Federal Reserve press conference, 2023-12-13 — Chair Jerome Powell

Question (Christopher Rugaber, Associated Press): Thank you. Chris Rugaber at Associated Press. I wanted to ask, how should we interpret the addition of the word “any” before “additional . . . firming” in the statement? I mean, does that mean that you’re pretty much done with rate hikes and the Committee has shifted away from a tightening bias and toward a more neutral stance? Thank you.
Answer: So—specifically on “any”: We do say that “in determining the extent of any additional policy firming that may be appropriate,” so “any additional policy firming”—that sentence. So we added the word “any” as an acknowledgement that we believe that we are likely at or near the, the peak rate for this cycle. Participants didn’t write down additional hikes that we believe are likely, so that’s what we wrote down. But participants also didn’t want to take the possibility of further hikes off the table. So that’s really what we were thinking.

Question (Steve Liesman, CNBC): Can you give some color as to the nature of that discussion today? Thank you.
Answer: Sure. So it, it comes up in this way today. Everybody wrote down an SEP forecast. So many people mentioned what their—what their rate forecast was. And there was no back-and-forth, no attempt to sort of reach agreement like, “This is what I wrote down; this is what I think,” that kind of thing, and a preliminary kind of a discussion like that. Not everybody did that, but many people did. And then, and I would say, there’s a general expectation that this will be—this will be a topic for us, looking ahead. That, that’s really what happened in today’s meeting. I can’t do the head count for you in real time. But that’s generally what happened today.

Question (Howard Schneider, Reuters): Thanks. Howard Schneider with Reuters, and thanks for taking the questions. I, I wonder if you could give a little more color or detail on what—on what motivates the lower rates next year, whether it’s a coincidence, for example, that the spread between PCE inflation, core inflation, and the federal funds rate stays constant over the year. Are you simply calibrating against the fall in prices, in the price level that you’re expecting, in the rate of inflation that you’re expecting as opposed to supporting the economy?
Answer: Nothing quite that mechanical is happening. The SEP really is, is a bottoms-up—built from the bottom up, right? So I think people are looking at what’s happening in the economy. And I think if you look at the big difference from September in the SEP, [it is that] the expectations for inflation this year, both headline and core, have come down, you know, really significantly in three months. That’s a big piece of, of this. At the same time, [real GDP] growth has turned out to be very strong in the third quarter. [Now it] is slowing, we believe, as, as appropriate. And we’ve got—we’ve had several labor market reports, which suggest, again, significant progress toward greater balance across a very—a broad range of indicators. You’re seeing so many of the indicators coming back to normal, not all of them. But so I think that people look at that, and they write down their—basically, each individual writes down a forecast and a rate forecast that goes with that forecast. We tabulate them and, and publish it. And so it’s not—it isn’t—you ask about real rates, I take it? You know, that’s—that is—that is something that we’re very conscious of, and aware of, and monitor, and it’s certainly a big part of—it’s a part of how we think about things. But, really, it’s broader financial conditions that matter. And, as you well know, it’s so hard to know exactly, you know, what the—what the real rate is or exactly how tight policy is at any given time. So you couldn’t follow that like it was a rule and think that you would get the right answer all the time, but it’s certainly something that we’re focused on. And, indeed, if you look at the projections, I think the expectation would be that the real rate is declining as we—as we move forward.

Question (Nick Timiraos, Wall Street Journal): The markets seem to think inflation is coming down credibly. Do you believe we’re at the point where inflation is coming down credibly?
Answer: Listen, I welcome the progress. I think it’s, it’s really good to see the progress that we’re making. I think if you look at the 12-month—look at the 6-month measures, you see very low numbers. If you look at 12-month measures, you’re still well above 2 percent. You’re actually above 3 percent on core, through November, PCE [inflation]. That isn’t to say— I’m not, you know, calling into question the progress. It’s great. We just need to see more. We need to see, you know, continued further, further progress toward getting back to 2 percent. That’s, that’s what we need to see. So, you know, our—it’s our job to restore price stability. And that—it’s one of our two jobs, along with maximum employment, and they’re equal. So we’re very focused on, on, you know, doing that. As I mentioned, we’re moving carefully at this point. We’re pleased with the progress, but, but we see the need for further progress, and I think—I think it’s fair to say there is a lot of uncertainty about going forward. We’ve seen the economy move in surprising directions, so we’re just going to need to see more further progress.

Question (Jeanna Smialek, New York Times): Jeanna Smialek, New York Times. Thanks for taking our questions. In the SEP from today, [real GDP] growth is notably below potential in 2024. If growth were to surprise us again in the way that it has for years now by being stronger than expected next year, would it still be possible to cut rates? Or, put another way, is below-trend growth necessary to cut rates, or would continued progress on inflation alone be sufficient?
Answer: So we’ll, we’ll look at the totality of the data. Growth is one thing, so is inflation, so is labor market data. So we’d, we’d look at the totality. As we—as we make decisions about policy changes going forward, we’re going to be looking at all those things and, particularly, about the—as they affect the outlook. So it’s ultimately all about the outlook and the balance of risks as well. So that’s what—that’s what we’d be looking for. If we have stronger growth, you know, that’ll be good for people. That’ll be good for the labor market. It might actually mean that it takes a little longer to get inflation down to 2 percent. We will get it down to 2 percent, but, you know, if we see stronger growth, we’ll—we will set policy according to what we actually see. And, and so that’s how I would answer.

Question (Neil Irwin, Axios): Hi, Chair Powell. Neil Irwin with Axios. How do you interpret the state of the labor market right now? And, in particular, you’ve referred even today to evidence that it’s coming into better balance. What would you need to see to conclude that it has reached that balance?
Answer: So on, on the better-balance side, there are just a lot of things. It’s— you see—you see job growth still strong but moving back down to more sustainable levels, given population growth and labor force participation. The things that are not quite—but let me go on with that list. You know, claims are low. If you look at surveys of businesses, they’re, they’re— sort of the era of this frantic labor shortage, [those kinds of worker shortages] are behind us, and they’re seeing a shortage of labor as being significantly alleviated. If you look at shortages of workers, whereas they thought job, job availability was the highest that it’d ever been or close to it, that’s now down to more normal levels by so many measures—participation, unemployment—so many measures: the unemployment—job openings, quits, all of those things. So wages are still running a bit above what would be consistent with 2 percent inflation over a long period of time. They’ve been gradually cooling off. But if wages are running around 4 percent, that’s still a bit above, I would say. And I guess there, there are just a couple of other—the unemployment rate is very, very low. And these are—but, but I would just say, overall, the development of the labor market has been very positive. It’s been a good time for workers to find jobs and get solid wage increases.

Question (Claire Jones, Financial Times): Claire Jones, Financial Times. You know, I’d say the mood among economists at the moment seems to be one of cautious optimism, which is somewhat corroborated by your forecast by the sense that we are going to have a soft landing. Yet when we—when we hear from the general public, there’s a lot of discord about economic conditions. What do you think explains this disconnect, and does it matter for policymakers?
Answer: It may be. A common theme is that, while inflation is coming down, and that’s very good news, the price level is not coming down. Prices of some, some goods and services are coming down. But overall, in the aggregate, the price level is not. So people are still living with high prices, and that’s, that’s not—that is something that people don’t like. And, you know, so what will happen with that is, wages are now—[changes in] real wages are now positive. So [nominal] wages are now moving up more than inflation, as inflation comes down. And so that might help improve the mood of people. But we do see those—we see those public opinion surveys. The thing that we can do is to do our jobs, which is to use our tools to foster price stability, which has such great benefits over such long periods of time, and which is the thing that really enables us to work for and achieve an extended period of high employment, which is so beneficial for, you know, families and, and companies around the country.

Question (Victoria Guida, Politico): Hi. Victoria Guida with Politico. I wanted to ask, you know, on, on the flip side of if things start to deteriorate rapidly, if we do fall into a recession, if we do start to see unemployment rise, at sort of the levels of inflation that we’re seeing now, how would you all think about that in terms of rate cuts? Would that be a sign that you’ve, you’ve done your job demand-wise?
Answer: That’s not something we’re hoping to see. Obviously, we’re hoping to, to see something very different—which is a continuation of what we have seen, which is the labor market coming into better balance without a significant increase in unemployment, inflation coming down without a significant increase in unemployment, and growth moderating without a significant increase in unemployment. That’s what we’re, we’re trying very much to achieve and not something that we’re looking to see.

Question (Victoria Guida, Politico): But, but would you take that as a signal that you should cut rates?
Answer: You know, obviously, what we’ll do is we’ll look at the totality of the data, as I’ve mentioned a couple times, and, certainly, the labor data would be important in that. And, you know, if you—if you can describe a situation like that where if, if there were the beginning of a recession or something like that, then, yes, that would certainly weigh heavily on that decision.

Question (Michael McKee, Bloomberg): Michael McKee from Bloomberg Television and Radio. Mr. Chairman, you were, by your own admission, behind the curve in starting to raise rates to fight inflation, and you said earlier, again, “the full effects of our tightening (cycle) have not yet been felt.” How will you decide when to cut rates, and how will you ensure you’re not behind the curve there?
Answer: So we’re, we’re aware of the risk that we would hang on too long. You know, we know that that’s a risk, and we’re very focused on not making that mistake. And we do regard the two—you know, we’ve come back into a better balance between the risk of overdoing it and the risk of underdoing it. Not only that, we were able to focus hard on the—on the price-stability mandate. And we’re getting back to the point where—which is what you do when you’re very far from, from one of them, one of the two mandates—you’re getting now back to the point where both mandates are important, and they’re, they’re more in balance, too. So I think we’ll be—we’ll be very much keeping that in mind, as we make policy going forward. And the things we’ll be looking at, I’ve already described. You know, we’re, we’re obviously looking hard at what’s happening with demand, and what we see? We see the same thing other people see, which is a strong economy, which really put up quite a performance in 2023. We see good evidence and good reason to believe that growth will come in lower next year. And you see what the forecasts are. I think the median growth—median participant wrote down 1.4 percent growth, but, you know, we’ll have to see. It’s very hard to predict. We’ll also be looking to see progress on inflation and, you know, the labor market remaining strong but, but ideally, without seeing the kind of large increase in unemployment that happens sometimes.

Question (Catarina Saraiva, Bloomberg): Catarina Saraiva of Bloomberg News. Thanks for taking our questions. I just wanted to ask a little bit about, you know, we had some pretty positive data this, you know, this morning and yesterday. I’m assuming those were not incorporated into the forecast we see today, but I just wanted to ask, you know, how that kind of adds to your thinking, you know, on the inflation outlook.
Answer: Right. So we got—we got CPI the morning of the first day, and we got PPI the next day, which informs the, you know, the translation into PCE [inflation]. So it’s very late in the game, you know, to—but nonetheless, participants are allowed to, encouraged to update their SEP forecast until probably midmorning today. After that, so staff has to—has to cumulate all of that and create the documents that you see. So until about midmorning, a little, maybe late morning, it’s okay to update, and I believe some people did update their forecast based on what we saw today.

Question (Jennifer Schonberger, Yahoo Finance): Thank you, Chair Powell. Jennifer Schonberger with Yahoo Finance. You said back in July that you needed to start cutting rates before getting to 2 percent inflation. As you mentioned, PCE inflation is now running at 3½ on core. On a six- month annual basis, core PCE is running at 2½ percent, though when you look at supercore and shelter, they are, of course, stickier. So when looking in the different components of the data, how much closer do you have to get to 2 percent before you consider cutting rates?
Answer: I mean, the reason you wouldn’t wait to get to 2 percent to cut rates is that policy would be, it would be too late. I mean, you’d want to be reducing restriction on the economy well before 2 percent because—or before you get to 2 percent so you don’t overshoot, if we think, think of restrictive policy as weighing on economic activity. You know, it takes—it takes a while for policy to get into the economy, affect economic activity, and affect inflation. So I can’t give you a precise answer. But if you look at what’s in the—in the SEP, and, you know, I think you’ll see a reasonable estimate of the time lags and things like that that it would take.

Question (Jennifer Schonberger, Yahoo Finance): Do think below 3 percent would be reasonable?
Answer: I wouldn’t want to—I wouldn’t want to identify any one precise point, because I would be able to look back then and probably find out that it turned out not to be right. But we’ll be looking at it and, and looking at the broad collection of factors.

Question (Jean Yung, MNI): Hi, Chair Powell. Jean Yung with Market News. I wanted to go back to the stickiness-of-inflation question. Over the past couple of years, a lot of central bankers have talked about the more difficult last mile of getting inflation back down to 2 percent, yet it’s also been surprising how fast inflation has come down this year. I’m curious, do you think something has changed in our understanding of inflation, or do you subscribe to this notion still? Or is it something different about the U.S. economy? Thank you.
Answer: I think—I think this. You know, we felt since the beginning that it would be a combination of two factors. The first factor is just the unwinding of, of what happened in the pandemic: the distortions of supply and demand. And the second thing would be our policy, which was weighing on aggregate demand and actually making it easier for the supply side to recover because of lower demand. We thought those two things were going to be necessary. Sorry, say your—say the last part of your question again. Yeah. So it’s not that—it may or may not be about “different,” the U.S. economy being different. I think that this inflation was not the classic demand overload, pot-boiling-over, kind of inflation that we [typically] think about. It was a combination of very strong demand, without question, and unusual supply-side restrictions, both on the goods side but also on the labor side, because we had a—we had a participation shock. So this is just very unusual. And, you know, we had the view—my colleagues and I broadly had the view—that we could get a lot of—you know, you had essentially a vertical supply curve, because you ran into the limits of, of capacity at very low levels, because there weren’t workers and because people couldn’t—the supply chains were all broken. So we, we had the view that you could come straight down that vertical supply curve to the extent demand [was] lowered, reduced. And, you know, something like that has happened. It happened so far. The question is, you know, once, once that part of it runs out—and we think it has a ways to run; we definitely think that the sort of supply chain and shortages side has some, some ways to run—does labor force participation have much more to run? It might. Immigration could help, but it may be that, at some point—at some point, you will run out of supply-side help, and then it gets down to demand, and it gets harder. That’s, that’s very possible. But to say with certainty that the last mile is going to be different, I’d be reluctant to, you know, to suggest that we have any certainty around that. We just don’t know. I mean, inflation keeps coming down. The labor market keeps getting back into balance. And it’s so far, so good—although we kind of assume that it will get harder from here. But so far, it hasn’t.

Question (Megan Cassella, Barron's): Hi, Chair Powell. Thanks for taking our questions. Megan Cassella with Barron’s. I want to ask about the balance sheet given the Fed’s focus now on proceeding carefully and considering rate cuts. And can you talk us through what the latest thinking is, and has there been any consideration of altering the pace of quantitative tightening at all?
Answer: We’re, we’re not talking about altering the pace of QT right now, just to get that out of the way. So the balance sheet seems to be working pretty much as expected. What we’ve been seeing is, you know, that we’re allowing runoff each month. That’s adding up. I think we’re down—we’re close to 1.2 trillion [dollars]. That’s showing up. The reverse repo facility [take- up] has been coming down quickly, and reserves have been either moving up or—as a result—or holding steady. At a certain point, you know, there won’t be any more to come out of, or there’ll be a level where [take-up at] the reverse repo facility levels out. And, at that point, reserves will start to come down. You know, we still have—you know that we intend to reduce our securities holdings until we judge that the quantity of reserve balances has reached a level somewhat above that consistent with ample reserves, and we also intend to slow and then stop the decline in size of the balance sheet when reserve balances are somewhat above the level judged to be consistent with ample reserves. We’re not at those levels, you know, with, with reserves close to 3.5 trillion [dollars]. We’re not—we don’t think we’re at those [levels judged consistent with ample] reserves. There isn’t a lot of evidence of that. We’re watching it carefully. And, you know, so far—so far, it’s working pretty much as expected, we think.

Question (Megan Cassella, Barron's): Do you anticipate adjusting that thinking at all by the time you’re, you’re considering or moving forward with rate cuts? Is that time to rethink, or are you still going to follow that thinking?
Answer: So I think they’re, they’re on independent tracks. You’re asking, though, the question, I guess you’re implying the question of can you continue with QT at such time—QT, which is a tightening action—at such time as policy is still tight? And the answer is, it depends on the reason. You know, if you’re—if you’re—if you’re cutting rates because you’re going back to normal, that’s one thing, [and distinct from] if you’re cutting them because the economy is really weak. So you can imagine, you’d have to know what the reason is to know whether it would be appropriate to do those two things at the same time.