Federal Reserve press conference, 2021-11-03 — Chair Jerome Powell

Question (Nick Timiraos, Wall Street Journal): Hi. Nick Timiraos of the Wall Street Journal. Chair Powell, the markets anticipate you will raise rates once or twice next year. Are they wrong?
Answer: So I would say it this way. We try to focus on what we can control—and that is how to communicate as clearly as possible, in this highly uncertain world, how we’re thinking about the economic outlook and the balance of risks and how policy will evolve in that case and also in the cases, which are frequent, where the economy evolves in unexpected ways. So the focus at this meeting is on tapering asset purchases, not on raising rates. It is time to taper, we think, because the economy has achieved substantial further progress toward our goals, measured from last December. We don’t think it’s time yet to raise interest rates. There is still ground to cover to reach maximum employment, both in terms of employment and in terms of participation. Getting to your question, our baseline expectation is that supply bottlenecks and shortages will persist well into next year, and elevated inflation as well, and that, as the pandemic subsides, supply chain bottlenecks will abate—and job growth will move back up. And as that happens, inflation will decline from today’s elevated levels. Of course, the timing of that is highly uncertain. But, certainly, we should see inflation moving down by the second or third quarter. The time for lifting rates and beginning to remove accommodation will depend on the path of the economy. We think we can be patient. If a response is called for, we will not hesitate. So, what I will tell you is, we will be watching carefully to see whether the economy evolves in line with our expectations, and policy will adapt appropriately. And that’s what I would say.

Question (Nick Timiraos, Wall Street Journal): Based on—if I could follow up, based on your current outlook for the labor market, do you think it’s possible—or likely, even—that maximum employment could be achieved by the second half of next year?
Answer: So if you look at the progress that we’ve made over the course of the last year, if that pace were to continue, then the answer would be: “Yes, I do think that that is possible.” Of course, we measure maximum employment based on a wide range of figures, but it’s certainly within the realm of possibility.

Question (Steve Liesman, CNBC): Thank you, Mr. Chairman. I wonder if you could perhaps give us your thinking about the tradeoffs between inflation and unemployment. You talked about the shortfall of unemployment—reemployment relative to before the pandemic, and yet you have inflation, which is affecting everybody. Are we at, or close to, a point where the risk of inflation is greater than the benefit that you’d—for recovering these lost jobs so that now, from a risk- management standpoint, it makes sense to move more aggressively on rate hikes? And kind of a related question: The statement today says you’ll keep policy accommodative until you hit that 2 percent inflation target. Our surveys show looking for 5 percent inflation this year, 3½ percent next year—it sure seems like you’re on track to modestly or moderately exceed that 2 percent target. Thanks.
Answer: Yes, so, you know, this isn’t the traditional Phillips curve situation where there’s a direct tradeoff, where that’s really what we’re talking about. The inflation that we’re seeing is really not due to a tight labor market. It’s due to bottlenecks, and it’s due to shortages, and it’s due to very strong demand meeting those. So I think it’s not the classical situation where you have that precise tradeoff. But, you know, in this situation, we do have a provision in our Statement on Longer-Run Goals, as you know, that says when those two things are in tension, what we do is, we take into account the employment shortfalls and inflation deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with the mandate. So we used to call that the “balanced approach” paragraph. We have to think about the amount of the deviation, we have to think about the time it will take, and we have to make policy in a world where the two goals are in tension. It’s very difficult. But what it really boils down to is something that’s common sense. And that is risk management. We have to be aware of the risks that we’re—particularly now the risk of significantly higher inflation. We see shortages and bottlenecks persisting into next year, well into next year. We see higher inflation persisting, and we have to be in position to address that risk should it become really a threat to—should it create a threat of more persistent, longer-term inflation. And that’s what we think our policy is doing now. It’s putting us in a position to be able to address the range of plausible outcomes.

Question (Colby Smith, Financial Times): Yes. It’s just on characterizing the risks that you might actually have to do so later on.
Answer: You know, I would just leave you with the words we have here. We are prepared to speed up or slow down the pace of reductions in asset purchases if it’s warranted by changes in the economic outlook. And, again, if we feel like something like that’s happening, then we’ll be very transparent about it. We wouldn’t want to surprise markets. We’ll say, in light of this factor or these factors, we are considering doing this, and then we would either do it or not do it. But so—but I’m not going to, you know, start making up examples of what that might be today. Thanks.

Question (Rachel Siegel, Washington Post): Hi, Chair Powell. Thank you so much for taking our questions. You mentioned at the beginning that the Fed understands the difficulties that high inflation poses for individuals and families, especially those with limited means. What is your message to those families or consumers that are struggling with higher prices right now, and do you feel that your expectations around transitory inflation, that message is reaching them? Thank you.
Answer: Yes. So, first of all, it is our job to—and we accept responsibility and accountability for inflation in the medium term. We’re accountable to Congress and to the American people for maximum employment and price stability. The level of inflation we have right now is not at all consistent with price stability. By the way, we’re also not at maximum employment, as I mentioned. So I would want to assure people that we will use our tools as appropriate to get inflation under control. We don’t think it’s a good time to raise interest rates, though, because we want to see the labor market heal further. And we have very good reason to think that that will happen as the Delta variant declines, so—which it’s doing now. So “transitory” is a word that people have had different understandings of. For some, it carries a sense of “short lived,” and that’s, you know, there’s a real time component—measured in months, let’s say. Really, for us, what “transitory” has meant is that if something is transitory, it will not leave behind it permanently or very persistently higher inflation. So that’s why we, you know, we took a step back from “transitory.” We said “expected to be transitory,” first of all, to show uncertainty around that—we’ve always said that, by the way, in other contexts; we just hadn’t done it in the statement—but also to acknowledge, really, that it means different things to different people. And then we added some language to really explain more what we’re talking about in paragraph two and paragraph three. We said that “supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases,” and we said, “Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation.” So we’re trying to explain what we mean and also acknowledging more uncertainty about “transitory.” So it’s, I mean, it’s become a word that’s attracted a lot of attention that maybe is distracting from our message, which we want to be as clear as possible. Ultimately, the only other thing I would say is, look, we understand completely that it’s particularly people who are living paycheck to paycheck or seeing higher grocery costs, higher gasoline costs—when the winter comes, higher heating costs for their homes. We understand completely what they’re going through. And, you know, we will use our tools over time to make sure that that doesn’t become a permanent feature of life. Really, that’s one of our principal jobs, along with achieving maximum employment. And that’s our commitment.

Question (Howard Schneider, Reuters): Thanks, and thanks for doing this. So, given that answer about employment, I would like to get back to Steve’s question a little bit. On a headline basis, just as it’s evolved this year, do you feel that the two tests on inflation have been met? The two tests in the statement—the guidance that it has to hit 2 percent and be on track to moderately be above 2 percent. Has the economy cleared that?
Answer: That’s a decision for the Committee. I would put it to you this way. When we reach maximum employment, when we reach a state where labor market conditions are at maximum employment in the Committee’s judgment, it’s very possible that the inflation test will already be met. We’re aware that that language sounds, it sounds a little out of touch with what’s going on, but, you know, we’re not at maximum employment. When that is the case, we’ll look to see whether the inflation test is met, and there’s a good chance that it will be if you look at how inflation has evolved in the last year and a half.

Question (Howard Schneider, Reuters): So, to follow up, so you’re not willing to commit that the current levels of inflation and their persistence have met “moderately” and “for some time.” So, given that, I mean, how should we wonder what “moderately” over and “for some time” mean?
Answer: What I’m really saying is, that question is not before us right now. You know, we had the question on when to taper. We’ve now answered that question and the speed of it and all that. We have not focused on whether we meet the liftoff test, because we don’t meet the liftoff test now because we’re not at maximum employment. What I’m saying is, given where inflation is and where it’s projected to be, let’s say we do meet the maximum-employment test. Then the Committee—the question for the Committee at that time will be, has the inflation test been met? And, you know, I don’t want to get ahead of the Committee on that, but the answer may very well be “Yes, it’s been met.” But we’re not asking that question today, because we’re not running a liftoff test. We’re not evaluating the liftoff test today. We didn’t have that discussion at today’s meeting. We did talk about the economy and the development of the economy, but we didn’t ask ourselves whether the liftoff test is met, because, you know, it’s clearly not met on the maximum-employment side.

Question (Matthew Boesler, Bloomberg): And if I could just follow up briefly, you know, you’ve talked a little bit about this possibility that the two goals might be in tension and how you would have to balance those two things. Could you talk a little bit about what the Fed’s process for balancing those two goals would be in the event that, say, come next year, you decide there’s a serious risk of persistent inflationary pressures despite ongoing employment shortfalls?
Answer: Yes. I mean, again, it’s a risk-management thing. It’s not—I can’t reduce it to an equation, but, ultimately, it’s about risk management. So you want to be in a position to act, to cover the full range of plausible outcomes, not just the base case. And in this case, the risk is skewed. For now, it appears to be skewed toward higher inflation. So we need to be in a position to act in case it becomes necessary to do so or appropriate to do so, and we think we will be. So that’s how we’re thinking about it. And I think, though, that, judgmentally, too, it’s appropriate to be patient. It’s appropriate for us to see what the labor market and what the economy look like when they heal further. We know that we were on a path to a different place, as I mentioned, when Delta arrived. And Delta stopped, it stopped job creation. It stopped that transition away from a goods-focused economy where there’s excess demand for goods because there—services are not available. People are not traveling. That transition itself could help bring inflation down, because, presumably, people would spend a little less on goods while they start spending more on travel and all sorts of travel services and things like that. So we want to see that healthy process unfold as we decide what the true state of the economy is, and we think it will evolve in a way that will mean lower inflation. Bottlenecks should be abating. We start to see that now with some of them, but, overall, they haven’t gotten better overall, and, you know, we’re very aware of that. So that’s really how we’re thinking about it. We’re thinking that time will tell us more. In the meantime, we don’t think it’s time to raise rates now. You know, if we do conclude that it’s necessary to do so, then we’ll be patient, but we won’t hesitate.

Question (Edward Lawrence, Fox Business): Thank you, Mr. Chairman, for taking the call. So the Federal Reserve—I want to talk about climate change. The Federal Reserve released a statement today—says “the Federal Reserve supports the efforts . . . to identify key issues and potential solutions for the climate-related challenges most relevant to central banks and supervisory” outcomes. Is this putting us on the path to regulate what banks can offer loans on or invest in, like coal plants or fossil fuels?
Answer: So that’s not a decision for bank regulators or for any agency. That’s a decision for elected representatives. So we feel that any role that we have—and we do think we have a role in climate change. It relates to our existing mandates, and our existing mandates are, really, prudential regulation of financial institutions. We expect them, and the public will expect us to expect them, to understand and be in a position to manage their risks. So that’s physical risk, and it’s transition risk for climate. And, by the way, the large financial institutions are doing this already, and, you know, we think that’s right within our mandate. There’s also a financial stability question, the overall stability of the financial system. And so, from that standpoint, we can do research. We can try to help understand what will the pathways be through which climate change effects the economy—both physical risk and transition risk. That’s what we can do, and that’s what we will do. And we’ll do it well. Within the frame of our existing mandates, we’ll do it well. We’re not the people who will decide the national strategy on climate change. That has to be elected people, and not so much us. We feel like we have that narrow mandate, and we will do it well.

Question (Victoria Guida, Politico): Hi, Chair Powell. So the Fed recently announced that there is going to be new conflict-of-interest rules for investments by Fed officials, and this follows, obviously, the resignation of two regional Fed presidents. And I’m just wondering, do you think that there is more that you will need to do to rebuild the credibility of the Fed, such as, you know, requiring officials to put their assets in blind trusts? And also, if you could speak to whether you have any concerns that any rules or laws were broken by Fed officials. Thank you.
Answer: So we, you know, we—let me just say that this system, the ethics system we had in place had been in place for decades and had, as far as we know, served us well, and then that was no longer the case. And so we had no moment of denial about that. As a group, we stepped in, and we took the actions that we took. And, you know, within one FOMC cycle, we announced a new set of rules to, you know, to try to put us back where we need to be, which is, we need to have the complete trust of the American people that we’re working in their interest all the time—absolutely critical to our work, as it is for any government agency. And I feel like this called that into question. So we reacted, I would characterize it, strongly and forcefully. If there were other things that we could do that were reasonable, we would certainly do them. So you asked me about blind trusts. You know, the overall authority for ethics around these issues in the federal government is the Office of Government Ethics, OGE. And they have a long-held position which is not favorable to blind trusts. They do not encourage them. They don’t think they’re effective. They think they’re cumbersome. And they think there are better ways to get at the things that need to be done. And those are the things that we’re actually doing. So I don’t know that there are any blind trusts, for that reason, because they are the, they’re the regulator. They say this on their website, if you look. In terms of laws broken, you know, I asked the inspector general to look to see whether there were rules broken and whether there were laws broken, and I won’t speculate on that. But that is with the inspector general now and, of course, out of my hands.

Question (Michael McKee, Bloomberg): Mr. Chairman, the critics of your patience policy argue that, given the long and variable lags with which monetary policy works, that you are likely to end up, given inflation, by having to raise rates faster and farther than you would have liked and, therefore, send the economy into recession. Given the fact that, basically, your forecast has been chasing inflation over the last year, and now you’re talking about it not coming down until the second or third quarter, why would they be wrong in thinking that?
Answer: Well, so, let me say what’s happened—and we’re very, very straightforward about it—is that inflation has come in higher than expected, and bottlenecks have been more persistent and more prevalent. We see that just like everybody else does, and we see that they’re now on track to persist well into next year. That was not expected—not expected by us, not expected by other macro forecasters. Now, let me say, you know, it’s difficult enough to just forecast the economy in normal times. When you’re talking about, you know, global supply chains in turmoil, it’s a whole different thing. And you’re talking about a pandemic that’s holding people out of the labor force for reasons that we can sample, but we don’t have a lot of experience with this. So it’s very, very difficult to forecast and not easy to set policy. So we have to set policy, though. So that’s what we’re doing. And, you know, so, to look at your question this way, I don’t think that we’re behind the curve. I actually believe that policy is well positioned to address the range of plausible outcomes, and that’s what we need to do. I do think it would be premature to raise rates today. That’s not—I don’t think that’s controversial. Certainly, I don’t know anyone arguing for that today. And the reason is that there’s still ground to cover to get to maximum employment. And we don’t want to stop that when there’s good reason to think—there’s still good reason to think, although it’s been delayed, clearly, there’s good reason to think that the economy will reopen, particularly if we do get past, you know, significant outbreaks of COVID. That’s when we’re really going to see what the characteristics of the labor market are. And, you know, I think, you know, the bottlenecks that we’re seeing in global supply chains around goods and, frankly, now at our own domestic ports, because demand is stronger than the capacity of those ports—those things are going to work themselves out. We have a flexible economy. It’ll take some time, but, you know, it took—you know, the experts managed to create a vaccine faster than, certainly, than I expected. And I think this stuff will work itself out over the course of next year. That is my baseline understanding, and that’s a very widely held one among people. But, you know, we are prepared for different eventualities, and we will use our tools to achieve price stability and maximum employment. And we’re going to let the data lead us to where we need to go. Our policy will adapt—and has already adapted—to the changing understanding of inflation and of bottlenecks and the whole supply-side story—which is also partly a demand story. So our policy will continue to adapt as is appropriate.

Question (Hannah Lang, American Banker): Hi. I wanted to ask about the supplementary leverage ratio. Is the Fed still planning on taking comment on ways to permanently address that, and how concerned are you, ultimately, about banks’ willingness to intermediate in the Treasury markets without a permanent fix?
Answer: So I don’t have anything for you on supplemental leverage ratio right now. We are looking at ways to, if there are ways we can address liquidity issues through that channel. We’re also—we also have a—there’s a working group headed by [the] Treasury about, over Treasury [securities] markets, and what happened in the acute phase of the pandemic, and what structural things may need to be done. So that would be part of that workstream, and I know that there’s a lot going on. I’m not sure when that report will be out. So it’s work under way. That’s one of the many issues that are part of that, along with things like central clearing of Treasuries, greater central clearing, and, you know, many other ideas. It’s important that we have a liquid Treasury [securities] market. It’s a huge public benefit that we do, and, you know, I think we need to do those things that enable that, you know, while also assuring the safety and soundness of our largest financial institutions, who tend to be the main dealers. So we have to make sure that that’s always a first order of concern as well.

Question (Jeff Cox, CNBC): Yes, thank you. Chair, I just want to dig a little bit deeper on employment. We’ve seen what’s been called the great resignation, folks leaving their jobs in record numbers. Is there any feeling there that maybe you’ve been accused of “fighting the last war”—that perhaps the labor dynamics have changed in the post-COVID environment and that full employment may not look like what it looked like before?
Answer: Yes. So, what’s happening is, people are leaving their jobs. They’re quitting their jobs in all-time-high numbers—but, in many cases, going back into employment and getting higher wages. So a lot of the higher wages you’re seeing are for job switchers rather than incumbents. So that’s just, that’s a sign of a really strong labor market, as opposed to people just running off and quitting. There have also been—there are a significant number of retirements, and we’ll just have to see what that means. So, toward the end of the last cycle, which was the longest in our recorded economic history, we did see labor force participation moving up well above what economists estimate was the trend, and part of that was people staying in the labor force or just not retiring at the rates they were expected to retire. So maybe this was just catch-up on that. I am a believer that, over time, you won’t know how far—you won’t know what can happen with labor force participation in advance. You’re just going to have to give it some time, because we saw that over and over again. There are things that we can, where we can say, you know, this is where the limit is. Labor force participation is a much more flexible subject for me, and so I do think we need to be humble about what the limits are of labor force participation. But we expect labor force participation to pick up. We don’t know the pace at which it will do so. So in terms of full employment, as I discussed earlier, I think, at the very beginning of the recovery, the natural thing to do was to look back at labor conditions, labor market conditions in February of 2010, at the end of the longest expansion in our history. There was so much to like about that labor market, a really historically good labor market—never perfect, but a good labor market. We’re in a different world now. This is a—it’s just very different. The pandemic recession was the deepest, and the recovery has been the fastest. And wages didn’t really go down. And, you know, real incomes were more than fully replaced by fiscal policy [support]. All of this is completely unusual. You know, an economy where inflation was driven by services is now inflation where—all the inflation is in goods, which have had negative inflation for a quarter-century. So you ask about full employment. I think we have to—I’m very open to the thought that it’s going to be an empirical question of where it is located, and we’re just going to learn more and more. I mean, one thing we’ll learn, I think, I hope we’ll learn in the next, in the near term is, once the Delta variant really does continue to decline, what’s going to happen to employment? Are we going to start to see over the winter, you know, significant increases in jobs again? If you look back, the three-, six-, and nine-month average job creation is between 550,000 and 600,000. So if you think of that as a stronger—you don’t have to think back to the million-job months of June and July. You can just think, okay, 550 to 600—if we should get back on that path, then we would be making good progress, and we like to see that, of course. So we’ll know so much more. And, believe me, we understand. It’s a different world in so many ways. And we’re very open to that.