On Wednesday, November 3, 2021 FOMC Chairman Jerome Powell gave his scheduled November 2021 FOMC Press Conference. (link of video and related materials)
Below are Jerome Powell’s comments I found most notable – although I don’t necessarily agree with them – in the order they appear in the transcript. These comments are excerpted from the “Transcript of Chairman Powell’s Press Conference“ (preliminary)(pdf) of November 3, 2021, with the accompanying “FOMC Statement.”
Excerpts from Chairman Powell’s opening comments:
Economic activity expanded at a 6.5 percent pace in the first half of the year, reflecting progress on vaccinations, the reopening of the economy, and strong policy support. In the third quarter, real GDP growth slowed notably from this rapid pace. The summer’s surge in COVID cases from the Delta variant has held back the recovery in the sectors most adversely affected by the pandemic, including travel and leisure. Activity has also been restrained by supply constraints and bottlenecks, notably in the motor vehicle industry. As a result, both household spending and business investment flattened out last quarter. Nonetheless, aggregate demand has been very strong this year, buoyed by fiscal and monetary policy support and the healthy financial positions of households and businesses. With COVID case counts receding further and progress on vaccinations, economic growth should pick up this quarter, resulting in strong growth for the year as a whole.
The supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors. In particular, bottlenecks and supply chain disruptions are limiting how quickly production can respond to the rebound in demand in the near term. As a result, overall inflation is running well above our 2 percent longer-run goal. Supply constraints have been larger and longer lasting than anticipated. Nonetheless, it remains the case that the drivers of higher inflation have been predominantly connected to the dislocations caused by the pandemic, specifically the effects on supply and demand from the shutdown, the uneven reopening, and the ongoing effects of the virus itself.
We understand the difficulties that high inflation poses for individuals and families, particularly those with limited means to absorb higher prices for essentials such as food and transportation. Our tools cannot ease supply constraints. Like most forecasters, we continue to believe that our dynamic economy will adjust to the supply and demand imbalances, and that as it does, inflation will decline to levels much closer to our 2 percent longer-run goal. Of course, it is very difficult to predict the persistence of supply constraints or their effects on inflation. Global supply chains are complex; they will return to normal function, but the timing of that is highly uncertain.
Excerpts of Jerome Powell’s responses as indicated to various questions:
JEANNA SMIALEK. Hi Chair Powell. I was wondering if you could detail a little bit how you’re thinking about wages at this moment. Obviously, we’re seeing strong wage growth, particularly for people in sort of lower-income fields. I wonder if you see that as a positive thing or as a potential start to a wage price spiral and sort of how you sort of delineate those two things.
CHAIR POWELL. So, wages have been moving up strongly, very strongly, and in particular, I would point to the Employment Compensation Index reading that we got last Friday. Now, in real terms, they’ve been, they had been running a little bit below inflation, so real wages were not really increasing. I think with the ECI reading, it becomes close to maybe not increasing but close to back to zero in terms of the real increase. So, wages moving up, of course, is how standard of living increases over the years for generation upon generation. It’s very important, and it’s generally a good thing. You know, the concern is a somewhat unusual case where if wages were to be rising persistently and materially above inflation and productivity gains, that could put upward pressure on or downward pressure on margins and cause companies to their employers really to raise prices as a result, and you can see yourself, find yourself in what we used to call a wage price spiral. We don’t have evidence of that yet. Productivity has been very high. The ECI reading is just one reading. Again, if you look back, we — so we’ll be watching this carefully, but I would say that at this point we don’t see troubling increases in wages, and we don’t expect those to emerge, but we’ll be watching carefully.
VICGTORIA GUIDA. 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.
CHAIR POWELL. 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 irregular. 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.
MICHAEL MCKEE. 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?
CHAIR POWELL. Well, so, let me say what’s happened, and we’re very, very straightforward about it, is that inflation is coming 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 is 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, 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 very widely held among people. But, you know, we are prepared for different eventualities, and we will use our tools to achieve prices 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.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 4668.39 as this post is written