Federal Reserve press conference, 2023-02-01 — Chair Jerome Powell

Question (Christopher Rugaber, Associated Press): Chris Rugaber, the Associated Press. Thank you for doing this. As you know, financial conditions have loosened since the fall with bond yields falling, which has also brought down mortgage rates, and the stock market posted a solid gain in January. Does that make your job of combating inflation harder? And could you see lifting rates higher than you otherwise would to offset the increase in—or to offset the easing of financial conditions?
Answer: So it is important that overall financial conditions continue to reflect the policy restraint that we’re putting in place in order to bring inflation down to 2 percent. And, of course, financial conditions have tightened very significantly over the past year. I would say that our focus is not on short-term moves but on sustained changes to broader financial conditions. And it is our judgment that we’re not yet at a sufficiently restrictive policy stance, which is why we say that we expect ongoing hikes will be appropriate. Of course, many things affect financial conditions—not just our policy. And we will take into account overall financial conditions along with many other factors as we set policy.

Question (Colby Smith, Financial Times): Thank you. Colby Smith with the Financial Times. Given the economic data since the December meeting, is the trajectory for the fed funds rate in the most recent SEP still the best guidepost for the policy path forward? Or does ongoing now mean more than two rate rises now?
Answer: So you’re right. At the December meeting, we all wrote down our best estimates of what we thought the ultimate level would be, and that’s obviously back in December. And the median for that was between 5 and 5¼ percent. At the March meeting, we’re going to update those assessments. We did not update them today. We did, however, continue to say that we believe ongoing rate hikes will be appropriate to attain a sufficiently restrictive stance of policy to bring inflation back down to 2 percent. We think we’ve covered a lot of ground, and financial conditions have certainly tightened. I would say we still think there’s work to do there. We haven’t made a decision on exactly where that will be. I think, you know, we’re going to be looking carefully at the incoming data between now and the March meeting and then the May meeting. I don’t feel a lot of certainty about where that will be. It could certainly be higher than we’re writing down right now. If we come to the view that we need to write down to, you know, to move rates up beyond what we said in December, we would certainly do that. At the same time, if the data come in, in the other direction, then we’ll, you know, we’ll make data-dependent decisions at coming meetings, of course.

Question (Colby Smith, Financial Times): Just as a quick follow-up, how are you viewing the kind of balance of risk between those two options of, you know, the likelihood of maybe falling short of that or going beyond that level?
Answer: I guess I would say it this way. I continue to think that it’s very difficult to manage the risk of doing too little and finding out in 6 or 12 months that we actually were close but didn’t get the job done. Inflation springs back, and we have to go back in. And now, you really do worry about expectations getting unanchored and that kind of thing. This is a very difficult risk to manage, whereas I—of course, we have no incentive and no desire to overtighten. But we, you know, if we feel like we’ve gone too far, we can certainly—and inflation is coming down faster than we expect, then we have tools that would work on that. So I do think that, in this situation, where we have still the highest inflation in 40 years, you know, the job is not fully done. As I started to mention earlier, we have a sector that represents 56 percent of the core inflation index where we don’t see disinflation yet. So we don’t see it. It’s not happening yet. Inflation in the core services ex. housing is still running at 4 percent on a 6- and 12-month basis. So there’s not—nothing happening there. In the other two sectors representing, you know, less than 50 percent, you actually, I think, now have a story that is credible, that’s coming together, although you don’t actually see disinflation yet in housing services, but it’s in the pipeline, right? So, for the third sector, we don’t see anything here. So I think it would be premature—it would be very premature to declare victory or to think that we’ve really got this. We need to see—our goal, of course, is to bring inflation down. And how do we get that done? There are many, many factors driving inflation in that sector, and they should be coming into play to have inflation—the disinflationary process begin in that sector. But, so far, we don’t see that. And I think until we do, we see ourselves as having a lot of work left to do.

Question (Howard Schneider, Reuters): Hi, Howard Schneider with Reuters, and thanks as usual. So I just wanted to connect a couple of dots here. The statement made a number of changes that seem to be saying things are getting better. You’re saying inflation has eased That’s new. You’ve taken out references to the war in Ukraine that’s causing price increases. You’ve taken out references to the pandemic. You’ve eliminated all the reasons that you said prices were being driven higher, yet that’s not mapping to any change in how you describe policy. We still have ongoing increases to come. So I’m wondering, why is that the case? And does it have more to do with uncertainty around the outlook or more to do with you not wanting to give a very overeager market a reason to get ahead of itself and overreact?
Answer: So I guess I would say it this way. We can now say, I think, for the first time that the disinflationary process has started. We can see that. And we see it, really, in goods prices so far. Goods prices is a big sector. We—this is what we thought would happen since the very beginning, and now here it is actually happening, and for the reasons we thought. We—you know, it’s supply chains, it’s shortages, and it’s demand revolving back towards services. So this is a good thing. This is a good thing. But that’s, you know, around a quarter of the PCE price index—core PCE price index. So the second sector is housing services, and that’s driven by very different things. And we—as I mentioned, with housing services, we expect, and other forecasters expect, that measured inflation will continue moving up for several months but will then come down, assuming that [rent increases associated with] new leases continue to be soft. And we do assume that. So we think that that’s sort of in the pipeline. And we actually see disinflation in the goods sector, and we see it in the pipeline for two sectors that amount to a little less than half. So this is good. And we note that when we say inflation is coming down that this is good. We expect to see that that disinflation process will be seen, we hope soon, in the core goods ex. housing—sorry, the core services ex. housing sector that I talked about. We don’t see it yet. It’s—you know, it’s seven or eight different kinds of services, not all of them are the same. And, you know, we have a sense of what’s going on in each of those different subsections. Probably the biggest part of it, probably 60 percent of that is, you know, research would show is sensitive to slack in the economy and so the labor market will probably be important. Some of the other ones it’s—the labor market is not going to be important. Many other factors will drive it. In any case, we don’t see disinflation in that sector yet. And I think we need to see that it’s the majority of the core PCE index, which is the thing that we think is the best predictor of headline PCE, which is [the price series that we associate with] our mandate. So it’s not that we’re not—we’re neither optimistic nor pessimistic. We’re just telling you that we don’t see inflation moving down yet in that large sector. I think we will fairly soon, but we don’t see it yet. Until we do, I think we—you know, we see ourselves, we’ve got to be honest with ourselves, but we see ourselves as having perhaps more persistent—we’ll see more persistent inflation in that sector, which will take longer to get down. And we’re just going to have to—we have to complete the job. You know, that’s what we’re here for.

Question (Nick Timiraos, Wall Street Journal): Nick Timiraos, the Wall Street Journal. Chair Powell, you observed several years ago that we learned we can have a low unemployment rate without above-target inflation. And we have learned lately that inflation can come down from its uncomfortably high level despite a historically low unemployment rate. Given that, and given how much you did over the last year, why do you think further rate increases are needed? Why not stop here and see what transpires in the coming months before raising rates again?
Answer: So we’ve—you know, we’ve raised rates 4½ percentage points, and we’re talking about a couple of more rate hikes to get to that level we think is appropriately restrictive. And why do we think that’s probably necessary? We think, because inflation is still running very hot. We’re, of course, taking into account long and variable lags, and we’re thinking about that. It really—the story we’re telling about inflation is to ourselves, and the way we understand it is basically the three things that I’ve just gone through a couple of times. And, again, we don’t see it affecting the services sector ex. housing yet. But, I mean, I think our assessment is that we’re not very far from that level. We don’t know that, though. We don’t know that. So I think we’re—you know, we’re living in a world of significant uncertainty. I would look across the rate—the spectrum of rates and see that real rates are now positive by— you know, by an appropriate set of measures are positive across the yield curve. I think policy is restrictive. We’re trying to make a fine judgment about how much is restrictive enough. That’s all. And we’re going to—you know, that’s why we’re slowing down to 25 basis points. We’re going to be carefully watching the economy and watching inflation and watching the progress of the disinflationary process.

Question (Nick Timiraos, Wall Street Journal): Did you or your colleagues discuss the conditions for a pause at this meeting this week?
Answer: We—you know, you’ll see that the minutes will come out in three weeks, and we’ll give you a lot of detail. I—you know, we spend a lot of time talking about the path ahead and the state of the economy. And I wouldn’t want to start to drive the—describe all the details there, but that was the sense of the discussion, was really talking quite a bit about the path forward.

Question (Victoria Guida, Politico): Are you actively doing any planning of what might happen in the event that that would happen?
Answer: I’m just going to leave it at that. This is a matter that’s to be resolved between, really—it’s really Congress’ job to raise the debt ceiling. And I gather there are discussions happening, but they don’t involve us. We’re not involved in those discussions. So we’re the fiscal agent.

Question (Jeanna Smialek, New York Times): Jeanna Smialek from the New York Times. Thanks for taking our questions. I wonder, was there any discussion today of the possibility of pausing rate increases and then restarting them? Lorie Logan from the Federal Reserve Bank of Dallas seemed to suggest that would be a possibility in a recent speech. And I wonder if that view is broadly shared on the Committee.
Answer: So the Committee obviously did not see this as the time to pause. We judged that the appropriate, you know, thing to do at this meeting was to raise the federal funds rate by 25 basis points. And we said that we continue to anticipate that ongoing increases in the target range will be appropriate in order to attain that stance of sufficiently restrictive monetary policy that will bring inflation down to 2 percent. So that’s the judgment that we made. You know, we’re going to write down new forecasts in March, and we’ll—you know, we’ll certainly be looking at the incoming data as everyone else will.

Question (Jeanna Smialek, New York Times): Sorry, I should have been clearer. I mean, would it be possible to take a meeting off, for example, and then resume? You know, could you, rather than just doing at every meeting that move, go a little bit more slowly, take some gaps in between moves?
Answer: I mean, I think this is not something that the Committee is thinking about or exploring in any kind of detail. In principle, though, you know, we used to—the thing we used to do was go every other meeting, if you remember, 25 basis points, and that was considered a fast pace. So I think a lot of options are available. And I mean, you saw what the Bank of Canada did and, you know, they left it that they’re willing to raise rates after pausing. But this is not something that the Federal Open Market Committee is on the point of deciding right now.

Question (Steve Liesman, CNBC): Steve Liesman, CNBC. Mr. Chairman, the SEP has the PCE inflation rate in 2023 at 3.1 percent. Meanwhile, the three-month annualized PCE is 2.1 percent, and you’ve achieved this without going to your 5.1 percent funds rate, which is what you have penciled in for this year. And you’ve also achieved it without the 1 percentage point increase in the unemployment rate, which you have penciled in for this year. I’m wondering if you’ve considered the idea of whether or not your understanding of the inflation dynamic may be wrong, and it’s possible to achieve these things without raising rates that high and also without the surge in unemployment. And, specifically, I wonder if you might comment on the speech given by Vice Chair Lael Brainard, who said, “To the extent that inputs other than wages may be responsible in part for important price increases for some nonhousing services, an unwinding of these factors.” In other words, it may not be wages. The idea that it may not require unemployment rising to get this sector of inflation under control. Thanks.
Answer: So a couple of things. First, on the forecast, if—you’re right—if you take very short-term three-month, say, measures of PCE—core PCE inflation, they’re quite low right now. But that’s because that’s driven by, you know, significantly negative readings from goods inflation. Most forecasters would think that the significantly negative readings will be transitory and that goods inflation will move up fairly soon, back up to its longer-run trend of something around zero, something like that. So a lot of forecasts would call for core PCE to go back up to 4 percent by the middle of the year, for example. So that’s really where the sustainable level is. It’s more like at 4 percent. So that would suggest there’s work left to do. You know, let’s say inflation does come down much faster than we expect, which is possible. As I mentioned, you know, obviously our policy is data dependent. We would take that into account. In terms of the non—sorry, the core nonhousing services, as I mentioned earlier, it’s a very diverse sector, six or seven sectors. And so sectors that represent 55 or 60 percent of that— subsectors of that sector are—we think are sensitive to slack in the economy, sensitive to the labor market in a way, but some of the other sectors are not. And, for example, you know, financial services is a big sector that’s really not driven by labor markets—wages. So that’s why I said there are a number of things that will affect—take restaurants, right? So, clearly, labor is important for restaurants but so are food prices. And, you know, transportation services is going to be driven by fuel prices, for example. So there are lots of things in that mix that will drive inflation. I would say overall, though, my own view would be that you’re not going to have, you know, a sustainable return to 2 percent inflation in that sector without a better balance in the labor market. And I don’t know what that will require in terms of increased unemployment, your question. I do think there are a number of dimensions through which the labor market can soften. And so far, we’ve got—as I mentioned, in goods, we have inflation moving down without the softening in the labor market. I think most forecasters would say that unemployment will probably rise a bit from here. But I still think—I continue to think that there’s a path to getting inflation back down to 2 percent without a really significant economic decline or a significant increase in unemployment. And that’s because the—you know, the setting we’re in is quite different. The inflation that we originally got was very much a collision between very strong demand and hard supply constraints, not something that you really have seen in prior— you know, in prior business cycles. And so now we see goods inflation coming down for the reasons we thought, and we understand why housing inflation will come down. And I think will—a story will emerge on the nonhousing services sector soon enough. But I think there is— there’s ongoing disinflation, and we don’t yet see weakening in the labor market. So we’ll have to see.

Question (Richard Miller, Bloomberg): Good. Second off, I think, earlier on in the press conference, you said you need to see substantially more evidence of inflation coming down. Can you give us some idea of what you’re thinking of? You mentioned three months—that we’ve seen three months in a row. Governor Waller suggested he might want to see six months. And so is it just the inflation data, or do you have to see the labor market coming back into better balance to have that “substantially more evidence” metric?
Answer: So I don’t think there’s, you know, going to be a light switch flipped or anything like that. I think it’s just an accumulating—accumulation of evidence. So, of course, we’ll be looking—by the time of the March meeting, we’ll have two more employment reports, two more CPI reports, and we’ll be looking at those carefully as all of us will. And we’ll be asking ourselves, what are they telling us? And soon after that, we’ll have another ECI wage report, which, as you know, is a report that we like because it adjusts for composition and it’s very complete. And, you know, the one we got, I guess it was yesterday, was some—was constructive. It’s—you know, it shows wages coming down but still at a high level. They’re still at a level that’s way above—well above where they were before the pandemic. So I don’t want to put a number on it in terms of months, but as the accumulated evidence comes in, it’s going to be reflected in our assessment of the outlook, and that will be reflected in our policy over time. But I will say, though, we—you know, it is our job to restore price stability and achieve 2 percent inflation for the benefit of the American public. We’re not—market participants have a very different job. It’s a fine job. It’s a great job. In fact, I did that job for years but in one form or another. But, you know, we have to deliver that. And so we are strongly resolved that we will, you know, complete this task because we think it has benefits that will, you know, support economic activity and benefit the public for many, many years.

Question (Edward Lawrence, Fox Business): Thank you, Michelle. Thank you, Fed Chairman, for taking the questions. So you’ve talked about we had solid job growth. Edward Lawrence from Fox Business, by the way. We had solid job growth, a slight falling in the increase in consumer spending. It seems so far it’s been relatively mild from the economy to go to—from a 9.1 percent CPI inflation to 6.5 percent CPI inflation. Is the hard part yet to come to go from 6.5 to 2?
Answer: I don’t think we know, honestly. You know, the—so we, of course, expected goods inflation to start coming down by the end of 2021, and it didn’t come down all through ’22. And now it’s coming down, and it’s come down pretty fast. So I would say these are—this is not a standard business cycle where you can look at the last 10 times there was a global pandemic and we shut the economy down and Congress did what it did and we did what we did. It’s just—it’s unique. So I think certainty is just not appropriate here. Inflation—it’s just harder to forecast inflation. It may come down faster. It may take longer to come down. And, you know, our job is to deliver inflation back to target, and we will do that. But I think we’re going to be cautious about declaring victory and, you know, sending signals that we think that the game is won because, you know, it’s—we’ve got a long way to go. It’s just—it’s the early stages of disinflation. And it’s most welcome to be able to say that we are now in disinflation, but that’s great. But we just see that it has to spread through the economy and that it’s going to take some time. That’s all.

Question (Edward Lawrence, Fox Business): Do you—how long do you see then, the federal funds rate remaining at this elevated level?
Answer: You know, so—again, my forecast and that of my colleagues as you will see from the SEP and—I mean, there are many different forecasts, but, generally, it’s a forecast of slower growth, some softening in labor market conditions, and inflation moving down steadily but not quickly. And, in that case, if the economy performs broadly in line with those expectations, it will not be appropriate to cut rates this year, to loosen policy this year. Of course, other people have forecasts with inflation coming down much faster, that’s a different thing. You know, if that happens—inflation comes down much faster, you know, then we’ll be seeing that, and it will be incorporated into our thinking about policy.

Question (Scott Horsley, NPR): Hi, Chair Powell. Scott Horsley from NPR. One of the changes in the statement this month is that the Committee is no longer listing public health as among the data points you’ll consider in assessing conditions. What should we make of that? Does the Federal Reserve no longer see the pandemic as weighing on the economy?
Answer: That’s the general sense of it. Look, we understand—I personally understand well that COVID is still out there, but that it’s no longer playing an important role in our economy. And, you know, we’ve kept that statement in there for quite a while, and I think we just—we knew we would take it out at some point. There’s never a perfect time, but we thought that—you know, people are handling it better, and the economy and the society are handling it better now. It doesn’t really need to be in a—you know, in the Fed’s monthly, you know, postmeeting statement as an ongoing economic risk as opposed to, you know, a health issue.

Question (Nancy Marshall-Genzer, Marketplace): Hi, Chair Powell. Nancy Marshall-Genzer with Marketplace. I wanted to go back to another thing that Fed Vice Chair Lael Brainard said recently. She said she doesn’t see signs of a wage–price spiral, and I’m wondering if you agree with that.
Answer: I do. Yeah, I do. You don’t see that yet. But the whole point is, you know, if you—once you see it, you have a serious problem. That means that, effectively, in people’s decisionmaking, inflation has become a really salient issue. And once that happens— that’s what we can’t allow to happen. And, you know, so that’s why we worry that the longer we’re at this and the longer people are talking about inflation all day long, every day, you know, the more risk of something like that. But no, there’s not much—it’s more of a risk. It always has been more of a risk than anything else. By the way, I think it’s becoming less salient. And people are—you know, we pick that up in conversations. And I’ve seen some data, too, that show people are, you know, gradually—they’re glad that inflation is coming down. People really don’t like inflation. And as we see it coming down, that could also add a boost to economic activity. You look at the sentiment surveys now, and they’re very, very low with 3½ percent unemployment and, you know, high wage increases nominally by historical standards. Why can that be? It has to be inflation, right? So I think once inflation is seen to be coming down in coming months, even you will also see a boost to sentiment, I hope.

Question (Nancy Marshall-Genzer, Marketplace): So that’s what you’re looking at most closely, is consumer expectations?
Answer: That’s at the very heart, is consumers and businesses that, you know, are the—essentially, we believe that expectations of future inflation are a very important part of the process of creating inflation. That’s a sort of bedrock belief. In one way or another, it has to be. We think it’s important. And, in this case, I would say, the risk eight months ago or so, longer-term inflation expectations had moved up. We moved quite vigorously last year. Expectations are—seem to be well anchored, including at the shorter end now, not just the longer end. So it’s, you know—and that’s—I think that’s very reassuring. I think, you know, the markets have decided, and the public has decided, that inflation is going to come back down to 2 percent and it’s just a matter of us following through. That's immeasurably helpful to the process of getting inflation down. The fact that people now do generally believe that it will come down, that’ll be part of the process of getting it down. And it’s a very positive thing.

Question (Greg Robb, MarketWatch): Thank you, Chair Powell. Greg Robb from MarketWatch. In the minutes of the December meeting, there was a couple of sentences that struck people as important, when the Committee said participants talked about this unwarranted easing of financial conditions was a risk and it would make your life harder to bring inflation down. I haven’t seen—heard you talk much about that today or in the statement. So I was wondering, has that concern eased among members, or is that still something you’re concerned about? Thank you.
Answer: I would put it this way. It’s something that we monitor carefully. Financial conditions didn’t really change much from the December meeting to now. They mostly went sideways or up and down but came out in roughly the same place. It’s important that the markets do reflect the tightening that we’re putting in place. As we’ve discussed a couple times here, there’s a difference in perspective by some market measures on how fast inflation will come down. We’re just going to have to see. I mean, I’m not going to try to persuade people to have a different forecast, but our forecast is that it will take some time and some patience and that we’ll need to keep rates higher for longer. But we’ll see.

Question (Brendan Pedersen, Punchbowl News): Hi, Chair Powell. Brendon Pedersen with Punchbowl News. I wanted to ask if the Fed takes into account at all the debt ceiling when it comes to quantitative tightening, given the fact that rapid or faster quantitative tightening could bring us closer, faster to that drop-dead debt ceiling deadline. Could it play in effect as we get closer to that drop-dead deadline this summer?
Answer: Look, I—it’s very hard to think about all the different possible ramifications. And I think the answer is, basically, I don’t think there’s likely to be any important interaction between the two, because I believe Congress will wind up acting, and—as it will and must, in the end, to raise the debt ceiling in a way that doesn’t risk, you know, the progress we’re making against inflation and the economy and the financial sector. I believe that that will happen. I believe it will happen. You know, we, of course, will monitor money market conditions carefully as—you know, as the process moves on. For example, the Treasury General Account will shrink down, and then it will grow back up. And we understand there’ll be lots of flows between there and the overnight repo facility and reserves. We understand all that. We’re watching it carefully. We’ll just be monitoring it. Thank you very much.