Federal Reserve press conference, 2022-01-26 — Chair Jerome Powell

Question (Christopher Rugaber, Associated Press): Thanks, Michelle. And thank you, Chair Powell. So it’s expected that the Fed will hike rates perhaps every other meeting, but certainly in the past, the Fed has hiked at every meeting. So I just wanted to ask, you know, are rate hikes at consecutive meetings on the table this year? Is every meeting a live—a live meeting? And, on that note, would the Fed consider front-loading some of its rate hikes, even if it doesn’t raise at every meeting? Thank you.
Answer: Thanks. So, as I—as I referred to in my opening statement, it’s—it is not possible to predict with much confidence exactly what path for our policy rate is going to prove appropriate. And so, at this time, we haven’t made any decisions about the path of policy. And I stress again that we’ll be humble and nimble. We’re going to have to navigate crosscurrents and actually two-sided risks now. So—and, and I’ll say also that we’re going to be guided by the data. In fact, what I’ll say is that we’re going to be led by the incoming data and the evolving outlook, which we’ll try to communicate as clearly as possible, moving steadily and transparency—transparently. So more to your question, we know that the economy is in a very different place than it was when we began raising rates in 2015. Specifically, the economy is now much stronger. The labor market is far stronger. Inflation is running well above our 2 percent target, much higher than it was at that time. And these differences are likely to have important implications for the appropriate pace of policy adjustments. Beyond that, we haven’t made any decisions.

Question (Victoria Guida, Politico): Hi, Chair Powell. I wanted to ask, you were talking about the health of the labor market. And I’m curious whether you would characterize where we’re at right now as maximum employment. And also, along those same lines, obviously rate hikes [are] on the table this year, do you think that the Fed can raise rates, bring inflation under control without hurting jobs and wages?
Answer: Sorry. Just getting both, both parts of your question written down. So I would say—and this view is widely held on the Committee—that both sides of the mandate are calling for us to move steadily away from the very highly accommodative policies we put in place during the challenging economic conditions that the economy faced earlier in the pandemic. And I would say that most FOMC participants agree that labor market conditions are consistent with maximum employment in the sense of the highest level of employment that is consistent with price stability. And that is—that is my personal view. And, and, again, very broad support on the Committee for the judgment that it will soon be appropriate to raise the target range for the federal funds rate. The other thing is, maximum employment will, will evolve over time and through the course of the business cycle. In the particular situation we’re in now, it may well increase. Max—the level of maximum—of employment that’s consistent with stable prices may increase. And we hope that it will, as more people come back into the labor market, as participation gradually rises. And the policy path that we’re broadly contemplating would be supportive of that comment—that outcome as well. So the thing about the labor market right now is that there are—there are many millions of, of more job openings than there are unemployed people. So you ask whether we can— whether we can raise rates and, and move to less accommodative, and even tight, financial conditions without hurting the labor market. I think there’s quite a bit of room to raise interest rates without threatening the labor market. This is, by so many measures, a historically tight labor market. Record levels of job openings, of quits. Wages are moving up at the highest pace they have in decades. If you look at surveys of workers, they find jobs plentiful. Look at surveys of companies—they find workers scarce. And all of those readings are at levels, really, that we haven’t seen in a long time—and, in some cases, ever. So this is a very, very strong labor market, and my strong sense is that we can—we can—we can move rates up without, without having to, you know, severely undermine it. I also would point out that there are—there are other forces at work this year, which should also help bring down inflation, we hope, including improvement on the supply side, which will ultimately come. The timing and pace of that are uncertain. And also, fiscal policy is going to be less supportive of, of growth this year—not of the level of economic activity, but the fiscal impulse to growth will be significantly lower. So there are multiple forces—which should be working over the course of the year for inflation to come down. We do realize that the timing and pace of that are, are highly uncertain and that inflation has persisted longer than we—than we thought. And, of course, we’re prepared to use our tools to assure that higher inflation does not become entrenched.

Question (Nick Timiraos, Wall Street Journal): Good afternoon, Chair Powell. Nick Timiraos of the Wall Street Journal. I, I have a couple of questions on the balance sheet. The statement on the balance sheet today calls for “significantly reducing” your holdings. What does that mean? And then, apart from moving sooner and faster to shrink the holdings, are there any other ways in which you and your colleagues are seriously thinking about recalibrating this process? And, finally, how much disagreement is there around how you should use this tool, including active sales rather than passive sales or changes in the composition of reinvestments? Thank you.
Answer: So I’m afraid to tell you that those are all great questions, and they’re questions that the Committee is just turning to now. So we had—we had a discussion, as you know, at the last meeting, an introductory discussion of the balance sheet and a teeing up of the issues. At this meeting, we’ve gone through and carefully put together a set of principles at a high level. And those are meant to guide the actual decisions we’ll make about the pace and about all of the questions that you’re, you’re asking. And I expect that this process will, will be something that we spend time on in coming meetings. I can’t tell you how many. I can’t tell you how long it will take. But—and then, you know, at the appropriate time, we’ll provide additional information. So I did—the last cycle when we—when we went through balance sheet issues, we did find that over, over the course of two or three meetings, for example, we did come to interesting and better answers, we thought. So we’re just in that process now. And at the next meeting, we’ll be turning to, you know, more of the details that you’re—that you’re asking about. I would say this. The balance sheet is, is much bigger. I’d say it has a shorter duration than the last time. And the economy’s much stronger, and inflation is much higher. So—and I think that leads you to—and I said, I’ve said this—being willing to move sooner than we did the last time and also perhaps faster. But beyond that, it’s really—it’s really not appropriate for me to speculate exactly what that would be. And, and—but I would point you to principle number one, which is “the Committee views changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy.” So we do want the federal funds rate—we, we want to operationalize that [as the primary means]. And we want the balance sheet to be declining in a predictable manner, and we want it to be declining primarily by adjusting reinvestments.

Question (Howard Schneider, Reuters): If I could follow just on a related question, the December SEPs had this copacetic sort of set of circumstances where inflation comes down without the federal funds rate ever getting over the estimate of neutral. Given developments since then, do you still think that’s a credible narrative for the ultimate path of policy?
Answer: I think the path is highly uncertain and that we’re committed to using our tools to make sure that inflation, high inflation that we’re seeing, does not become entrenched. So a number of factors would be—it’s not just monetary policy—a number of factors are supporting a decline in inflation, as I mentioned. Fiscal policy will be—will provide significantly less of an impulse to growth. We do expect this year—although we do expect now that it will come slower than, than we had expected and hoped—that there will be relief on the supply side. So that, too, should—should lower the supply-side barriers, which are a big part of the story of why inflation is high. In addition, monetary policy will be becoming significantly less accommodative. So the question is—you know, we’ll, we’ll be asking this question all year long, and that will be, are things turning out as we expect? There’s a case that, for whatever reason, the economy slows more and inflation slows more than expected; we’ll react to that. If, instead, we see inflation at a higher level or a more persistent level, then we’ll react to that. And, again, we’re, we’re well aware that this is a different economy than—than existed during the last tightening cycle, and our policy is going to reflect those differences.

Question (Craig Torres, Bloomberg): Chair Powell, Chair Powell. Good afternoon, Michelle and Chair Powell. Craig Torres from Bloomberg. Chair Powell, at the beginning of the conversation, you said risks are two sided. And I’m wondering if you can elaborate on what are the risks to the elusive soft landing. Is Fed policy a risk? Overtightening? Or what are the risks? And then second, Chair Powell, I have a quick administrative question. You know, Robert Kaplan’s disclosure of his securities transactions—and in a couple of months, Chair Powell, or maybe sooner, you and I will file our tax returns. And we’ll list transactions and all kinds of things. And next to those transactions, we’ll put dates. And Bloomberg asked for the dates of Mr. Kaplan’s transactions. The Dallas Fed is not giving us the dates. And I don’t see why this is a matter for the inspector general or anybody else. I mean, why can’t he give us the dates? Will you help us get the dates of those transactions? Thanks.
Answer: So you asked about the risks first. So I—you know, the one risk is that inflation risks are still to the upside in the views of most FOMC participants and, certainly, in my view as well. There’s a risk that, that the high inflation we’re seeing will be prolonged, and there’s a risk that it will move even higher. So we don’t—we don’t think that’s the base case, but you asked what the risks are. And that’s—we have to be in a position with our monetary policy to address all of the plausible outcomes. And that calls for us to be in position. We, we have an expectation about the way the economy is going to be evolved, but we’ve got to be in a position to, to address different outcomes, including the one where inflation remains higher. And, of course, that is a risk to the—to the—to the expansion. You know, we’ve been saying that what we need here is another long expansion, which is the kind of thing we saw over the last [one], which was a record long expansion. We saw labor force participation rise. We saw wages persistently higher for people at the lower end, and there, there really was no obvious imbalance in the economy that threatened that expansion. It could have gone on for years were it not hit by the pandemic. So we’d love to find a way to get back to that. That’s going to require price stability, and that’s going to require the Fed to tighten interest rate policy and do our part in getting inflation back down to our 2 percent goal. So I mentioned two-sided risks. You know, a couple things. One, Omi—COVID is not over. And COVID can continue to evolve, and it’s just—we have to accept that it’s not over, and the risks to it can slow down growth. And that would be—that’s sort of a downside risk from a growth standpoint. I would point to—you know, another, another risk is just further, further problems in the supply chains, which could slow down activity. And you see the situation in China as a situation there where that’s—their no-COVID policy may cause more lockdowns, is likely to, and that may play into—may play into more problems in supply chains. In addition, there’s what’s going on in Eastern Europe and things like that. So there’s plenty of risk out there. And we, you know, we can’t—we can’t forget that there are risks on both sides. So that’s, that’s there. That’s what I would say. I know you’ve been all over this issue with, with my colleagues, Craig, on the issue of, of information. We don’t—we don’t have that information at the Board. And, you know, I hand— I asked the inspector general to do an investigation, and that is out of my hands. I play no role in it. I seek to play no role in it. And I don’t—I really—I can’t help you here today on this issue. And I’m sorry I can’t.

Question (Colby Smith, Financial Times): Thank you, Michelle. Chair Powell, when you talk about being humble and nimble about the path forward for monetary policy, does that also include the possibility of raising interest rates by larger increments and, say, doing a 50 basis point hike at some point if inflation does not moderate sufficiently? And should we interpret this approach as a departure from the gradual pace that we saw during the last hiking cycle?
Answer: So, as I mentioned, we have not made these decisions. We really haven’t. And, and what I can tell you now, though, is that we fully appreciate that this is a different situation. If you look back to where we were in 2015, ’16, ’17, ’18 when we were raising rates, inflation was very close to 2 percent, even below 2 percent. Unemployment was, was not at our estimates of the natural rate. And growth was, you know, in the 2 to 3 percent range. Right now, we have inflation running substantially above 2 percent and, and, you know, more persistently than we would like. We have growth—even in forecasts, even in the somewhat reduced forecast for 2022—we still see growth higher than, substantially higher than what we estimate to be the potential growth rate. And we see a labor market where, by so many measures, it is historically tight. I think the—you know, in a way, the least tight aspect of it is, is looking at the unemployment rate, which is still below our median estimate of, of [the unemployment rate consistent with] maximum employment. If you look at things like quits and job openings, as I mentioned earlier, and wages, you’re seeing—and, and just the ratio of job openings to unemployed—you’re seeing a very, very tight labor market. Now, we also know that labor force participation is significantly lower. It’s 1½ percentage points lower than it was in February of 2020. Maybe a [full] percentage point of that is, is retirements. Some part of those retirements are, are, you know, related to COVID rather than just regular retirements. So we think there’s, there’s a pool of people out there who could come back into the labor force. But it’s not happening very quickly, and it may not—it may continue to not happen very quickly as long as the pandemic is on[going]. So that’s, that’s, that’s how we think about that. We haven’t made—to your specific question—we really have not addressed those questions. And we’ll begin to address them as we—as we move into the March meeting and meetings after that.

Question (Rachel Siegel, Washington Post): Thank you, Michelle. And thank you, Chair Powell, for taking our questions. I’m wondering if you can talk to us about any metrics that the Fed uses to assess how inflation affects different groups of Americans, especially lower-, lower-income earners? And are you worried that the Fed underestimates, or can’t effectively measure, the impact of inflation on some of the most vulnerable households? Thank you.
Answer: So it’s, it’s more a matter of—I think the problem that we’re—that we’re talking about here is really that people who are on fixed incomes who are living paycheck to paycheck, they’re spending most or all of their—of, of what they’re earning on food, gasoline, rent, heating their—heating, things like that, basic necessities. And so inflation right away, right away forces people like that to make very difficult decisions. So that’s really the point. I don’t—I’m not aware of, you know, inflation literally falling more on, on different socioeconomic groups. It’s—that’s not the point. The point is, some people are just really in a—prone to suffer more. I mean, for people who are economically well off, inflation isn’t good. It’s bad. High inflation is, is bad, but they’re going to be able to continue to eat and keep their homes and drive their cars and things like that. It’s more—so that, that’s really how I think of it. And, you know, we, we have to control inflation for the benefit of all Americans. But part of—part of it is just that it’s particularly hard on people with fixed incomes and low incomes who spent most of their—of their income on necessities, which are—which are experiencing high inflation now.

Question (Michael McKee, Bloomberg): Thank you, Mr. Chairman. I’d like to sort of weave some of the strands of your answers together and ask you, as you start to reverse policy, what your goal is. Are you going to be raising interest rates until you get inflation to 2 percent? Do you want to go below 2 percent so that, on average, you get a 2 percent inflation rate? And because you said we have to protect the employment part of your mandate, is there some sort of circuit breaker that would stop you from raising interest rates on the employment side?
Answer: So, no. There’s no—there’s nothing in our framework about having inflation run below 2 percent so that we would do that, try to achieve that outcome. So the answer to that is, is “no.” What we’re trying to do is get inflation, keep inflation expectations well anchored at 2 percent. That’s, that’s always the, the ultimate goal. And we do that in the service of having inflation—we get to that goal by having inflation average 2 percent over time. And if inflation doesn’t average 2 percent over time, then it’s not clear why inflation expectations would be anchored at 2 percent. So that, that’s the way we think about that. You know, it—what was the last part of your—of your question?

Question (Michael McKee, Bloomberg): If I could—if I could follow up, does the danger of tightening too much as policy works its way into the economy with a lag mean that you should go back to being more forecast dependent in making decisions, rather than the state dependency you’ve been using as a framework for the last year and a half or so?
Answer: State dependency was particularly around the thought that if we—if we saw a very strong labor market, we would wait to see actual inflation—actual inflation before we tightened. And so that was a very state-dependent thought because, for a long time, we’d been tightening on the expectation of high inflation, which never appeared. And that was the case for, for a number of years. So in this particular situation, we will be clearly monitoring incoming data as well as the evolving outlook.

Question (Michael Derby, Wall Street Journal): Thank you for taking my question. I want to ask you, with the benefit of hindsight, and I realize, I mean, that is what it is. But do you feel that, you know, monetary policy and fiscal policy maybe did too much to react to the crisis and that part of the inflation problem that we’re having right now is because the government response, you know, collectively was more than what the economy ended up needing?
Answer: So I think it’s too soon to write that history, really. But what I would say is this. The—if you remember what it felt like at the beginning of the pandemic, literally the global economy shutting down in large part, including our own economy, and people going to their homes for weeks on end in masks, and there are no vaccines, and it could be a really long time to get them, you know. And then, you know, you have—economic activity drops by a shocking amount in one—so there was a real risk of lasting damage. And I think Congress responded remarkably with the—with the CARES Act, incredibly timely and very powerful. People will—there’ll always be flaws in these things. But in real time, it was a remarkable achievement. And we responded. And what we were able to do was, you know, stave off a collapse of the financial system at the beginning and make time for what really needed to happen, which was the income replacement and then the recovery that Congress enabled with the CARES Act. So now, that was a lot of—that was a lot. And what we did was a lot. And, you know, now—so, what we have now is, we have the strongest recovery of any, any country. And we have—we have a recovery that looks completely unlike other recoveries that we’ve had, because we’ve, we’ve put so much support behind the recovery. And we’re managing the, the relatively high-class problems that come with that, which are high inflation and a labor shortage. So—and these are serious problems, very serious problems that we, you know, we’re working as hard as we can on. Was it too much? Again, I’m going to leave that to the historians. And—but look, in 25 years, we’ll look back at this incident, which will be a, you know, 2-, 3-, 4-, 5-year period. And we’ll say, you know, we’ll have a—we’ll have a much better basis to make a judgment about the actions that people took. But it was all founded, though, in a—in a very strong reaction to a, you know, to a unique historical event. And I guess I’ll have to leave it at that. I look for—I hope I’ll be around to see how that looks in 25 years.

Question (Jean Yung, MNI): Can I follow up real quick and ask, if it—if it did invert, would you tie it to U.S. fundamentals? Or would it be driven by a much broader set of factors?
Answer: We’d—that’s, that’s a good question in, in real time. Obviously, U.S. long-term sovereign debt is an—is an important global asset. And it—and the fact that our rates are so much higher than, than other risk-free sovereign rates around the world may put something of a ceiling on our—on our rates. I don’t know. But it would really depend on the— on the facts and circumstances at that time.

Question (Brian Cheung, Yahoo Finance): Hi, Chairman Powell. Brian Cheung, Yahoo Finance. Within the context of just the broad effort to normalize rates, would you describe what you want to do as a gradual hiking? And then, secondly, within the context of hiking cycles, it’s often the talking point for financial stability and wanting to make sure that asset bubbles don’t emerge. Is that something that has also factored into the conversation as you start to think about hiking rates? Thanks.
Answer: I would describe what we’re doing along these lines. This is going to be a year in which we move steadily away from the very highly accommodative monetary policy that we put in place to deal with the—with the economic effects of the pandemic. And that’s going to involve a number of things. It’s going to involve and does involve finishing asset purchases. It’s going to involve lifting off. And it’s going to involve additional rate increases as appropriate. And we, we have—we’re going to write down in March our next assessment of what that might be. It’s going to continue to evolve as the data evolve. We need to be quite adaptable, I think, in our understanding of this. The last thing we’re going to do is, we’re going to have a couple more meetings, I think, to talk about allowing the balance sheet to begin to run off and [to] do so in a predictable manner. And that’s, that’s something that we will also be doing as appropriate. And I wouldn’t—I don’t think it’s possible to say exactly how this is going to go. And we’re, we’re going to need to be, as I’ve mentioned, nimble about this. And the economy is quite different this time. I’ve said this several times now. The economy is quite different. It’s stronger. Inflation is higher. The labor market is much, much stronger than it was. And growth is above trend, even this year, let alone last year. So all of those things are going to go into our thinking as we make—as we make monetary policy. And you asked about financial stability concerns. In connection with our policy–was that your question?

Question (Brian Cheung, Yahoo Finance): Yes. Within the context of other hiking cycles, it seems like [a set of] worries about asset bubbles emerging as a result of easy rates has been part of that . I didn’t know if that was part of the discussion today.
Answer: I would just say this. We, we, of course, have a financial stability framework. And what it shows is a number of, of positive aspects of financial stability. But you mentioned, really, [the behavior of] asset prices is one of the four. So asset prices are somewhat elevated, and they reflect a high risk appetite and that sort of thing. I don’t really think asset prices themselves represent a significant threat to financial stability, and that’s because households are in good shape financially than they have been. Businesses are in good shape financially. Defaults on business loans are low and that kind of thing. The banks are highly capitalized with high liquidity and quite resilient and strong. There are some concerns in the—in the nonbank financial sector around—still around money market funds, although the SEC is making—has made some very positive proposals there. And we also saw some things in the Treasury market during the acute phase of the crisis, which, which we’re looking at ways to address. But, overall, the financial stability vulnerabilities are manageable—are manageable, I would say.