that lowers tax rates should encourage more labor force participation. So I do think it’s very important that we have a focus on productivity in the country. It’s not something that we can really do at the Fed, but, you know, we’re certainly hopeful that there will be supply-side effects like that from the tax bill. I think estimates are really all over the place in terms of the amount and the timing of those.

Question (Jonathan Spicer, Reuters): Chairman Powell, Jonathan Spicer with Reuters. I take your caveats on the dot plot, as it were, but I’ll ask another question. In 2020, it shows that policymakers expect the policy rate to get up almost to 3½ percent, which is quite a ways—or, definitively, anyways—above the neutral rate. Does that increase the risk of a Fed-induced recession and decrease the risk of a soft landing? Which is asking, in a way, about the fiscal policy. And, as a follow-up, is that fiscal stimulus starting to lead to questions within the Fed around this narrative of secular stagnation and the economy entering a new sort of “low rates” environment? Thanks.
Answer: You know, I would say that—remember that forecasts three years out—so, you’re right, in 2020 there’s a—I think it’s 3.4 percent is the median of the SEP dots for 2020, which is 40 basis points above the estimates of the neutral rate, which I would characterize as, you know, modestly restrictive, modestly tightening policy, but that’s three years in the future. It’s highly uncertain. You know, we don’t have the ability to see that far into the future, so I really wouldn’t put a lot in that. It could make sense. You could imagine narratives in which that would make sense, but I honestly I wouldn’t put too much on that. Sorry, your second question was?

Question (Jonathan Spicer, Reuters): The second question was whether the secular stagnation narrative—whether fiscal policy is being questioned by the Fed around that?
Answer: You know, we’ve been through many years of growth around 2 percent, and I’ve given a number of public remarks where I’ve called on, you know, the country to focus more on potential growth and productivity and labor force participation, which drive potential growth. So, you know, I think it’s really important that we do something—do what we can as a country to increase our potential growth rate. I would say in the bill that passed Congress, the Tax Cuts and Jobs Act, there were elements that should encourage productivity, as I mentioned—sorry, encourage investment, which should help productivity, encourage labor force participation. We don’t know how big those effects are going to be. We don’t know what the timing would be. I think, as you look around the table at the FOMC, there’s a wide range of views on the amount and the timing of those. I think all of us would agree that we hope that they will be large.

Question (Michael Derby, Dow Jones Newswires): Hi. Mike Derby from Dow Jones Newswires. I have a question about the future of the mechanics of monetary policy. I wanted to know whether you favor sticking with the system that you have now of keeping interest on excess reserves and reverse repo—the reverse repo rate to control interest rates—or do you want to shift back to the old way of doing things at some point of targeting the fed funds market? And do you have any concern that if you do stick with the current system that, as rates rise, that you might see issues where the Fed is under—is being criticized for paying out ever larger shares of money to banks to, you know, to control interest rates that some might perceive as a subsidy to the banks that are getting this money?
Answer: Sure. Our current framework for implementing monetary policy is working very well. We have excellent control over rates, and it’s working. And it’s— you described it accurately. We haven’t made a decision to keep that as our longer-run framework. We haven’t really addressed that question. We’ve had meetings where we’ve talked about it, and we’ve agreed that it’s working well. But it’s—and it’s not something I see us as needing to urgently address. I think we’re continuing to learn about this framework. For example, one—in the long-run, the size of the balance sheet is going to depend on the public’s demand for our liabilities, including currency and reserves. So we don’t know what the demand is for reserves in a world where you have—you know, you have regulations that require banks to hold lots of high-quality liquid assets, and reserves are one of those. So it’s not something we’re looking at resolving in the near term. You mentioned the question of interest on excess reserves, and I think it’s a little bit of a misnomer to think that there’s a subsidy there. We pay interest on excess reserves. We can’t pay interest on excess reserves that are—is above the general level of short-term interest rates. So we’re paying rates that banks can get from other interest rates from other—any other investment in the short-term money markets. In addition, remember that those liabilities—those are our liabilities. The assets that we have on the other side are Treasury securities and mortgage-backed securities, which yield much higher than interest on reserves. So, in fact, it’s not a subsidy, and it’s not a cost to the taxpayer.

Question (Victoria Guida, Politico): Hi. Victoria Guida with Politico. More on the regulatory side, you know, the Fed might soon be getting more power to decide exactly which regulations—which stricter regulations to apply to banks with between $100 and $250 billion in assets. And so I had a couple of questions about that. So, for CCAR, those stress tests, since that’s based around, you know, having a punitive penalty of potentially being able to restrict dividend payouts or stock buybacks, is there any kind of logistical challenge that could be posed if you don’t have CCAR every year for certain banks? Is it possible to have CCAR not on an annual basis? And then, my other question is, you know, you’ve talked a lot about how size isn’t the only thing that causes banks to pose systemic risk, and I was wondering, what other factors do you think would cause a bank to potentially pose a systemic risk?
Answer: Okay. So, this is a matter that Congress has under consideration. It’s not something—so Congress is looking at raising the threshold for applying enhanced financial standards to—from $50 billion to $250 billion, while leaving us with the ability to reach below $250 billion and apply those standards where we think it’s appropriate. And, you know, we haven’t been shy about doing that, because, of course, one of the eight SIFIs is below 250 already. So we are fully prepared to do that. But this is a decision that’s in the hands of Congress. It’s not something that’s been—been taken. The version of the bill, I think, that passed the Senate did have—did give us the ability to do supervisory stress tests periodically, as opposed to annually, is the language. We haven’t made any decision about that at all. We would want to think very carefully about that, and, you know, we would—whatever we do decide to do, we’d put that out for comment. Is it, you know, logistically possible? I would think it would be, but it’s certainly not something that we’ve decided to do. And the second question you had was?

Question (Victoria Guida, Politico): About what causes banks to pose systemic risk beyond size.
Answer: Sure. Well, it’s—I guess the next thing on the list would be activities. So, you know, we—regular way commercial banks that do deposit taking and lending and don’t speculate in markets, you know, that’s one business model. Another business model might be, you know, if you think of a hedge fund, right? That’s what they do. They’re speculating on markets, and—you know, so very different business models and different levels of risk and that sort of thing. So, that’s—that would be the next thing on the list. I mean, there would be a range of things, you know—how well capitalized is the institution, but mainly those things.

Question (Michael McKee, Bloomberg): Michael McKee from Bloomberg Television and Radio. I’d like to go back to the idea of the additional growth that you’re getting from the fiscal package and ask you how much you think comes from the supply side and how much from demand? You use words like “might” and “should” about what results should come from this process, but, around the table, did any of the presidents or Governors report that businesses are actually getting ready to spend? Is this something that’s going to happen? Do we know that there’s going to be a supply-side effect, or are you just guessing at this point?
Answer: Remember that there are 15 FOMC participants, and we—each of us has his or her own forecast. So there’s a real diversity of views on this, particularly on these fiscal issues. If I could try to summarize, it would be that, I think, broadly speaking, participants believe there will be meaningful increases in demand from the new fiscal policies for at least the next, let’s say, three years. I think there’s a general view as well that supply-side issues—that there could be supply-side effects as well, and you would see that again through higher investment, driven by lower corporate tax rates and the expensing of some investment, which would drive—tend to drive productivity over time. If you make investment more attractive, companies should do more of it. It’s uncertain, though. I mean, I spent many years of my life working with companies and discussing—and, you know, the cost of capital is one of many factors that they’ll consider. It isn’t the only factor or the principle factor, but it should result in more investment, and investment should drive productivity. At the same time, the—you know, I mentioned labor supply. You should see some labor supply effects over time from lower individual effective tax rates. The whole thing is very uncertain, and particularly the supply-side effects should and would be expected to take longer to appear and would be less certain in amount. So that’s really as good as you can go. And, you know, we’ve all looked at the literature carefully. We’ve all thought about it. We’ve discussed it with our in-house experts and come up with our own views, and they’re disparate, but that’s— I’d say that’s about where the—where the views are.

Question (Donna Borak, CNN): Hi, Chair Powell. Donna Borak with CNN. Just to go back to trade policy, if you don’t mind. You said that participants today generally are feeling that the trade policy shouldn’t necessarily affect the current economic outlook, but I am wondering if there was any discussion—if there are fears about inflationary effects, should there be trade barriers imposed? And, secondly, you know, we might be on the verge of a tit-for-tat trade war with China. Wondering what your thoughts are of how that might dampen the economic—the global economic outlook going forward should that occur.
Answer: You know, at this stage, what our FOMC participants discussed—it wasn’t—it was—it was just that this is a new risk that had been probably a low- profile risk, which has become, you know, a more prominent risk to the outlook. That’s really what people were saying. They didn’t get into talking about particular—you know, whether it’s inflation or growth or whatever it would be. So that’s not something that did come up. You know—your second question, sorry, was China?

Question (Donna Borak, CNN): Yes. I mean, in the event that the United States and China—in the event that the U.S. and China end up in a tit-for-tat trade war, or any other retaliatory actions that are imposed elsewhere against the United States, what that means for the global economic outlook, and whether that was something that was discussed and are you worried about.
Answer: That didn’t—it’s not something that came up in particular. And, let me say, you know, we don’t do trade policy here at the Fed, and, you know, I would be reluctant to comment on any particular situation with any particular country.

Question (Virginie Montet, Agence France-Presse): Virginie Montet with Agence France-Presse. If the economy behaves as the Fed is predicting, by the time of the midterm elections, the rates will be—keep on rising, and the prime rate will be above—well above 5 percent, a level not reached in 10 years for what is a base of consumer credit. And we know that, historically, raising rates—especially in campaign times—has never been very popular in the White House. Does this prospect of a possible pressure and dichotomy of concerns keep you awake at night?
Answer: No. That doesn’t keep me awake at night. We don’t consider the election cycle. You know, we—we’re looking very carefully at our assigned responsibilities of maximum employment, stable prices, and that’s really our focus. You can count on us to stay focused on the jobs that Congress has assigned us and count on us to use the tools we have to achieve them. You’re right, that’s the highest rate. By the way, I’m hearing this, the 10-year thing a few times these days, and it’s true that rates are higher than they’ve been in 10 years. On the other hand, the economy’s healthier than it’s been since—since before the financial crisis. So, it’s a healthier economy than it’s been in 10 years. The financial crisis, of course, was just really getting going 10 years ago.

Question (Myles Udland, Yahoo Finance): Thanks. Myles Udland, Yahoo Finance. Chair Powell, I’m curious if the Fed would be willing to tolerate an inverted yield curve. We continue to see the spread between the 2-year and the 10-year tighten, even with longer-term yields coming up since the beginning of the year. This is a dynamic that has typically preceded recessions, and we’re likely to see shorter-term rates come up as the Fed continues to increase rates. So, I’m just curious if you guys have discussed that, if you’d be willing to push back against that, or if that’s a dynamic you’d be comfortable with?
Answer: You know, it’s an interesting question, and there are a range of views there. I think it’s true that yield curves have tended to predict recessions if you look back over many cycles, but a lot of that was just situations in which inflation was allowed to get out of control, and the Fed had to tighten, and that put the economy into a recession. That’s really not the situation we’re in now, so I don’t know that that’s—I don’t know that—I don’t think that recession probabilities are particularly high at the moment, any higher than they normally are. But, having said that, I think it’s—there are good questions about what a flat yield curve or inverted yield curve does to intermediation. It’s hard to find in the research data, but nonetheless, I think those are issues that we’ll be watching carefully. Thank you very much.