Federal Reserve press conference, 2022-05-04 — Chair Jerome Powell

Question (Nick Timiraos, Wall Street Journal): Nick Timiraos, the Wall Street Journal. Chair Powell, the unemployment rate at 3.6 percent in March is now essentially at the level that the Committee had expected would prevail over the next three years and at the bottom end of FOMC participants’ projections for the longer-run rate that you submitted in the projections at the last meeting. How has your outlook for further declines in the unemployment rate changed since March? What does this imply for your inflation forecast? And how has your level of confidence changed with regard to the feasibility of slowing hiring without pushing the economy into recession? Thanks.
Answer: Thank you. So you’re right—3.6 percent unemployment is just about as low as it’s been in 50 years. And I would say that I expect, and Committee members generally expect, that we’ll get some additional participation. So people will be coming back into the labor force. We’ve seen that particularly among prime-age people. And that will, of course, tend to hold the unemployment rate up a little bit. I would also expect, though, that job creation will slow. Job creation has been, you know, more than half a million per month in recent months—very, very strong, particularly for this stage of the economy. And so we think— with fiscal policy less supportive, with monetary policy less supportive, we think that job creation will slow as well. So it is certainly possible that the unemployment would go down further. But so I would expect those to be relatively limited because of the additional supply and also just the slowing in job creation. Implications for inflation—really, the wages matter a fair amount for companies, particularly in the service sector. Wages are running high, the highest they’ve run in quite some time. And they are one good example, or good illustration, really, of how tight the labor market really is, the fact that wages are running at the highest level in many decades. And that’s because of an imbalance between supply and demand in the labor market. So we think through our policies—through further healing in the labor market, higher rates, for example, of vacancy filling and things like that, and more people coming back in—we’d like to think that supply and demand will come back into balance and that, therefore, wage inflation will moderate to still high levels of wage increases, but ones that are more consistent with 2 percent inflation. That’s our expectation. Your third question was?

Question (Nick Timiraos, Wall Street Journal): Your level of confidence that you can slow hiring without pushing the economy into a downturn.
Answer: So I guess I would say it this way: There’s a path. There’s a path by which we would be able to have demand moderate in the labor market and therefore have vacancies come down without unemployment going up, because vacancies are at such an extraordinarily high level. There’re 1.9 vacancies for every unemployed person, 11.5 million vacancies, 6 million unemployed people. So we haven’t been in that place on the vacancy, sort of the vacancy/unemployed curve, the Beveridge curve. We haven’t been at that sort of level of a ratio in the modern era. So, in principle, it seems as though by moderating demand, we could see vacancies come down and, as a result—and they could come down fairly significantly and, I think, put supply and demand at least closer together than they are. And that would give us a chance to get inflation down, get wages down, and then get inflation down without having to slow the economy and have a recession and have unemployment rise materially. So there’s a path to that. Now, I would say, I think we have a good chance to have a soft or softish landing or outcome, if you will. And I’ll give you a couple of reasons for that. One is, households and businesses are in very strong financial shape. You’re looking at, you know, excess savings on balance sheets—excess in the sense that they’re substantially larger than the prior trend. Businesses are in good financial shape. The labor market is, as I mentioned, very, very strong. And so it doesn’t seem to be anywhere close to a downturn. Therefore, the economy is strong and is well positioned to handle tighter monetary policy. So, but I’ll say, I do expect that this will be very challenging; it’s not going to be easy. And it may well depend, of course, on events that are not under our control. But our job is to use our tools to try to achieve that outcome, and that’s what we’re going to do.

Question (Steve Liesman, CNBC): Steve Liesman, CNBC. Thanks for taking my question, Mr. Chairman. You talked about using 50-basis-point rate hikes or the possibility of them in coming meetings. Might there be something larger than 50? Is 75 or a percentage point possible? And perhaps you could walk us through your calibration. Why one month should—or one meeting should we expect a 50? Why something bigger? Why something smaller? What is the reasoning for the level of the amount of tightening? Thank you.
Answer: Sure. So a 75-basis-point increase is not something the Committee is actively considering. What we are doing is, we raised [the funds rate by] 50 basis points today. And we’ve said that, again, assuming that economic and financial conditions evolve in ways that are consistent with our expectations, there’s a broad sense on the Committee that additional 50- basis-point increases should be on the table for the next couple of meetings. So we’re going to make those decisions at the meetings, of course, and we’ll be paying close attention to the incoming data and the evolving outlook as well as to financial conditions. And, finally, of course, we will be communicating to the public about what our expectations will be as they evolve. So the test is really just as I laid it out—economic and financial conditions evolving broadly in line with expectations. And, you know, I think expectations are that we’ll start to see inflation, you know, flattening out—and not necessarily declining yet, but we’ll see more evidence. We’ve seen some evidence that core PCE inflation is perhaps either reaching a peak or flattening out. We’ll want to know more than just some evidence. We’ll want to really feel like we’re making some progress there. And we’re going to make these decisions, and there’ll be a lot more information. I just think we want to see that information as we get there. It’s a very difficult environment to try to give forward guidance 60, 90 days in advance. There are just so many things that can happen in the economy and around the world. So, you know, we’re leaving ourselves room to look at the data and make a decision as we get there.

Question (Neil Irwin, Axios): Thanks, Chair Powell. Neil Irwin with Axios. Do you see evidence that inflationary psychology is changing in areas like workers’ wage demands, businesses’ willingness to raise prices? Do you see evidence that there is a psychological shift going on on inflation? Thanks.
Answer: We don’t really see strong evidence of that yet, but that does not in any way make us comfortable. I think if you look at short-term inflation expectations, they’re quite elevated. And you can look at that and say, “Well, that’s because people expect inflation to come down.” And, in fact, inflation expectations [at longer horizons] come down fairly sharply. Longer-term inflation expectations have been reasonably stable but have moved up to—but only to levels where they were in 2014, by some measures. So you can look at that. And I think that’s a fair description of the picture. But it’s really about the risks. We don’t see a wage–price spiral. We see that companies have the ability to raise prices, and they’re doing that, but there have been price shocks. So I just think it takes you back to the basic point—was that we know we need to expeditiously move our policy rate up to ranges of more normal, neutral levels. And we need to look around and keep going if we don’t see that financial conditions have tightened adequately or that the economy is behaving in ways that suggest that we’re not where we need to be. So, again, you don’t see those things yet, but I would say there’s no basis for feeling comfortable about that. It’s a risk that we simply can’t run. We can’t allow a wage–price spiral to happen. And we can’t allow inflation expectations to become unanchored. It’s just something that we can’t allow to happen, and so we’ll look at it that way.

Question (Victoria Guida, Politico): Hi. Victoria Guida from Politico. I want to follow up on that, because you all have obviously highlighted that there are both supply and demand issues at play in inflation. And I’m just wondering, you know, if these supply chain issues continue because of Russia, because of China, or just because these things take a while to work out, does getting back down to your 2 percent mandate require that the supply chain issues get resolved, since you can only handle the demand side, as you said? Or will you have to crimp demand maybe even further if the supply chain issues don’t resolve themselves, in order to try and get inflation back down to where you want it to be?
Answer: So, you know, I’ll just say: For now, we’re focused on doing the job we need to do on demand, and there’s plenty to be done there. Again, if you look at it, it’s essentially almost two to one, job vacancies to unemployed people. There’s a lot of excess demand. There’re more than 5 million more employed plus job openings than there are the size of the labor force. So there’s an imbalance there that we have to do our work on. A very difficult situation—you know, you would look at core inflation, which wouldn’t include the commodity price shocks. And, you know, that’s one of the reasons we would tend to focus on that, because we can have more of an effect on that, but it would be a very difficult situation. I mean, we have to be sure that inflation expectations remain anchored. And I mean, that’s part of our job, too, so we’d be watching that carefully. And it puts any central bank in a very difficult situation.

Question (Rachel Siegel, Washington Post): Hi, Chair Powell. Rachel Siegel here from the Washington Post. To follow up from your message from the very beginning, what is your message to the American people about when they will start to feel the effects of, say, a 50-basis-point rate hike or multiple hikes? How do you explain to them what that does to their grocery bill or their rent or their gas bill? Thank you.
Answer: So, first, the first thing to say is that we understand. And some of us are old enough to have lived through high inflation, and many aren’t. But it’s very unpleasant. It’s just something people don’t—when they experience it for the first time, you’re paying more for the same thing. If you’re a normal economic person, then you probably don’t have that much extra to spend. And it’s immediately hitting your spending on groceries, on, you know, on gasoline, on energy, and things like that. So we understand the pain involved. So how do you get out of that? And it’s our job to make sure that inflation of that unpleasant, high nature doesn’t get entrenched in the economy. That’s what we’re here for, one of the main things we’re here for—perhaps the most fundamental thing we’re here for. And the way we do that is, we try to get supply and demand back in sync with each other, back in balance, so that the economy is under less stress and inflation will go down. Now, the process of getting there involves higher rates—so higher mortgage rates, higher borrowing rates, and things like that. So it’s not going to be pleasant either. But in the end, everyone is better off. Everyone— particularly people on fixed incomes and at the lower part of the income distribution are better off with stable prices. And so we need to do everything we can to restore stable prices. We’ll do it as quickly and effectively as we can. We think we have a good chance to do it without a significant increase in unemployment or, you know, a really sharp slowdown. But, ultimately, we think about the medium and longer term, and everyone will be better off if we can get this job done—the sooner, the better.

Question (Edward Lawrence, Fox Business): Thank you, Chair Powell. Edward Lawrence with the Fox Business Network. So you’ve talked in the past about consumer spending and how that drives the economy. Are you concerned, with this high level of inflation, that the consumer will stop spending—and what’s the level of your concern—pushing us into a recession?
Answer: So the economy is doing fairly well. We expect growth to be solid this year. And we see, you know, household spending and business investment as fairly strong— and even in the first quarter, which was relatively slow on some other fronts. So, and the labor market—if you look at the labor market, for people who are out of work and looking, there are lots of job opportunities for—wages are moving up and at rates that haven’t been seen in quite a long time. So it’s a good time to be a worker looking to, you know, either change jobs or get a wage increase in your current job. So it’s a strong economy, and nothing about it suggests that it’s close to, or vulnerable to, a recession. Now, of course, given events around the world and fading fiscal policy effects and higher rates, you could see some slower economic activity. Certainly, it will not be—last year was an extraordinarily strong growth year as we recovered from the pandemic. As I mentioned, growth [was] over 5 percent. But most forecasters have growth this year at, you know, at a solid pace above 2 percent.

Question (Steve Matthews, Bloomberg): Steve Matthews with Bloomberg News. A number of your colleagues have said that the rates will need to go above neutral into a restrictive territory to bring down inflation. One, do you agree with that? And, two, you’ve recently spoken in great praise of Paul Volcker, who had the courage to bring inflation down with recessions in the 1980s. And while it’s certainly not your desire—the soft landing is the big hope of everyone— would this FOMC have the courage to endure recessions to bring inflation down if that were the only way necessary?
Answer: So I think it’s certainly possible that we’ll need to move policy to levels that we see as restrictive as opposed to just neutral. We can’t know that today. That decision is not in front of us today. If we do conclude that we need to do that, then we won’t hesitate to do it. I’ll say again, there’s no bright line, you know, that you’re stepping over. You’re really looking at what our policy stance is and what the market is forecasting for it. You’re looking at financial conditions and how that’s affecting the economy and making a judgment. You know, we won’t be arguing about whose model of the neutral rate is better than the other one. It’s much more about a practical application of our policy tools. And we’re absolutely prepared to do that. It—wouldn’t hesitate if that’s what it takes. So I am, of course—who isn’t an admirer of Paul Volcker? I shouldn’t be singled out in this respect. But I knew him just a little bit and have tremendous admiration for him. And I— But I would phrase it this way: He had the courage to do what he thought was the right thing. That’s what it was. It wasn’t a particular thing. It was that he always did—he always did—what he thought was the right thing. If you read his last autobiography, that really comes through. So that’s [what] the test is. It isn’t, will we do one particular thing? I would say, we do see, though—we see restoring price stability as absolutely essential for the country in coming years. Without price stability, the economy doesn’t work for anybody, really. And so it’s really essential, particularly for the labor market. If you think about it, like if you look at the last cycle, we had a very, very—longest expansion cycle in our recorded history. In the last two, three years, you had the benefits of this tight labor market going to people in the lower quartiles. And it was, you know, racial, wealth, and income—not wealth, but income gaps were coming down, wage gaps. So it’s a really great thing. We’d all love to get back to that place. But to get back to anything like that place, you need price stability. So, basically, we’ve been hit by historically large inflationary shocks since the pandemic. This isn’t anything like regular business. This is, we have a pandemic, we have the highest unemployment, you know, in—since the Depression. Then we have this outsized response from fiscal policy and monetary policy. Then we have inflation. Then we have a war in Ukraine, which is cutting the commodity, you know, patch in half. And now we have these shutdowns in China. So it’s been a series of inflationary shocks that are really different from anything people have seen in 40 years. So we have to look through that and look at the economy that’s coming out the other side. And we need to somehow find price stability out of this. And it’s obviously going to be very challenging, I think, because you do have, you know, numerous supply shocks, which are famously difficult to deal with. So I guess that’s how I think about it.

Question (Christopher Rugaber, Associated Press): Thank you. Chris Rugaber, Associated Press. Earlier, you just said that if necessary—I think were the words—that you would, or if it, if it turned out to be necessary, or you said that it’s possible that we’ll need to move policy to restrictive levels. Given where inflation is and the hot economy is—or, certainly, the hot labor market, as you described it—why still the hesitation? I mean, what else do you need to see in order to determine that? Wouldn’t the Fed naturally be looking to go to a restrictive level at this point? Thank you.
Answer: So I didn’t—if I said “necessary,” I meant to say “appropriate.” We’re not going to be erecting a high barrier for this. It’s more, if we think it’s appropriate. You know, the point is, we’re a very long way from neutral now. We’re moving there expeditiously, and we’ll continue to do so. And we can’t make that decision, really, today. The decision for about how high to go will be on the table to be made when we reach neutral. And, you know, I expect we’ll get there expeditiously, as I’ve mentioned. So it’s not that we don’t want to—making that decision today wouldn’t really mean anything. But I’ll say again, if we do believe that it’s appropriate to go to those levels, we won’t hesitate.

Question (Michael McKee, Bloomberg): Mike McKee from Bloomberg Television and Radio. The balance sheet—why did you decide to wait until June 1st to begin letting securities roll off and not immediately start in the middle of this month, say? And do you have another, a newer or a better, estimate for the monetary policy impact of letting the balance sheet decline? And then, finally, I’m just curious why you felt the need to address the American people at the top of your remarks? Are you concerned about Fed credibility with the American people?
Answer: So, why June 1? It was just, pick a date, you know, and that happened to be the date that we picked. It was—nothing magic about it. You know, it’s not going to have any macroeconomic significance over time. We just picked that. Sometimes we publish these calendars on the first day of the month, and that’s what we’re doing. I wouldn’t read anything into it. In terms of the effect, I mean, I would just stress how uncertain the effect is of shrinking the balance sheet. You know, we run these models—and everyone does in this field—and make estimates of what will be, how do you measure, you know, a certain quantum of balance sheet shrinkage compared to quantitative easing? And, you know, these are very uncertain. I really can’t be any clearer. There won’t be any clearer [estimates]. You know, people estimate that, broadly, on the path we’re on—and this will be taken, probably, too seriously—but sort of ¼ percent, one rate increase over the course of a year at this pace. But I would just say, with very wide uncertainty bands—very wide. We don’t really know. There are other estimates that are much smaller than that, by the way. And some of you may read about that. That’s kind of a mainstream estimate. We know that it is part of returning to more normal, more neutral financial conditions. And, you know, our strategy is to set up a plan and have it operate and really have, you know, have the interest rate be the active tool of monetary policy. In terms of speaking to the American people, so I feel like sometimes I just want to remind us, really, that that’s who we work for, and that it’s inflation that people are feeling all over the country. And it’s very important that they know that we know how painful it is and that we are working hard on fixing it. I thought it was quite important to do that. And so that was really the thinking behind that.

Question (Brian Cheung, Yahoo Finance): Hi there. Brian Cheung with Yahoo Finance. To expand on Steve’s question about Paul Volcker, there was also a great pain that came with that as well—higher interest rates, obviously affecting households and businesses. I’m wondering how you kind of square what might be demand disruption. Are you already seeing that? Is the idea here to incentivize a lack of spending, to decrease consumption, to perhaps table business investments? Is that essentially what’s happening through this hiking cycle? Thanks.
Answer: Well, so, as I mentioned, you can see places where the demand is substantially in excess of supply. And what you’re seeing as a result of that is prices going up and at unsustainable levels, levels that are not consistent with 2 percent inflation. And so what our tools do is that as we raise interest rates, demand moderates: it moves down. Interest rates, you know—businesses will invest a little bit less, consumers will spend a little bit less. That’s how it works. But, ultimately, getting those, getting supply and demand back, you know, back in balance, is what gives us 2 percent inflation, which is what gives the economy a footing where people can lead successful economic lives and not worry about inflation. I mean, so, yes, there may be some pain associated with getting back to that. But, you know, the big pain over time is in not dealing with inflation and allowing it to become entrenched.

Question (Greg Robb, MarketWatch): Thank you. Thank you, Chair Powell. Greg Robb from MarketWatch. I was wondering if you could take a step back and talk about, in March the dot plot had, you know, looked like steady quarter-point rate hikes, get the funds rate up to 2 percent at the end of the year. Now—where it seems like you’re much more aggressive. So could you talk about the thinking that’s behind that? Thank you.
Answer: So, look, I think what you’ve seen is—really, I would say, in the middle of last fall—there was a time when our policy stance was still pretty much in sync with what the data were saying. If you remember, there were a couple of weak jobs reports. And inflation—month by month, inflation had come down till September, a few months in a row, stayed low. And then around the end of October, we got three or four really strong readings that just said, no, this is a much stronger economy. And by the way—then, with the restatement of the jobs numbers, it looked like the job market was much more even and stronger in the second half of the year. But that hadn’t happened yet. Anyway, we got an ECI reading—employment compensation, [employment cost] index reading—the Friday before the November meeting. Then we got a really strong jobs report. Then we got a really high CPI report. And so I think it became clear to the Committee that we needed to adjust and adapt. And we have. Ever since then, really ever since then, we’ve been adapting. We, you know—the Committee moved by the time of the December meeting to a median [in participants’ 2022 projections] of three rate increases, then to a median of seven increases at the March meeting. And that process is going on. And it’s clearly continuing. And that’s why I say—and I actually mentioned this at the March meeting—that no one should look at any single SEP as sort of a real resting place for 90 days, because we’re in a fast-evolving situation. And that’s what’s happened. You can see— unanimous vote today, of course. And I told you the guidance—that broad support on the Committee to have 50-basis-point hikes on the table at the next couple of meetings. So you’re right. And by the way, other forecasters have been doing the same thing. And it’s just us adapting to the data and to the situation and using our tools to deal with it.