Federal Reserve press conference, 2022-09-21 — Chair Jerome Powell

Question (Jeanna Smialek, New York Times): Hi, Chair Powell. Thank you for taking our questions. Jeanna Smialek from the New York Times. I wonder if you could give us a little detail around how you’ll know when to slow down these rate increases and how you’ll eventually know when to stop.
Answer: So I will answer—I will answer your question directly, but I want to start here today by saying that my main message has not changed at all since Jackson Hole. The FOMC is strongly resolved to bring inflation down to 2 percent, and we will keep at it until the job is done. So the way we’re thinking about this is, the overarching focus of the Committee is getting inflation back down to 2 percent. To accomplish that, we think we’ll need to do two things, in particular: to achieve a period of growth below trend; and also some softening in labor market conditions to foster a better balance between demand and supply in the labor market. So on the first, the Committee’s forecasts and those of most outside forecasters do show growth running below its longer-run potential this year and next year. On the second, though, so far there’s only modest evidence that the labor market is cooling off. Job openings are down a bit, as you know; quits are off their all-time highs; there’s some signs that some wage measures may be flattening out but not moving up; payroll gains have moderated but not much. And in light of the high inflation we’re seeing, we think we’ll need to—and in light of what I just said, we think that we’ll need to bring our funds rate to a restrictive level and to keep it there for some time. So, what will we be looking at, I guess, is your question. So we’ll be looking at a few things. First, we’ll want to see growth continuing to run below trend, we’ll want to see movements in the labor market showing a return to a better balance between supply and demand, and, ultimately, we’ll want to see clear evidence that inflation is moving back down to 2 percent. So that’s what we’ll be looking for. In terms of reducing rates, I think we’d want to be very confident that inflation is moving back down to 2 percent before we would consider that.

Question (Steve Liesman, CNBC): Thank you, Mr. Chairman. Steve Liesman, CNBC. Can you talk about how you factor in the variable lags on inflation and the extent to which the outlook for rates should be seen as linear in the sense that you keep raising rates? Well, can you envision a time when there’s a pause to kind of look at what has been wrought in the economy from the rate increases? Thank you.
Answer: Sure. So, of course, monetary policy does, famously, work with long and variable lags. The way I think of it is, our policy decisions affect financial conditions immediately. In fact, financial conditions have usually been affected well before we actually announce our decisions. Then, changes in financial conditions begin to affect economic activity fairly quickly, within a few months. But it’s likely to take some time to see the full effects of changing financial conditions on inflation. So we are very much mindful for that. And that’s why I noted in my opening remarks that, at some point, as the stance of policy tightens further, it will become appropriate to slow the pace of rate hikes while we assess how our cumulative policy adjustments are affecting the economy and inflation. So that’s how we think about that. Your second question—sorry—was?

Question (Rachel Siegel, Washington Post): Hi, Chair Powell. Rachel Siegel from the Washington Post. Thank you for taking our questions. The projections show the unemployment rate rising to 4.4 percent next year, and, historically, that kind of rise in the unemployment rate would typically bring a recession with it. Should we interpret that to mean no soft landing, and is that kind of rise necessary to get inflation down?
Answer: Right. So you’re right—in the SEP, there’s what I would characterize as a relatively modest increase in the unemployment rate from a historical perspective, given the expected decline in inflation. Now, why is that? So, really, that is what we generally expect because we see the current situation as outside of historical experience in a number of ways, and I’ll mention a couple of those. First—and you know these—but first, job openings are incredibly high relative to the number of people looking for work. It’s plausible, I’ll say, that job openings could come down significantly—and they need to—without as much of an increase in unemployment as has happened in earlier historical episodes. So that’s one thing. In addition, in this cycle, longer-run inflation expectations have generally been fairly well anchored, and, as I’ve said, there’s no basis for complacency there. But to the extent that continues to be the case, that should make it easier to restore price stability. And I guess the third thing I would point to that’s different this time is that part of this inflation is caused by this series of supply shocks that we’ve had, beginning with the pandemic, and, really, with the reopening of the economy, and more recently amplified and added to by Russia’s invasion of Ukraine—have all contributed to the sharp increase in inflation. So these are the kinds of events that are not really seen in prior business cycles, and, in principle, if those things start to get better—and we do see some evidence of the beginnings of that. It’s not much more than that, but it’s good to see that. For example, commodity prices look like they may have peaked for now; supply chain disruptions are beginning to resolve. Those developments, if sustained, could help ease the pressures on inflation. So let me just say, how much these factors will turn out to really matter in this sequence of events—it remains to be seen. We have always understood that restoring price stability while achieving a relatively modest decline—or, rather, increase—in unemployment and a soft landing would be very challenging. And we don’t know—no one knows whether this process will lead to a recession or, if so, how significant that recession would be. That’s going to depend on how quickly wage and price inflation pressures come down, whether expectations remain anchored, and whether, also, do we get more labor supply, which would help as well. In addition, the chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive or restrictive for longer. Nonetheless, we’re committed to getting inflation back down to 2 percent—because we think that a failure to restore price stability would mean far greater pain later on.

Question (Rachel Siegel, Washington Post): Just to follow up on one small thing—are vacancies still at the top of your list in terms of understanding the labor market and how much room there is there?
Answer: Yes, vacancies are still almost a 2-to-1 ratio to unemployed people. That and quits are really very good ways to look at how tight the labor market is and how different it is from other cycles, where, generally, the unemployment rate itself is the single best indicator. We think those things have, for quite a time now, really added value in terms of understanding where the labor market is.

Question (Nick Timiraos, Wall Street Journal): Nick Timiraos of the Wall Street Journal. You said not too long ago, in describing the policy destination, there’s still a way to go. But I imagine you have to have some idea about how you’re thinking about your destination, whether it’s a stopping point or a pausing point. And so I was wondering if you could discuss how you are thinking about, as the data come in, where that destination is, how it’s moving up. If inflation doesn’t perform as you expect, do you want to have a policy rate that’s above the underlying inflation rate, for example, and do you have an estimate for where you think the underlying inflation rate might be in the economy right now?
Answer: Well, so, again, we believe that we need to raise our policy stance overall to a level that is restrictive—and by that I mean, is meaningfully, putting meaningful downward pressure on inflation. That’s what we need to see in the stance of policy. We also know that there are long and variable lags, particularly as they relate to inflation. So it’s a challenging assessment. So, what do you look at? You look at broader financial conditions, as you know; you look at where rates are, real and nominal in some cases; you look at credit spreads; you look at financial conditions indexes. We also, I would think—and you see this in the—this is something we talked about today in the meeting and talk about in all of our meetings. And you see this, I think, in the Committee forecast. You want to be at a place where real rates are positive across the entire yield curve. And I think that would be the case if you look at the numbers that we’re writing down and think about—you measure those against some sort of forward-looking assessment of inflation, inflation expectations. I think you would see at that time—you’d see positive real rates across the yield curve, and that is also an important consideration.

Question (Howard Schneider, Reuters): Hi. Howard Schneider with Reuters. Thanks for the opportunity. I just want to be clear on the SEPs. You say it’s meeting by meeting, but it sure looks like we’re going 75–50–25. Is 75 next month the baseline?
Answer: So we make one decision per meeting, and the decision we made today was to raise the federal funds rate by 75 [basis points]. You’re right that the median for the year-end suggests another 125 basis points in rate increases, but there’s also, there’s another fairly large group that saw a 100 basis points addition to where we are today. So that would be 25 basis points less. So we’re going to make that decision at the meeting. We didn’t make that decision today; we didn’t vote on that. I would say that we’re committed to getting to a restrictive level for the federal funds rate and getting there pretty quickly, and that’s what we’re thinking about.

Question (Howard Schneider, Reuters): So, just as a follow-up to that, I’m wondering about the sort of risk-management considerations here, given there’s some discussion now of overdoing it. What’s the incentive to continue front-loading right now? Is it lack of progress on inflation seen in the CPI reports? Or is it a motivation to get as much done while the job market is still as strong as it is?
Answer: So, what we’ve seen is, inflation has—our expectation has been that we would begin to see inflation come down, largely because of supply-side healing. By now we would have thought that we’d have seen some of that. We haven’t. We have seen some supply- side healing, but inflation has not really come down. If you look at core PCE inflation, which is a good measure of where inflation is running now, if you look at it on a 3-, 6-, and 12-month trailing annualized basis, you’ll see that inflation is at 4.8 percent, 4.5 percent, and 4.8 percent. So that’s a pretty good summary of where we are with inflation. And that’s not where we expected or wanted to be. So, what that tells us is that we need to continue, and we can—keep doing these, and we did today—do another large increase as we approach the level that we think we need to get to. And we’re still discovering what that level is. But people are writing that down in their SEP where they think policy needs to be. So that’s how we’re thinking about it.

Question (Colby Smith, Financial Times): Thank you. Colby Smith with the Financial Times. Chair Powell, how should we interpret the fact that core inflation is still not forecast in the SEP to be back to target in 2025, and yet the dot plot projects cuts as early as 2024? And does that mean there’s a level of inflation above the 2 percent target that the Fed is willing to tolerate?
Answer: So I guess core is at 2.1 in 2025—in the median—and headline is at 2.0, so that’s pretty close. I mean, we write down our forecasts, and we figure out what the median is, and we publish it. So it’s not—I mean, I would say that if, actually, if the economy followed this path, this would be a pretty good outcome. But you’re right—it is a tenth higher than 2 percent.

Question (Colby Smith, Financial Times): Okay. Just as a quick follow-up: I mean, if the concern is that underlying inflation is becoming more entrenched, perhaps, each month, then why forgo the more aggressive 100 basis point increase today, and does that risk having to do more later on?
Answer: Yeah. So we, as we said at the last press conference and in between that one and this one, we said that we would make our decision based on the overall data coming in. So, if you remember, we got a surprisingly low reading in July and then a surprisingly high reading for August. So I think you have to—you can’t really—you never want to overreact too much to any one data point. So if you look at them together—and, as I just mentioned, if you really look at this year’s inflation, 3-, 6-, and 12-month trailing, you see inflation is running too high. It’s running 4.5 percent or above; you don’t need to know much more than that. If that’s the one thing you know, you know that this Committee is committed to getting to a meaningfully restrictive stance of policy and staying there until we feel confident that inflation is coming down. That’s how we think about it.

Question (Victoria Guida, Politico): Hi. Victoria Guida with Politico. I wanted to ask about the balance sheet. You all have left open the possibility that you might sell mortgage-backed securities, but we’ve seen significant slowing in the housing market. Mortgage rates have gone up significantly, and I’m just wondering whether conditions there might affect your plans for how quickly you have the runoff on the MBS side.
Answer: So we, what we said, as you know, was that we would consider that once balance sheet runoff is well under way. I would say it’s not something we’re considering right now and not something I expect to be considering in the near term. It’s just, it’s something I think we will turn to, but that time, the time for turning to it, has not come and is not close.

Question (Victoria Guida, Politico): Will conditions in the housing market affect that decision?
Answer: I think a number of things might affect that decision, really. The main thing is, we’re not considering that decision, and I don’t expect that we will any time soon.

Question (Neil Irwin, Axios): Thanks. Neil Irwin with Axios. A number of commentators have come to the view, including over at the World Bank, that simultaneous global tightening around the world is, creates a risk of a global recession that’s worse than is necessary to bring inflation down. How do you see that risk? How do you think of coordination with your fellow central bankers? And is there much risk of overdoing it on a global level?
Answer: So we, actually, my colleagues and I, a number of my FOMC colleagues and I, just got back from one of our frequent trips to Basel, Switzerland, to meet with other senior central bank officials from around the world. We are in pretty regular contact, and we exchange, of course—we all serve a domestic mandate, domestic objectives—in our case, the dual mandate, maximum employment and price stability. But we regularly discuss what we’re seeing in terms of our own economy and international spillovers, and it’s a very ongoing, constant kind of a process. So we are very aware of what’s going on in other economies around the world and what that means for us, and vice versa. The forecasts that we put together, that our staff puts together, and that we put together on our own always take all of that—try to take all of that into account. I mean, I can’t say that we do it perfectly, but it’s not as if we don’t think about the policy decisions—monetary policy and otherwise—the economic developments that are taking place in major economies that can have an effect on the U.S. economy. That is very much baked into our own forecast and our own understanding of the U.S. economy, as best we can. It won’t be perfect. So I don’t see—it’s hard to talk about collaboration in a world where people have very different levels of interest rates. If you remember, there were coordinated cuts and raises and things like that at various times, but, really, we’re all, we’re in very different situations. But I will tell you, our contact is more or less ongoing, and it’s not coordination, but there’s a lot of information sharing. And we all, I think, are informed by what other important economies— economies that are important to the United States—are doing.

Question (Craig Torres, Bloomberg): Craig Torres from Bloomberg. Chair Powell, you talked about some ways the higher interest rates are affecting the economy, but we’ve also seen a resilient labor market with durable consumption, strong corporate profits, and I’m wondering what your story is on the resilience of the economy. After all, you and your colleagues said, “Well, we started tightening in March when we were talking about interest rates in the future.” And, indeed, Treasury rates moved up, so we should have had a lot of tightening taking effect. Why is the economy, in your view, so resilient, and does it mean that we might need a possibly higher terminal rate?
Answer: You’re right, of course—the labor market, in particular, has been very strong. But there are—the sectors of the economy that are most interest rate sensitive are certainly showing the effects of our tightening, and, of course, the obvious example is housing, where you see declining activity of all different kinds and house price increases moving down. So we’re having an effect on interest-sensitive spending. I think, through exchange rates, we’re having an effect on exports and imports. I think—so all of that’s happening, but you’re right, and we’ve said this: This is a strong, robust economy. People have savings on their balance sheet from the period when they couldn’t spend and where they were getting government transfers. There’s still very significant savings out there, although not as much at the lower end of the income spectrum—but still, some savings out there to support growth. The states are very flush with cash, so there’s good reason to think that this will continue to be a reasonably strong economy. Now, the data sort of are showing that growth is going to be below trend this year. We think of trend as being about 1.8 percent, or in that range. We’re forecasting growth well below that, and most forecasters are. But you’re right—there’s certainly a possibility that growth can be stronger than that. And that’s a good thing, because that means the economy will be more resistant to a significant downturn. But, of course, we are focused on the thing I started with, which is getting inflation back down to 2 percent. We can’t fail to do that. I mean, if we were to fail to do that, that would be the thing that would be most painful for the people that we serve. So for now, that has to be our overarching focus, and you see that, I think, in the SEP, in the levels of rates that we’ll be moving to reasonably quickly, assuming things turn out roughly in line with the SEP. So that’s how we think about it.

Question (Michael McKee, Bloomberg): Thank you, Mr. Chairman. In a world of euphemisms that we live in here, with “below-trend growth” and “modest increase in unemployment,” I’m wondering if I can ask you a couple of direct questions for the American people. Do the odds now favor, given where you are and where you’re going with interest rates, favor a recession? Four point four percent unemployment is about 1.3 million jobs. Is that acceptable job loss? And then, given that the data you look at is backward looking, and the lags in your policy are forward looking, and you don’t know what they are, how will you know, or will you know, if you’ve gone too far?
Answer: So I don’t know what the odds are. I think that there’s a very high likelihood that we’ll have a period of what I’ve mentioned is below-trend growth, by which I mean much lower growth, and we’re seeing that now. So the median forecast, I think, this year among my colleagues and me was 0.2 percent growth. So that’s very slow growth. And then below trend next year. I think the median was 1.2, also well below. So that’s a slower, that’s a very slow level of growth, and it could give rise to increases in unemployment. But I think that’s, so that is something that we think we need to have, and we think we need to have softer labor market conditions as well. We’re never going to say that there are too many people working, but the real point is this: Inflation—what we hear from people when we meet with them is that they really are suffering from inflation. And if we want to set ourselves up, really light the way to another period of a very strong labor market, we have got to get inflation behind us. I wish there were a painless way to do that. There isn’t. So, what we need to do is get rates up to the point where we’re putting meaningful downward pressure on inflation, and that’s what we’re doing. And we certainly don’t hope, we certainly haven’t given up the idea that we can have a relatively modest increase in unemployment. Nonetheless, we need to complete this task.

Question (Michael McKee, Bloomberg): But how will you know, or will you know, if you’ve gone too far?
Answer: It’s hard to hypothetically deal with that question. I mean, again, our really tight focus now continues to be ongoing rate increases to get the policy rate up where it needs to be. And, as I said, you can look at this SEP as today’s estimate of where we think those rates would be. Of course, they will evolve over time.

Question (Christopher Rugaber, Associated Press): Thanks. Chris Rugaber, Associated Press. I wanted to follow up with what you just mentioned about the labor market. You’ve said several times that to have the labor market we want, we need price stability, and you suggested maybe there isn’t a tradeoff in the long run. But in the short run, there is a lot of concern, as people have been expressing here, about higher unemployment as a result of these rate hikes or as a result of rate hikes. So can you explain, though, what about high inflation now threatens the job market? I mean, you seem to suggest inflation, high inflation, will eventually lead to a weaker job market. So can you spell that out a little more for the general public on how that would work?
Answer: So, for starters, people are seeing their wage increases eaten up by inflation. So if your family is one where you spend most of your paycheck, every paycheck cycle, on gas, food, transportation, clothing, basics of life, and prices go up the way they’ve been going up, you’re in trouble right away. You don’t have a cushion, and this is very painful for people at the lower end of the income and wealth spectrum. So that’s what we’re hearing from people is, you know, very much—that inflation is really hurting. So how do we get rid of inflation? And, as I mentioned, it would be nice if there were a way to just wish it away, but there isn’t. We have to get supply and demand back into alignment, and the way we do that is by slowing the economy. Hopefully, we do that by slowing the economy, and we see some softening in labor market conditions, and we see a big contribution from supply-side improvements, and things like that. But none of that is guaranteed. In any case, we, our job is to deliver price stability, and I think—you can think of price stability as an asset that just delivers large benefits to society over a long period of time. We really saw that for a long time. The United States had 2 percent inflation, didn’t move around much, and that was enormously beneficial to the public that we serve. And we have to get back to that and keep it for another long period of time. To pull back from the task of doing that is, you’re just postponing—the record shows that if you postpone that, the delay is only likely to lead to more pain. So I think we’re moving to do what we need to do and do our jobs, and that’s what you see us doing.

Question (Edward Lawrence, Fox Business): As a follow-up, what is that economic pain in your mind? Is it job losses? Is it higher interest rates on credit cards? What is that economic pain?
Answer: So it’s all of those things. Higher interest rates, slower growth, and a softening labor market are all painful for the public that we serve. But they’re not as painful as failing to restore price stability and then having to come back and do it down the road again and doing it at a time when, actually, now people have really come to expect high inflation. If the concept of high inflation becomes entrenched in people’s economic thinking about their decisions, then sort of getting back to price stability—the cost of getting back to price stability just rises, and so we want to avoid that. We want to act aggressively now and get this job done and keep at it until it’s done.

Question (Nicole Goodkind, CNN): Thank you, Chairman Powell. Nicole Goodkind, CNN Business. Existing home sales have fallen for seven months straight, mortgage rates are at their highest level since 2008, yet mortgage demand increased this week, and housing prices are still elevated. Now, at the end of your June press conference, you mentioned plans to reset the housing market. I was wondering if you could elaborate on what you mean when you say “reset” and what you think it will take to actually get there.
Answer: So when I say “reset,” I’m not looking at a particular, specific set of data or anything. What I’m really saying is that we’ve had a time of a red-hot housing market all over the country, where, famously, houses were selling to the first buyer at 10 percent above the ask, before even seeing the house. That kind of thing. So there was a big imbalance between supply and demand. Housing prices were going up at an unsustainably fast level. So the deceleration in housing prices that we’re seeing should help bring sort of prices more closely in line with rents and other housing market fundamentals, and that’s a good thing. For the longer term, what we need is supply and demand to get better aligned so that housing prices go up at a reasonable level—at a reasonable pace—and that people can afford houses again. And I think we—so we probably, in the housing market, have to go through a correction to get back to that place. There’s also, there are also longer-run issues, though, with the housing market. As you know, we’re—it’s difficult to find lots now close enough to cities and things like that, so builders are having a hard time getting zoning and lots and workers and materials and things like that. But from a sort of business cycle standpoint, this difficult correction should put the housing market back into better balance.

Question (Nicole Goodkind, CNN): Just to follow, though, shelter made up such a large part of this hot CPI report that we saw. Do you think that there is a lag and that we will see that come down in the coming months? Or do you think that there’s still this imbalance that needs to be addressed?
Answer: I think that shelter inflation is going to remain high for some time. We’re looking for it to come down, but it’s not exactly clear when that will happen. So it may take some time, so I think, hope for the best, plan for the worst. So I think, on shelter inflation, you’ve just got to assume that it’s going to remain pretty high for a while.