Federal Reserve press conference, 2019-03-20 — Chair Jerome Powell

Question (Steve Liesman, CNBC): Steve Liesman, CNBC. Mr. Chairman, can you talk about how global developments are affecting the U.S.? What’s the cause of the weakness over there? How much is it responsible for the downgrade in GDP over here? And what impact are tariffs, both in the United States and retaliatory tariffs, having on both the U.S. and the global economies? Thank you.
Answer: So the global economy was a tailwind for the United States in 2017. That was the year of synchronized global growth. And we began 2018 expecting and hoping for more of the same. What happened instead is that the global economy started to gradually slow, and now we see a situation where the European economy has slowed substantially—and so has the Chinese economy, although the European economy more. And just as strong global growth was a tailwind, weaker global growth can be a headwind to our economy. How big is that effect? It’s hard to be precise about it, but, clearly, we will feel that. It is an integrated global economy, and global financial markets are integrated as well. In terms of what’s causing it, it seems to be a range of different things. In China, you have, you know, factors that are very specific to China. The main point, though, is that, I would say, the outlook—let’s look at the outlook. Chinese authorities have taken many steps since the middle of last year to support economic activity, and I think the base case is that, ultimately, Chinese activity will stabilize at an attractive level. And in Europe, you know, we see some weakening, but, again, we don’t see—we don’t see recession, and we do see positive growth still. You ask about tariffs. I would say, tariffs may be a factor in China. I don’t think they’re the main factor. I think the main factors are the delevering campaign that the government undertook a couple of years ago and also just the longer-term slowing to a more sustainable pace of growth that economies find as they mature. In terms of our own economy, the level of tariffs is relatively small in the size of our economy—relative to the size of our economy. We have, since the beginning of the year—and before, really—been hearing from our extensive network of business contacts a lot of concerns about tariffs, concerns about material costs on imported products, and the loss of markets and things like that, depending on which industry, so there’s a fair amount of uncertainty. It’s hard to say how much of an effect that’s having on our economy. It’s very hard to tease that apart. But I will say, it’s been a prominent concern among our business contacts for some time now.

Question (James Puzzanghera, Los Angeles Times): Do you believe it’s appropriate—do you believe it’s appropriate for the CEO to be getting a pay raise in light of those conditions, in terms of corporate governance?
Answer: You know, our main supervisory focus is on the company fixing its risk-management approach and fundamentally rebuilding that approach. We don’t approve individual pay packages. We do supervise boards of directors for, you know, for having a set of compensation practices that don’t reward short-term risk-taking and that sort of thing. And we will supervise based on that.

Question (Michael McKee, Bloomberg): Michael McKee with Bloomberg Radio and Television. I wonder if you could discuss the balance of risks. I know you said that the outlook among the Committee members is a positive one, but since the end of the meeting, the 3-month–10-year Treasury spread has fallen to 7 basis points, and now, according to fed funds futures trading, there’s a 50 percent chance of a rate cut by next January. How far off are the markets? What do you think the risks actually are?
Answer: Well, first, the data are not currently sending a signal that we need to move in one direction or another, in my view. I would say it this way: We see a positive outlook for this year, a favorable outlook for this year, as I mentioned. So, in our SEP projections, Committee members, participants, generally see growth of around 2 percent. They see unemployment remaining below 4 percent. They see inflation remaining close to target. And they see growth, as I said, around 2 percent. So, you know, that’s a positive outlook. It’s a favorable outlook. We’re also very mindful—and we have been, of course, all along—of what the risks are. And you see—you mentioned some of them. You know, you see slowing global growth. You still have—there’s no resolution of Brexit. There’s no resolution, really, of the trade talks. These are ongoing risks. We’re also carefully monitoring what’s happening with U.S. growth. We called that out in our statement. You know, the limited data that we have do show a slowdown. On the other hand, as I mentioned, we see the underlying economic fundamentals for growth this year as still very positive. So that’s really how we’re thinking about it.

Question (Jim Tankersley, New York Times): Hi, Mr. Chairman. Jim Tankersley, New York Times. I’m curious, you’re now a full percentage point—actually, more than a percentage point—below the White House in your projections for growth this year. By my calculations, that’s the largest spread we’ve seen since the end of the recession between the White House and the Fed. Why, for one, do you see—do you think you see the economy so differently than they do, and do you worry at all about implications for policy from that?
Answer: I haven’t—I haven’t seen their projection. I wouldn’t comment on their projection. I would take it this way. You can think of growth as being composed of two things. And one is really growth in the workforce—more hours worked. And the other is productivity—it’s output per hour. You can really think of growth as those two things. And I’ve been calling—often mentioning these days that it would be great if we had national-level policies to support higher labor force participation. The United States is now one of the lowest countries among the advanced economies, in terms of our labor force participation by prime-age workers. And that’s a place where we can grow faster. If we can bring more people into the labor force and give them a chance to contribute to and benefit from our overall prosperity, that will be a great thing for the country. So I would like to see that. Productivity is much harder. It’s very difficult to project productivity over long stretches of time. It’s a function of evolving technology. So, I guess I would say, what is the potential growth rate? It’s quite hard to know with any precision, and I just would like to see us, you know, undertake an effort to make it be as high as it can sustainably be.

Question (Jim Tankersley, New York Times): A quick follow-up on that. Do you see the tax cuts—the 2017 tax cuts as having provided a large boost to labor force participation as the White House does?
Answer: I would say so. I think it’s clear that the tax and spending policies that were adopted early last year supported demand in a significant way last year. And it’s also the case, I think, that they should have some supply-side effects. I think it’s hard to know, it’s hard to identify those with any precision, and we hope they’re—we hope they’re very large. You know, the idea would be that lowering corporate taxes would spur more corporate investment, which would spur more productivity, and lowering individual taxes would spur greater labor force participation. I wouldn’t want to be handing—you know, assigning credit or blame for that, but I do think that the performance of labor force participation over the last, really, three or four years has been an upside surprise that most people didn’t see coming, and it’s extremely welcome.

Question (Nick Timiraos, Wall Street Journal): Nick Timiraos of the Wall Street Journal. Chair Powell, in 1998 the Fed eased policy in a way that some say may have avoided a recession, others say may have helped fuel the NASDAQ tech stock bubble. And financial conditions have eased considerably this year since the policy pivot that you made clear in January. The S&P, for example, is just 3 percent below last summer’s peak. And so, I wonder, does this episode from 20 years ago bear at all on your thinking today about the risks posed by rising asset values in an environment of a shallower policy path?
Answer: We’re in a very different world today and post-crisis, because we now very carefully monitor financial conditions and financial stability concerns on an ongoing basis, and we publish a report twice a year, and we have quarterly Board meetings and briefings where we look deeply into these things. So this is something we have very much on our radar screen. And I would say, overall, we don’t see financial stability vulnerabilities as high. There are some aspects of the financial markets that we’re carefully monitoring, and those are in the nature of things that might be amplifiers to a downturn—as opposed to a financial stability concern, which might lead to a financial crisis and that kind of thing, which we don’t see. So we do monitor that. And I would also say, you know, that the whole question of monetary policy and financial stability is an unsettled and difficult one in our world. We do think that the principal tools for, you know, for managing financial stability are regulation, supervision, macroprudential tools, and those sorts of things as opposed to changing the interest rate. But we’re certainly very mindful of financial conditions and those risks.

Question (Nick Timiraos, Wall Street Journal): If I could ask a follow-up—if it’s the case that we’re in a lower neutral interest rate world where you could have more asset price appreciation, do you think the Fed needs more macroprudential tools so that it doesn’t have to lean on monetary policy to do so much?
Answer: It’s a very difficult question with a long answer. We—in our system, we mainly rely on “through the cycle” tools like high capital and stress tests. Our financial stability system is built on those tools: high capital, high liquidity, resolution planning, stress testing. So those are always on. We also have some tools, like the countercyclical capital buffer, which we can deploy at times when vulnerabilities are meaningfully above normal. But we do rely on those tools. And I would say, our banks are well capitalized. They’re far better capitalized and better aware of their risks and more liquid than they were before the financial crisis. So they’ll be more resilient in, you know, in difficult states of the economy.

Question (Donna Borak, CNN): Donna Borak with CNN. Included in the President’s fiscal 2020 budget is a new estimate that the nation’s debt will balloon to more than $31 trillion over the next decade, by 2029. You’ve previously said that the country is on an unsustainable fiscal path. How alarming is that number to you? And, while the United States might not be quite there yet, when do you begin to worry about a possible credit crisis?
Answer: I do think that deficits matter, and I do think—I think it’s not really controversial to say that our debt can’t grow faster than our economy indefinitely and that’s what it’s doing now. So this is something we will have to deal with, and I think we can’t really lose sight of that, and I’d like to see a greater focus on that over time. It’s not in the nature of a near- term debt crisis or anything like that, and I wouldn’t want to try to predict when that would happen, but it is something that it’s important that the public discussion really come back to, if I can say that. And we will have to deal with it eventually.

Question (James Politi, Financial Times): James Politi of the Financial Times. There’s huge uncertainty at the moment over the fate of the Brexit negotiations. How much of a factor has this been for the Fed in turning towards a kind of patient approach to monetary policy, and what’s your base case on that? And on the size of the balance sheet, what’s your—do you have a numerical estimate for where it will be at the end of September once the runoff is complete?
Answer: So, of course, we’re watching Brexit carefully and hoping that it can be resolved in an orderly way. From our standpoint, the part of it that we can control is that we’ve been involved with supervising our financial institutions that are active either in the United Kingdom or the European Union or both to make sure that they’re ready for the full range of possible outcomes to the—to Brexit. So—and in doing so, we’ve also had—we’ve also worked alongside regulators from the United Kingdom and the EU. So we do, again, hope that that can be resolved well, but we know that our banks are well capitalized and resilient to different kinds of events. In terms of the size of the balance sheet, the balance sheet will be of a size of approximately 17 percent of GDP around the end of this year, down from 25 percent of GDP at the end of 2014—so, significantly smaller relative to GDP than it was. I’m guessing you’re looking for a dollar number, though, probably, and that would be—so, for the size of the balance sheet, it looks like it’ll be a bit above $3.5 trillion then.

Question (Greg Robb, MarketWatch): Greg Robb from MarketWatch. Chairman Powell, could you talk through your outlook for inflation this year? Aren’t—you’re not concerned about it? And rising—why aren’t rising wages feeding into inflation?
Answer: Let me take wages first, if I can. So wages have moved up in the last couple of years and are now running at healthier, higher levels, and that’s a good thing. In fact, a lot of the wage gains have been going to lower-paid workers, as can happen late in the cycle, which is also a good thing. So—but that’s not price inflation, that’s wage inflation. Our mandate, sorry, is price inflation. So what I see is inflation that’s close to 2 percent but that sort of keeps bumping up against 2 percent and then maybe moving back down a little bit. And I don’t feel that we have kind of convincingly achieved our 2 percent mandate in a symmetrical way. Now, what do we mean by “symmetrical”? What we really mean is that we would look at—we know that inflation will move around on both sides of the target, and what we say is that we would be equally concerned with inflation persistently above as persistently below the target. So that’s really our framework. And I don’t think we’ve quite achieved that yet, because we’re really 10 years deep in this—almost 10 years—in this expansion, and inflation is still kind of, I’d say, not, you know, clearly meeting our target. So that’s one of the reasons why we’re being patient. I think, as I’ve said before, I think inflation that is a little bit below our target— particularly headline inflation this year will be, you know, meaningfully below our target for most of the year because of lower oil prices, but we project that core will be too—that gives us the ability to be patient and not move until we see that our target goals are being achieved.

Question (Greg Robb, MarketWatch): I just wanted to press a little bit about, what is the story the Committee— you know, when you get in the discussion today and yesterday about inflation, what kind of is the story that emerges?
Answer: So there are a bunch of different stories. There’s no real easy answer. One of them is just that the natural rate of unemployment is lower than people think. That’s one way to think about it, that there’s still more slack in the economy. Another is that expectations play a very—inflation expectations play a very key role in our framework and other frameworks, and, you know, there is the possibility that some people discuss of expectations being anchored but below 2 percent. And so, either way, inflation itself has kind of bounced around a little below 2 percent. That’s the record.

Question (Edward Lawrence, Fox Business): Edward Lawrence from Fox Business Network. So I counted five downgrades in the first paragraph of the FOMC statement. What conditions do you need to see in order for a rate cut or a rate hike on the other side of that then?
Answer: Well, we—I think we were—we wanted to be careful to go ahead and acknowledge the things. I think it’s relatively little hard data so far this year, but we were careful to point out lower retail sales—the weak November meeting—BFI, all those things, and I think that was the right thing to do.2 Notwithstanding that, we do have a positive outlook for the year for the reasons I mentioned—you know, solid underlying economic fundamentals, et cetera. So, and in terms of what it would take, I’d say, again, today we don’t see any—we don’t see data coming in that suggests that we should move in either direction. They suggest that we should remain patient and let the situation clarify itself over time. When the time comes, we’ll act appropriately.

Question (Matthew Boesler, Bloomberg): Hi. Matthew Boesler at Bloomberg. Fed Vice Chairman Rich Clarida has talked about how the decline in labor’s share of income and the corresponding high profit margins might mean that lower unemployment and higher wage growth is not flowing through to price inflation the way it used to. But, so far throughout this tightening cycle, the Fed 2 Chair Powell intended to point to the weak reading on retail sales for December 2018. has not allowed wage growth to rise above longer-term interest rates until just very recently. So I’m wondering if, going forward, given these insights about the labor share and high profit margins and the linkage between wages and prices, would you be in favor of allowing wage growth to continue accelerating without matching that with higher interest rates?
Answer: Well, let me say that we’ve had, you know, a significant move up in wages and compensation over the last few years, and I—which does not trouble me from the standpoint of inflation. We’ve had—also had—in other cycles, we’ve had situations where, you know, unit labor costs were moving up above inflation, and that didn’t lead to price inflation. It does—you know, in theory, it can squeeze corporate margins, and, you know, that can’t go on indefinitely. But, nonetheless, I don’t see the current wage picture as concerning from an inflation standpoint.

Question (Nancy Marshall-Genzer, Marketplace): Nancy Marshall-Genzer with Marketplace. Just a quick follow-up on Brexit. You mentioned that you’re making sure that U.S. financial institutions are ready for whatever outcome. I’m wondering, can you be a little more specific about that? And also, how are you preparing for any pressures that a hard Brexit would put on the U.S. dollar?
Answer: Well, as I mentioned, you know, with the stress tests that the largest financial institutions—and those are the ones that tend to be active internationally—that they undergo every year, we put them through very large financial shocks with large losses and big changes in markets every year. And we vary that every year. So that’s a pretty good—you know, having done that for a number of years now, that’s—and having them be required to have adequate capital and liquidity even after all that happens. So that’s a good thing to have done, knowing that you’re going into something that’s quite unknown, which may prove stressful, it may not prove stressful, depending on what the outcome is. So I think all that has probably prepared our institutions well. That said, nothing like this has happened in recent years, and so it’s really hard to be confident. So we’re very watchful about what’s going on.

Question (Nancy Marshall-Genzer, Marketplace): And as far as the dollar goes?
Answer: So we don’t—you know, we—the dollar is really the business of the Treasury Department. It’s certainly a financial condition unto itself that plays into our models, but we don’t, you know, seek or model or attempt to affect the dollar directly with our policies.

Question (John Heltman, American Banker): Hi. John Heltman—John Heltman with American Banker. I have a question about the Fed’s proposal from October of last year regarding enhanced prudential standards for banks above $250 billion. Some analysts have suggested that that proposal could encourage consolidation mergers and acquisition among banks, particularly at the upper end of the range. I’m curious if the Fed anticipated that outcome and whether you have any reservations or whether you—the Fed cares about bank consolidation more generally.
Answer: We’re not motivated by a particular view of industry structure that we’re trying to achieve through our regulation. I think we want to have banks of all different sizes and with different business models out there carrying out their functions in the economy. So that’s how we think about that. I would also say, when banks merge and move into a larger asset category, they get stronger regulation, not weaker regulation. So if you think about it, you know, if you’re a medium-sized bank and you merge with another medium-sized bank, you wind up being more than a medium-sized bank, you know. But the sense of our tapering is that—“tailoring,” sorry—our tailoring policy is that the highest expectations fall upon the largest, most systemically important, most complex institutions, and then at every step along the way, the expectations become more tailored to the risks that that institution actually presents to the economy. So—

Question (Brian Cheung, Yahoo Finance): Hi, Chair Powell. Brian Cheung with Yahoo Finance. Thanks for taking my question. So as the Fed remains on pause, does the central bank find the onus on fiscal policy to extend its economic recovery and fend off a slowdown—as in, is the Fed positioning itself to take on a reactionary role to whatever fiscal policy is doing? I’m asking because we’re seeing the waning effect of tax reform and no material news on infrastructure, so just wondering kind of how you feel the monetary policy–fiscal policy balance is in swing right now.
Answer: So we take—we take fiscal policy as, you know, as exogenous to what we do. You know, in other words, whatever happens with fiscal policy, we take that. We don’t evaluate it, we don’t criticize it, and we don’t overreact to it either. So I think it’s just a fact. It’s just an external fact about the economy for us. I mean, our policy is—the reason we’re on hold is that we think our policy rate is in a good place, and we think the economy is in a good place, and we’re watching carefully as we see these events evolve around the world and at home, and we think that’s what we need to be doing.

Question (Steven Beckner, NPR): Steve Beckner, freelance journalist reporting for NPR, Mr. Chairman. The Fed has been allowing the average maturity of securities in its bond portfolio to lengthen. Is this aimed at—consciously aimed at flattening the yield curve, and is that going to be part of the Fed’s longer-run balance sheet strategy? And if flattening the yield curve is a conscious long-term strategy, are you concerned about the side effect of the heightening concerns about a flatter or inverted yield curve being a harbinger of recession?
Answer: The basic answer to your question is “no.” We are—the decision about the maturity composition of the Fed’s balance sheet in the longer run lies ahead of us. We have not made that decision, and we’re—we really haven’t begun to have a serious series of discussions over a series of meetings to grapple with that. That, I think, will be something we turn to reasonably soon, but I think it will take some time. It’s a consequential decision and one that needs some thought. We’ve had a lot of balance sheet discussions, as I mentioned, over the last four meetings, but this is the next big one that—big decision that we’ll face. And, you know, I think we’re not going to be in a rush to resolve it, but we’ll turn to it soon.

Question (Jean Yung, MNI): Hi, Jean Yung with Market News. I wanted to ask, at what point do you expect to begin to allow the balance sheet to grow slowly again? What are—how will you make that decision?
Answer: So, as I—as I mentioned, the balance sheet runoff will stop at about—at September 30. And if it is our view at that time that we’re still a ways away from—a ways above a balance sheet that is what we need to efficiently and effectively conduct monetary policy, at that time we will hold the balance sheet constant. And then what’ll happen is, organically, very gradually, currency and other nonreserved liabilities will grow, and reserves will shrink. And the question you’re asking is, how long will that go on? The truth is, we don’t know, and we don’t really know that we’ll move past September 30th. The level of reserve demand is something that we’ve put a lot of effort and time into creating estimates, based on market intelligence and surveys and that kind of thing. The truth is, we don’t know. It may evolve over time. So we’ll just have to see. I wouldn’t want to put a time out there for that, but—so I’ll just leave it there.

Question (Courtenay Brown, Axios): Hi, Mr. Chairman. Courtenay Brown from Axios. Are you concerned at all what the market impact will be should the Fed resume policy tightening somewhere down the line? As I’m sure you know, the market listens to you very, very closely.
Answer: You know, I’m just going to say that I think we’re in a good place right now, which is, we’re being patient, we’re watching, we don’t see any data pushing us to move rates in either direction, and we’re going to watch carefully and patiently as we allow events to evolve. And when they do clarify, we will act appropriately.