Federal Reserve press conference, 2022-11-02 — Chair Jerome Powell

Question (Colby Smith, Financial Times): Thank you. Colby Smith with the Financial Times. On the need to slow the pace of rate increases at some point: Is a downshift contingent on a string of better inflation data specifically between now and, let’s say, the December meeting? Or is that something that the Fed could potentially proceed with, independent of that data, given the lagged effects that you mentioned?
Answer: So a couple things on that. We do need to see inflation coming down decisively, and good evidence of that would be a series of down monthly readings. Of course, that’s what we’d all love to see, but that’s—I’ve never thought of that as the appropriate test for slowing the pace of increases or for identifying the appropriately restrictive level that we’re aiming for. We need to bring our policy stance down to a level that’s sufficiently restrictive to bring inflation down to our 2 percent objective over the medium term. How will we know that we’ve reached that level? Well, we’ll take into account the full range of analysis and data that bear on that question, guided by our assessment of how much financial conditions have tightened, the effects that that tightening is actually having on the real economy and on inflation, taking into consideration lags, as I mentioned. We will be looking at real rates, for example, all across the yield curve and all other financial conditions as we make that assessment.

Question (Howard Schneider, Reuters): Hi, Howard Schneider with Reuters. I’m sure there’s going to be tons of confusion out there about whether this means you’re going to slow in December or not. Would you say that the bias right now is not for another 75 basis point increase?
Answer: So, what I want to do is put that question of pace in the context of our broader tightening program, if I may, and talk about the statement language along the way. So I think you can think about our tightening program as really addressing three questions, the first of which was, and has been, how fast to go. The second is how high to raise our policy rate. And the third will be, eventually, how long to remain at a restrictive level. So on the first question—how fast to tighten policy—it’s been very important that we move expeditiously, and we have clearly done so. We’ve moved 3¾ percent since March, admittedly from a base of zero. It’s a historically fast pace, and that’s certainly appropriate given the persistence and strength in inflation and the low level from which we started. So now we come to the second question, which is how high to raise our policy rate. And we’re saying that we’d raise that rate to a level that’s sufficiently restrictive to bring inflation to our 2 percent target over time, and we put that into our postmeeting statement because that really does become the important question, we think now, is how far to go. And I’ll talk more about that. We think there’s some ground to cover before we meet that test, and that’s why we say that ongoing rate increases will be appropriate. And, as I mentioned, incoming data between the meetings, both a strong labor market report but particularly the CPI report, do suggest to me that we may ultimately move to higher levels than we thought at the time of the September meeting. That level is very uncertain, though, and I would say we’re going to find it over time. Of course, with the lags between policy and economic activity, there’s a lot of uncertainty, so we note that in determining the pace of future increases, we’ll take into account the cumulative tightening of monetary policy as well as the lags with which monetary policy affects economic activity and inflation. So I would say, as we come closer to that level, move more into restrictive territory, the question of speed becomes less important than the second and third questions. And that’s why I’ve said at the last two press conferences that at some point, it will become appropriate to slow the pace of increases. So that time is coming, and it may come as soon as the next meeting or the one after that. No decision has been made. It is likely we’ll have a discussion about this at the next meeting, a discussion. To be clear, let me say again [that] the question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restricted, which really will be our principal focus.

Question (Rachel Siegel, Washington Post): Hi, Chair Powell. Thank you for taking our questions. Rachel Siegel from the Washington Post. The statement points to lag times. I’m wondering if you can walk us through how you judge those lag effects, what that timeline looks like over the coming months or even a year, and where you would expect it to show up in different parts of the economy.
Answer: So the way I would think about that is, it’s commonly, for a long time, thought that monetary policy works with “long and variable lags,” and that it works first on financial conditions and then on economic activity and then perhaps later than that even on inflation. So that’s been the thinking for a long time. There was an old literature that made those lags out to be fairly long. There’s newer literature that says that they’re shorter. The truth is, we don’t have a lot of data [consisting] of inflation of [rates] this high in what is, now, the modern economy. One big difference now is that it used to be that you would raise the federal funds rate, financial conditions would react, and then that would affect economic activity and inflation. Now financial conditions react well before in expectation of monetary policy [actions]. That’s the way it has moved for a quarter of a century—in the direction of financial conditions, then monetary policy—because the markets are thinking, what is the central bank going to do? And there are plenty of economists that also think that once financial conditions change, that the effects on the economy are actually faster than they would have been before. We don’t know that. I guess the thing that I would say is: It’s highly uncertain—highly uncertain. And so from a risk-management standpoint—but we do need, it would be irresponsible not to, to ignore them. But you want to consider them but not take them literally. So I think it’s a very difficult place to be, but I would tend to be—want to be in the middle looking carefully at what’s actually happening with the economy and trying to make good decisions from a risk-management standpoint, remembering, of course, that if we were to overtighten, we could then use our tools strongly to support the economy, whereas if we don’t get inflation under control because we don’t tighten enough, now we’re in a situation where inflation will become entrenched and the costs, the employment costs in particular, will be much higher potentially. So from a risk- management standpoint, we want to be sure that we don’t make the mistake of either failing to tighten enough or loosening policy too soon.

Question (Victoria Guida, Politico): Hi, Victoria Guida with Politico. I wanted to ask about the labor market. You mentioned early on, again, that job openings are very high compared to available workers, and I’m just curious to what extent you do and don’t draw signal from that. So, for example, if wage growth is slowing and if maybe the unemployment rate starts to tick up, will that make you sort of decrease your focus on job openings? What do you see—are wages what’s really important? How are you thinking about the labor market as it relates to inflation?
Answer: So we talk a lot about vacancies in the—vacancy-to-unemployed rate, but it’s just one, it’s just another data series. It’s been unusually important in this cycle because it’s been so out of line. But so has quits. So have wages. So we look at a very wide range of data on the unemployment—on the labor market. So I’d start with unemployment, which is typically the single statistic you would look to, is at a 50-year low, 3½ percent. We’re getting really nothing in labor supply now. We had, I think, very small increase this year, which we had really thought, we thought we would get that back. Most analysts thought we would get some labor supply coming in. You mentioned wages, so I guess I would characterize that as sort of a mixed picture. It’s true, with average hourly earnings, you see—so I would call it a flattening out at a level that’s well above the level that would be consistent over time with 2 percent inflation, assuming a reasonable productivity. With the ECI reading this week, again, a mixed picture. The headline number was a disappointment. Let’s just say it was high. It didn’t show a decline. There’s some rays of light inside that if you look at private-sector workers—that did come down, that compensation did come down. Overall, though, the broader picture is of an overheated labor market where demand substantially exceeds supply. Job creation still exceeds sort of the level that would hold the market where it is. So that’s the picture. Do we see—we keep looking for signs that sort of the beginning of a gradual softening is happening. And maybe that’s there, but it’s not obvious to me, because wages aren’t coming down—they’re just moving sideways at an elevated level, both ECI and average hourly earnings. We want to see—we would love to see vacancies coming down, quits coming down. They are coming down. Vacancies are below their all-time high but not by as much as we thought, because—and the data series is volatile, we never take any one reading, we always look at two or three. So it’s a mixed picture. I don’t see the case for real softening just yet. But we look at, I guess as I just showed you, we look at a very broad range of data on the labor market.

Question (Victoria Guida, Politico): So do you see wages as being a significant driver of inflation?
Answer: I think wages have an effect on inflation and inflation has an effect on wages. I think that’s always been the case. There’s always—going back and forth, the question is, is that really elevated right now? I don’t think so. I don’t think wages are the principal story of why prices are going up. I don’t think that. I also don’t think that we see a wage–price spiral, but, again, it’s not something you can—once you see it, you’re in trouble. So we don’t want to see it. We want wages to go up—we just want them to go up at a level that’s sustainable and consistent with 2 percent inflation. And we think we can—we do think that, given the data that we have, that this labor market can soften without having to soften as much as history would indicate through the unemployment channel. It can soften through job openings declining. We think there’s room for that. But we won’t know that—that’ll be, that’ll be discovered empirically.

Question (Kayla Tausche, CNBC): Thank you so much. Kayla Tausche from CNBC. Earlier last month, the United Nations warned that there could be a global recession if central banks didn’t change course. The new U.K. prime minister warned of a profound economic crisis there. And I’m wondering how the Fed is weighing international developments in light of a very strong economy here in the U.S. that would seem to be bucking those trends.
Answer: So, of course, we, we keep close tabs on economic developments and also geopolitical developments that are relevant to the economy abroad. We’re in very frequent contact with our foreign counterparts both through the IMF meetings and the regular meetings with central banks that we have, and I have one this weekend with many, many central bankers. So we’re in touch with all of that. So I guess what—it’s clearly a time, a difficult time in the global economy. We’re seeing very high inflation in Europe, significantly because of high energy prices related to the war in Ukraine. And we’re seeing China’s having issues with the zero-COVID policy and much slower growth than we’re used to seeing. So we’re seeing—we see those difficulties. The strong dollar is a challenge for some countries. But we haven’t—we take all of that into account in our models. We think about the spillovers and that sort of thing. Here in the United States, we have a strong economy, and we have an economy where inflation is running at 5 percent. Core PCE inflation—which is a really good indicator of what’s going on for us, the way we see it—is running at 5.1 percent on a 12-month basis and sort of similar to that on a 3-, 6-, and 9-month basis. So we know that we need to use our tools to get inflation under control. The world’s not going to be better off if we fail to do that. That’s a task we need to do. Price stability in the United States is a good thing for the global economy over a long period of time. Price stability is the kind of thing that pays dividends for our economy—for decades, hopefully—even though it may be difficult to get it back. Getting it back is something that gives—that provides value to the people we serve for the long run.

Question (Kayla Tausche, CNBC): If I could just follow up up on that—thank you. The Fed has acknowledged in the past that the tools that you have don’t affect things like energy and food prices that stem from some of those conflicts overseas, and they’re some of the biggest pain points for consumers. So as you pursue the current path that you’ve outlined, is there a risk that some of those prices simply don’t come down?
Answer: So we don’t directly affect, for the most part, food and energy prices, but the demand channel does affect them just at the margin. The thing about the United States is that we also have strong—in many other jurisdictions, the principal problem really is energy. In the United States, we also have a demand issue. We’ve got an imbalance between demand and supply, which you see in many parts of the economy. So our tools are well suited to work on that problem, and that’s what we’re doing. You’re right, though. We don’t—the price of oil is set globally, and it’s not something we can affect. I think by the actions that we take, though, we help keep longer-term inflation expectations anchored and keep the public believing in 2 percent inflation by the things that we do, even in times when energy is part of the story of why inflation is high.

Question (Jonnelle Marte, Bloomberg): Hi, Chair Powell. Jonnelle Marte with Bloomberg. So the Fed is facing two more ethics-related incidents with the revision of the financial statements from President Bostic and President Bullard speaking at a closed event. So some senators, like Elizabeth Warren, are saying that this is a sign of greater ethics problems at the Fed. Could you talk about what this does to the public’s trust in the bank and what the Fed is doing to prevent this kind of behavior from becoming common?
Answer: Sure. So you’re right—the public’s trust is really the Fed’s and any central bank’s most important asset, and any time one of us, one of the policymakers, violates or falls short of those rules, we do risk undermining that trust, and we take that very seriously. We do. So at the beginning of our meeting yesterday, actually, we had a Committee discussion of the full Committee on the importance of holding ourselves individually and collectively accountable for knowing and following the high standard that’s set out in our existing rules with respect to both personal investment activities and external communications. And we’ve taken a number of steps, and I would just say we do understand how important those issues are. I would say that our new investment program that we have is up now and running, and, actually, it was through that that the problems with President Bostic’s disclosures were discovered, when he filed his new disclosure. We now have a central group here at the Board of Governors that looks into disclosures and follows them and approves people’s disclosures and also all of their trades. Any trade anyone has to make is covered, has to be approved, preapproved, and there’s a lag—it has to be preapproved 45 days before it happens, so there’s no ability to game markets. So it’s a really good system. It worked here. And we—I think we all said to each other today— yesterday, actually, yesterday morning, we recommitted to each other and to this institution to hold ourselves to the highest standards and avoid these problems.

Question (Jonnelle Marte, Bloomberg): Do you have an update on the investigations that are pending?
Answer: I don’t. So, as you know, I referred the matter concerning President Bostic to the inspector general, and once that happens, I don’t discuss it with the inspector general or with anybody. It’s just—the inspector general has, he has the ability to do investigations. We don’t really have that. So that’s what he’s doing.

Question (Michael McKee, Bloomberg): Michael McKee from Bloomberg Television and Radio. Earlier this year, you touted the three-month bill yield out to 18 months as the yield curve with 100 percent explanatory power. And you said, quote, “If it’s inverted, that means the Fed’s going to cut, which means the economy is weak.” That curve is only 2 basis points away from inversion now, so I’m wondering why you are so confident that you have not overtightened, particularly given that rates work with a lag.
Answer: Well, so we do monitor the near-term forward spread—you’re right. And it’s—that’s been our preferred measure. We think, just empirically, it dominates the ones that people tend to look at, which is 2s, 10s, and things like that. So it’s not inverted. And, also, you have to look at why things—why the rate curve is doing what it’s doing. It can be doing that because it affects—it expects cuts or because it expects inflation to come down. In this case, if you’re in a situation where the markets are pricing in significant declines in inflation, that’s going to affect the forward curve. So, yes, we monitor it. You’re right. And that’s what I would say.

Question (Christopher Rugaber, Associated Press): Thank you. Chris Rugaber at Associated Press. Just to go back to housing for a minute: You mentioned the impact that rate increases have had on housing—home sales are down 25 percent in the past year, and so forth—but none of this is really showing up in, as you know, in the government’s inflation measures. And as we go forward, private real-time data is clearly showing these hits to housing. Are you going to need to put a greater weight on that in order to ascertain things like whether there’s overtightening going on, or will you still focus as much on the more lagging government indicators?
Answer: So this is an interesting subject. So I start by saying, I guess, that the measure that’s in the CPI and the PCE, it captures rents for all tenants, not just new leases. And that makes sense, actually, because for that reason—conceptually, that is—that’s sort of the right target for monetary policy. And the same thing is true for owners’ equivalent rent, which comes off of—it’s a reweighting of tenant rents. The private measures are, of course, good at picking up, at the margin, the new leases, and they tell you a couple things. One thing is, I think right now, if you look at the pattern of that series of the new leases, it’s very pro-cyclical, so rents went up much more than the CPI and PCE rents did. And now they’re coming down faster. But what you’re—the implication is that there are still, as people, as non-new leases roll over and expire, right, they’re still in the pipeline, there’s still some significant rate increases coming, okay? But at some point, once you get through that, the new leases are going to tell you—what they’re telling you is, there will come a point at which rent inflation will start to come down. But that point is well out from where we are now. So we’re well aware of that, of course, and we look at it. But I would say that in terms of—the right way to think about inflation, really, is to look at the measure that we do look at, but considering that we also know that at some point, you’ll see rents coming down.

Question (Christopher Rugaber, Associated Press): Great, and just a quick follow. It looks like stock and bond markets are reacting positively to your announcement so far. Is that something you wanted to see? Is that a problem or what—how that might affect your future policy to see this positive reaction?
Answer: We’re not targeting any one or two particular things. Our message should be—what I’m trying to do is make sure that our message is clear, which is that we think we have a ways to go, we have some ground to cover with interest rates before we get to, before we get to that level of interest rates that we think is sufficiently restrictive. And putting that in the statement and identifying that as a goal is an important step. And that’s meant to put that question, really, as the important one now, going forward. I’ve also said that we think that the level of rates that we estimated in September—the incoming data suggests that that’s actually going to be higher, and that’s been the pattern. I mean, I would have little confidence that the forecast—if we made a forecast today, if we were doing an SEP today, the pattern has been that, one after another, they go up, and that’ll end when it ends, but there’s no sense that inflation is coming down. If you look at the—I have a table of the last 12 months of 12-month readings, and there’s really no pattern there. We’re exactly where we were a year ago. So I would also say, it’s premature to discuss pausing. And it’s not something that we’re thinking about. That’s really not a conversation to be had now. We have a ways to go. And the last thing I’ll say is that I would want people to understand our commitment to getting this done and to not making the mistake of not doing enough or the mistake of withdrawing our strong policy and doing that too soon. So those—I control those messages, and that’s my job.

Question (Edward Lawrence, Fox Business): Edward Lawrence with Fox Business. Thank you, Fed Chairman. So how big of a headwind is all the fiscal spending to what the Federal Reserve’s trying to do to get inflation back to the 2 percent target?
Answer: In theory, it was a headwind this year, but I do think the broader context is that you have households that have these significant amounts of savings and can keep spending even in—so I think those two things do tend to wage—to sort of counterbalance each other out. It appears, consumer spending is still positive—it’s at pretty modest growth levels. It’s not shrinking. The banks that deal with retail customers and many retailers will tell you that the consumers are still buying and they’re still—they’re fine. So I don’t know how big the fiscal headwinds are, and they haven’t shown up in the way that we thought they would in restraining spending. So it must have to do with the savings that people have.

Question (Edward Lawrence, Fox Business): So, what about the spending? There’s tens of billions yet to be spent, I mean, from the Inflation Reduction Act, the American Rescue Plan, CHIPS Act, bipartisan infrastructure bill. How does that play into your thinking about the future?
Answer: Demand is going to have some support from those savings and also from the strong demand that’s still in the labor market. We still see pretty significant demand and a tightening labor market in some respects, although I think, overall, I would say it’s not really tightening or loosening. So we see those things, and what those things tell us is that our job is going to require some resolve and some patience over time. We’re going to have to stick with this. And that’s just—we take all that as a given, but we know what our objective is, and we know what our tools can do, and that’s how we think about it.

Question (Nancy Marshall-Genzer, Marketplace): Hi, Chair Powell. Nancy Marshall-Genzer from Marketplace. I’m wondering, has the window for a soft landing narrowed? Do you still think it’s possible?
Answer: Has it narrowed? Yes. Is it still possible? Yes. We’ve always said it was going to be difficult, but I think to the extent rates have to go higher and stay higher for longer, it becomes harder to see the path—it’s narrowed. I would say the path has narrowed over the course of the last year, really. Hard to say. Hard to say. Again, I would say that the sort of array of data in the labor market is highly unusual and, to many economists, there is a path to— ordinarily there’s a relationship to GDP going down and vacancies declining, translating into unemployment, or there’s Okun’s law. So all those things are relationships that are in the data, and they’re very real. Data’s a little bit different this time, though, because you have this tremendously high level of vacancies and, we think, on a very steep part of the Beveridge curve. All I would say is that the job losses may turn out to be less than would be indicated by those traditional measures, because job openings are so elevated and because the labor market is so strong. Again, that’s going to be something we discover empirically. I think no one knows whether there’s going to be a recession or not and, if so, how bad that recession would be. And our job is to restore price stability so that we can have a strong labor market that benefits all over time. And that’s what we’re going to do.

Question (Nancy Marshall-Genzer, Marketplace): Just real quickly—why do you feel like the window has narrowed?
Answer: Because we haven’t seen inflation coming down. The implication of inflation not coming down. What we would expect by now to have seen is that as the—really, as the supply-side problems have resolved themselves, we would have expected goods inflation to come down by now, long since by now. And it really hasn’t. Actually, it has come down, but not to the extent that we had hoped. At the same time, now you see services inflation, core services inflation moving up, and I just think that the inflation picture has become more and more challenging over the course of this year, without question. That means that we have to have policy be more restrictive, and that narrows the path to a soft landing, I would say. Thanks very much.