On Wednesday, March 16, 2022 FOMC Chairman Jerome Powell gave his scheduled March 2022 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 March 16, 2022, with the accompanying “FOMC Statement” and “Summary of Economic Projections” dated March 16, 2022.
Excerpts from Chairman Powell’s opening comments:
Inflation remains well above our longer-run goal of 2 percent. Aggregate demand is strong, and bottlenecks and supply constraints are limiting how quickly production can respond. These supply disruptions have been larger and longer lasting than anticipated, exacerbated by waves of the virus here and abroad, and price pressures have spread to a broader range of goods and services. Additionally, higher energy prices are driving up overall inflation. The surge in prices of crude oil and other commodities that resulted from Russia’s invasion of Ukraine will put additional upward pressure on near-term inflation here at home.
We understand that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation. We know that the best thing we can do to support a strong labor market is to promote a long expansion, and that is only possible in an environment of price stability. As we emphasize in our policy statement, with appropriate firming in the stance of monetary policy, we expect inflation to return to 2 percent while the labor market remains strong. That said, inflation is likely to take longer to return to our price stability goal than previously expected. The median inflation projection of FOMC participants is 4.3 percent this year and falls to 2.7 percent next year and 2.3 percent in 2024; this trajectory is notably higher than projected in December, and participants continue to see risks as weighted to the upside.
The Fed’s monetary policy actions have been guided by our mandate to promote maximum employment and stable prices for the American people. Our policy has been adapting to the evolving economic environment, and it will continue to do so. As I noted, the Committee raised the target range for the federal funds rate by 1/4 percentage point and anticipates that ongoing increases in the target range will be appropriate. The median projection for the appropriate level of the federal funds rate is 1.9 percent at the end of this year, a full percentage point higher than projected in December. Over the following two years, the median projection is 2.8 percent, somewhat higher than the median estimate of its longer-run value. Of course, these projections do not represent a Committee decision or plan, and no one knows with any certainty where the economy will be a year or more from now.
Reducing the size of our balance sheet will also play an important role in firming the stance of monetary policy. At our meeting that wrapped up today, the Committee made good progress on a plan for reducing our securities holdings, and we expect to announce the beginning of balance sheet reduction at a coming meeting. In making decisions about interest rates and the balance sheet, we will be mindful of the broader context in markets and in the economy, and we will use our tools to support financial and macroeconomic stability.
Excerpts of Jerome Powell’s responses as indicated to various questions:
RACHEL SIEGEL. Thank you, Michelle. And thank you, Chair Powell, for taking our questions. I’m curious if you can be specific on when you expect to see inflation will start to come down, especially with the combination of rates going up, fiscal aid dissipating from the economy, and supply chains getting better? And if you don’t start to see that, how will you signal it? What will you be looking for? And what will you be looking for over the course of the year? Thank you.
CHAIR POWELL. So I guess I would say that at the — before the invasion of Ukraine by Russia, so let’s go back to that. I would have said that the expectation was that inflation would peak sometime in the first quarter, maybe the end of the first quarter of this year and then maybe stay at that level or a little bit lower and then start to come down in the back half of the year. So now we’re — you know, we’re getting — we’re going — we’re already seeing a little bit of short term upward pressure in inflation due to higher oil prices, not — natural gas a little bit but not so much for us since we have our own natural gas supply, other commodities prices. The other thing is that you’re seeing supply chain issues around shipping and around, you know, lots of countries and companies and people not wanting to touch Russian goods. So that’s going to mean more tangled supply chains. So that could actually push out the relief we were expecting on supply chains generally. So I guess I would say that the expectation is still that inflation will begin to come down in the second half of the year. But if you look at where I read the SEP headline meeting, we still expect inflation to be high this year, lower than last year. And then we — we expect, though, particularly with the effects of the war but also the data we’ve seen so far this year, we expect inflation to remain high through the middle of the year, begin to come down, and then come down more sharply next year.
NICK TIMIRAOS. Nick Timiraos of the Wall Street Journal. Chair Powell, over the last six months, the Fed has shifted its policy stance quite a bit. Six months ago, you were still buying assets. Most officials weren’t projecting any interest rate increases this year. And yet, despite the shift over the last six months, real rates are as negative today as they were then. So how concerned are you that further inflation surprises will offset the effects of recent policy firming by leading real rates to stay at levels that do not actually provide much restraint to the economy. Thanks.
CHAIR POWELL. So that’s one of many ways of capturing the situation, which is that we — the Committee really does understand that the time for rate increases and for shrinking the balance sheet has come. And I would just say — I would go back to the economy is very strong, as I mentioned. Tremendous momentum in the labor market. We expect growth to continue. As I — it’s clearly time to raise interest rates and begin the balance sheet shrinkage. And I just wanted to say that if — as I looked around the table at today’s meeting, I saw a committee that’s acutely aware of the need to return the economy to price stability and determined to use our tools to do exactly that. You couched it in terms of real rates. I would say if you look at the SEP, you’ve got people getting close to or even above in many cases their estimate of the longer run neutral rate. So I understand that doesn’t do it for real rates. But if you go out a year or two, many people are – in their forecasts are having — are having tight policy from a real, real interest rate standpoint. So that’s something that we’re focused on. Of course, it’s a highly uncertain environment. And, you know, we don’t know what’s going to happen. And — but we do we know that we’re going to deploy our tools to achieve our goals, and that includes the price stability goal.
EDWARD LAWRENCE. Yeah. Thank you, Chair Powell. Thank you, Michelle, for the question. I have a more basic question. The last time the CPI inflation — I know you look at PCE, but CPI inflation was as high as it is was July of 1981, when the effective federal funds rate was 19.2 percent. But given the current data, how far behind the curve of inflation do you believe the Federal Reserve is in your mind?
CHAIR POWELL. So I just would say a couple things. We have the tools that we need, and we’re going to use them. And as you can see, we have a plan over the course of this year to raise interest rates steadily and also to run off the balance sheet. We’ll take the necessary steps to ensure that high inflation does not become entrenched while also supporting a strong labor market. And, as I mentioned, if we conclude that it would be appropriate to move more quickly, we’ll do so. I’ll leave it to others to make the judgment you asked for.
CHRIS RUGABER. Hi. Thank you. Well, let me follow up a bit on that. I mean, there are a lot of economists skeptical that you can reduce inflation as much as you’ve penciled in without raising the unemployment rate. And I’m wondering just what are the mechanisms you see in reducing demand? I mean, outside housing and autos, how do higher fed rates reduce consumer demand unless it’s through higher unemployment? Thank you.
CHAIR POWELL. Well, if you take a look — take a look at today’s labor market, what you have is 1.7 plus job openings for every unemployed person. So that’s a very, very tight labor market, tight to an unhealthy level, I would say. So, in principle, if you were — if — let’s say that our tools work about as you described and the idea is we’re trying to better align demand and supply, let’s just say in the labor market, so it would actually, if you were just moving down the number of job openings so that they were more like one to one, you would have less upward pressure on wages. You would have — you would have a lot less of a labor shortage, which is going on pretty much across the economy. We’re hearing from companies that they can’t hire enough people. They’re having a hard time hiring. So that’s really the thinking there is, we know, these are fairly well-understood channels, interest sensitive. And basically across the economy, we’d like to slow demand so that it’s better aligned with supply; give supply, at the same time, time to recover; and get into a better, you know, a better alignment of supply and demand. And that over time should bring inflation down. And I’ll say again, though, you know, we don’t have a perfect crystal ball about the future, and we’re prepared to use our tools as needed to restore price stability. You know, with — as I mentioned in my opening remarks, without price stability, there — you really can’t have a sustained period of maximum employment. It’s our — one of our most fundamental obligations is to maintain and restore, in this case, price stability. So we’re very committed to that. Of course, the plan is to restore price stability while also sustaining a strong labor market. That is our intention, and we believe we can do that. But we have to restore price stability.
MICHAEL MCKEE. If I could follow up by asking, I guess what you’d call it as the Paul Volcker question, you don’t think unemployment is going to rise significantly. But, if it does, does that temper your desire to keep raising rates?
CHAIR POWELL. The goal, of course, is to restore price stability while also sustaining a strong labor market. We have a dual mandate, and they’re sort of equal. But as I said earlier, you know, price stability is an essential goal. In fact, it’s a precondition, really, for achieving the kind of labor market that we want, which is a strong and sustained labor market, we saw the benefits of a long expansion, a sustained labor market. It pulled people back in, and it was — there were really no imbalances in the economy that threatened a long expansion. It just the pandemic arrived, just it was just a completely exogenous event. So that’s how we’re thinking about it. We, of course, want to achieve, you know, price stability with a strong labor market. But we do understand also that, really, you can’t have maximum employment for any sustained period without price stability. So, we need to focus on price stability in particularly — particularly because the labor market is so strong and the economy is so strong. We feel like economy can handle tighter monetary policy.
NANCY MARSHALL-GENZER. Hi, Chair Powell. Thanks for taking the question. You’ve been talking a lot about rising wages, which on the one hand, is a great thing, but are we possibly seeing the beginning of a wage price spiral?
CHAIR POWELL. So the way I would say it is this: We — first of all, I would agree with the premise, that wages moving up is a great thing. You know, it’s — that’s how the standard of living rises over time. And it — generally it’s driven over long periods by rising productivity. But what we have now, if you look at these — the wage increases that we have, we look at a — we’re blessed with a range of measures of wages that all measure different things. But right now, they’re all showing the same thing, which is that the increases, not the levels but the increases are running at levels that are well above what would be consistent with 2 percent inflation, our goal over time. And that may be — we don’t know how persistent that phenomenon will be. It’s very hard to say. And that’s really, I think, the sense of your question about a wage price spiral, is that something that’s going to start happening and become entrenched in the system. We don’t see that. We — you can see, for example, in some sectors that got very high wage increases early on, those wage increases looked like they may have slowed down to one normal level. But it’s — it comes back to, you know, what I’m saying here, which is there is — there’s a misalignment of demand and supply, particularly in the labor market. And that is leading to wages moving up at ways that are not consistent with 2 percent inflation over time. And so we need to use our tools to, you know, guide inflation back down to 2 percent. And that would be in the context of an extraordinarily strong labor market. We think this labor market can handle, as I mentioned, tighter monetary policy. Yeah. And the overall economy can as well. But, yes, wages are moving up faster than is consistent with 2 percent inflation, but it’s good to see that moving up. But it wouldn’t be sustainable over too long of a period to see them moving up that much higher. And that’s because of this misalignment between supply and demand. We expect to get more labor supply. We did last time. We got more than we expected last — during the last cycle. This time, we’ve gotten much less than expected. So it’s not easy to predict these things. But we do expect that we’ll get people coming back in the labor market, particularly as COVID becomes less and less of a factor in many people’s lives, something we all wish. But — so that’s how we think about it.
DON LEE. Hi, Chair Powell. I think you said to the Senate earlier this month that, in hindsight, the Fed should have moved earlier. And it sounds like today that you don’t think that the Fed is late. And just wanted to get your clarification on that. And if it is, if you still think that the Fed is behind the curve, how much behind the curve is it?
CHAIR POWELL. Right. So we are not — we don’t have the luxury of 20/20 hindsight and actually implementing real-time decisions in the world. So the — you know, so the question is — the right question is, did you make the right decisions based on what you knew at the time? But that’s not the question I was answering, which is knowing what you know now. So I think if we knew now — of course, if we knew now that these supply blockages really and the inflation resulting from them in collision with, you know, very strong demand, if we knew that that was what was going to happen, then in hindsight, yes. It would have been appropriate to move earlier. Obviously, it would be. But, again, we don’t have that luxury. And then so — but that’s a separate question from your other question, which is behind the curve. And, you know, I don’t have the luxury of looking at it that way. You know, we are — we have our tools, powerful tools. And the Committee is very focused on using them. We’re acutely aware of the need to restore price stability while keeping a strong labor market. And what I saw today was a committee that is strongly committed to achieving price stability, in particular, and prepared to use our tools to do that. We’re not going to let high inflation become entrenched. The costs of that would be too high. And we’re not going to wait so long that we have to do that. No one wants — no one wants to have to really put restrictive monetary policy on in order to get inflation back down. So, frankly, the need is one of getting back up, getting rates back up to more neutral levels as quickly as we practicably can and then moving beyond that, if that turns out to be appropriate. And, as you can see, it is appropriate in the sense in — to people’s SEPs, they do write down levels of interest rates that are above their estimate of the longer-run neutral rate. And there’s also a range of estimates, too, as you will see if you look at the details of the SEP. But thanks for your question.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 4388.92 as this post is written