On Wednesday, May 4, 2022 FOMC Chair Jerome Powell gave his scheduled May 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 May 4, 2022, with the accompanying “FOMC Statement.”
Excerpts from Chairman Powell’s opening comments:
Good afternoon. It’s nice to see everyone in person for the first time in a couple years. Before I go into the details of today’s meeting, I’d like to take this opportunity to speak directly to the American people. Inflation is much too high and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses. The economy and the country have been through a lot over the past two years and have proved resilient. It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all.
From the standpoint of our Congressional mandate to promote maximum employment and price stability, the current picture is plain to see: The labor market is extremely tight, and inflation is much too high. Against this backdrop, today the FOMC raised its policy interest rate by 1/2 percentage point and anticipates that ongoing increases in the target rate for the federal funds rate will be appropriate. In addition, we are beginning the process of significantly reducing the size of our balance sheet. I’ll have more to say about today’s monetary policy actions after briefly reviewing economic developments.
After expanding at a robust 5-1/2 percent pace last year, overall economic activity edged down in the first quarter. Underlying momentum remains strong, however, as the decline largely reflected swings in inventories and net exports, two volatile categories whose movements last quarter likely carry little signal for future growth. Indeed, household spending and business fixed investment continued to expand briskly.
The labor market has continued to strengthen and is extremely tight. Over the first three months of the year, employment rose by nearly 1.7 million jobs. In March, the unemployment rate hit a post-pandemic and near five-decade low of 3.6 percent. Improvements in labor market conditions have been widespread, including for workers at the lower end of the wage distribution as well as for African Americans and Hispanics. Labor demand is very strong, and while labor force participation has increased somewhat, labor supply remains subdued. Employers are having difficulties filling job openings, and wages are rising at the fastest pace in many years.
Inflation remains well above our longer-run goal of 2 percent. Over the 12 months ending in March, total PCE prices rose 6.6 percent; excluding the volatile food and energy categories, core PCE prices rose 5.2 percent. Aggregate demand is strong, and bottlenecks and supply constraints are limiting how quickly production can respond. Disruptions to supply have been larger and longer lasting than anticipated, and price pressures have spread to a broader range of goods and services. The surge in prices of crude oil and other commodities that resulted from Russia’s invasion of Ukraine is creating additional upward pressure on inflation. And COVID-related lockdowns in China are likely to further exacerbate supply chain disruptions as well.
Excerpts of Jerome Powell’s responses as indicated to various questions:
STEVE LIESMAN. 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.
CHAIR POWELL. Sure. So 75 basis point increase is not something the committee is actively considering. What we are doing is we raised 50 basis points today. And we 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 increases should be on, 50 basis points 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 it 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 want to know, we’ll want to know more than just some evidence. We’ll want to really feel like we’re making some progress there. And but I mean, I — 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 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.
STEVE LIESMAN. I’m sorry, but if inflation is lower one month and the unemployment rate higher, would that be something that we would calibrate towards a lower increase in the in the funds rate?
CHAIR POWELL. I don’t think the one month, one month is not, no. No. One month reading would not — doesn’t tell us much. You know, we’d want to see evidence that inflation is moving in a direction that gives us more comfort. As I said, we’ve got two months now where core inflation is, is a little lower, but we’re not looking at that as a reason to take some comfort. You know, I think we need to — we need to really see that our expectation is being fulfilled. Inflation, in fact, is under control, and starting to come down. But again, it’s not like we would stop. We would just go back to 25 basis point increases. It’ll be a judgment call when these meetings arrive. But my, again, our expectation is, if we see what we expect to see, then we would have 50 basis point increases on the table the next two meetings.
COLBY SMITH. Thank you. Colby Smith from the Financial Times. Given the expectation that inflation will remain well above the Fed’s target at year end, what constitutes a neutral policy setting in terms of the fed funds rate? And to what extent is it appropriate for policy to move beyond that level at some point this year?
CHAIR POWELL. So, neutral. When we talk about the neutral rate, we’re really talking about the rate that neither pushes economic activity higher, nor slows it down. So it’s a concept really. It’s not something we can identify with any precision. So we estimate it within broad bands of uncertainty. And the current estimates on the Committee are sort of two to three percent. And also, that’s a longer-run estimate. That’s an estimate for an economy that’s at full employment and two percent inflation. So really the way, really what we’re doing is we are — we’re raising rates expeditiously to the — what we see as the broad range of plausible levels of neutral. But we know that there’s not a bright line drawn on the road that tells us when we get there. So we’re going to be looking at financial conditions, right. Our policy affects financial conditions and financial conditions affect the economy. So we’re going to be looking at the effect of our policy moves on financial conditions. Are they tightening appropriately? And then we’re going to be looking at the effects on the economy. And we’re going to be making a judgment about whether we’ve done enough to get us on a path to restore price stability. It’s that. So if that path happens to evolve levels that are higher than estimates of neutral, then we will not hesitate to go to those levels. We won’t. But again, it’s it there’s a there’s a sort of false precision in the discussion that we as policymakers don’t really feel. You know, you’re going to raise rates, and you’re going to be kind of inquiring how that is affecting the economy through financial conditions. And of course, if higher rates are required then we won’t hesitate to deliver them.
NEIL IRWIN. Thanks Chair Powell. Neil Irwin with Axios. Do you see evidence that inflationary psychology is changing that — in areas like workers wage demands, businesses willingness to raise prices? Do you see evidence that there is a psychological shift going on inflation? Thanks.
CHAIR POWELL. We don’t really see strong evidence of that yet, but that does not in any way make us comfortable. I think if you see, 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 come down fairly sharply. Longer term inflation expectations are, have been reasonably stable, but have moved up to but only two 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 suggests that we 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 — we can’t run that risk. 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.
also:
EDWARD LAWRENCE. Thank you, Chair Powell. Edward Lawrence with the Fox Business Network. So you’ve talked in the past about consumer spending and how that’s driving – drives the economy. Are you concerned with this high level of inflation that the consumer will stop spending pushing us into and what’s the level of your concern pushing us into a recession?
CHAIR POWELL. So the economy is doing fairly well. It’s — 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 in 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 very — 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 over five percent. But most forecasters have growth this year at, you know, at a solid pace above two percent.
EDWARD LAWRENCE. But we’ve talked with economists who have advised democrats and republican presidents who both said that the Fed is so far behind the curve on inflation that a recession is inevitable.
CHAIR POWELL. So and as I said, I think we have a good chance to restore price stability without a recession, without, you know, a severe downturn without materially high, higher unemployment. And I mentioned the reasons for that. So I see a strong economy now. I see a very strong labor market for example. Businesses can’t find the people to hire, they can’t find them. So typically in a recession, you would have unemployment. Now you have surplus demand. So there should be room in principle, to reduce that surplus demand without putting people out of work. The issue will come that we don’t have precision surgical tools. We have essentially interest rates, the balance sheet, and forward guidance, and they’re famously blunt tools. They’re not capable of surgical precision. So I would agree. No one thinks this will be easy. No one thinks it’s straightforward, but there is certainly a plausible path to this, and I do think there, we’ve got a good chance to do that. And, you know, our job is not to rate the chances, it is to try to achieve it. So that’s what we’re doing. There are a range of opinions, though, and that’s only appropriate.
also:
STEVE MATTHEWS. Steve Matthews with Bloomberg News. A number of your colleagues have said that 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 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?
CHAIR POWELL. 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. 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 is taken. 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 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 that he — 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 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, longest expansion cycle in our recorded history. In the last two, three years, you’ve 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 gap. 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 we’ve been – basically we’ve been hit by historically large inflationary shocks since the pandemic. It’s not — 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 outsize 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 the shutdowns in China. So it’s has 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 get, 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.
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The Special Note summarizes my overall thoughts about our economic situation
SPX at 4123.05 as this post is written