On Wednesday, September 21, 2022 FOMC Chairman Jerome Powell gave his scheduled September 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 September 21, 2022, with the accompanying “FOMC Statement” and “Summary of Economic Projections” dated September 21, 2022.
Excerpts from Chairman Powell’s opening comments:
Today, the FOMC raised its policy interest rate by 3/4 percentage point, and we anticipate that ongoing increases will be appropriate. We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent. In addition, we are continuing the process of significantly reducing the size of our balance sheet. I will have more to say about today’s monetary policy actions after briefly reviewing economic developments.
The U.S. economy has slowed from the historically high growth rates of 2021, which reflected the reopening of the economy following the pandemic recession. Recent indicators point to modest growth of spending and production. Growth in consumer spending has slowed from last year’s rapid pace, in part reflecting lower real disposable income and tighter financial conditions. Activity in the housing sector has weakened significantly, in large part reflecting higher mortgage rates. Higher interest rates and slower output growth also appear to be weighing on business fixed investment, while weaker economic growth abroad is restraining exports. As shown in our Summary of Economic Projections, since June FOMC participants have marked down their projections for economic activity, with the median projection for real GDP growth standing at just 0.2 percent this year and 1.2 percent next year, well below the median estimate of the longer-run normal growth rate.
Despite elevated inflation, longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets. But that is not grounds for complacency; the longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched.
At today’s meeting the Committee raised the target range for the federal funds rate by 3/4 percentage point, bringing the target range to 3 to 3-1/4 percent. And we are continuing the process of significantly reducing the size of our balance sheet, which plays an important role in firming the stance of monetary policy.
Over coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent. We anticipate that ongoing increases in the target range for the federal funds rate will be appropriate; the pace of those increases will continue to depend on the incoming data and the evolving outlook for the economy. With today’s action, we have raised interest rates by 3 percentage points this year. At some point, as the stance of monetary policy tightens further, it will become appropriate to slow the pace of increases, while we assess how our cumulative policy adjustments are affecting the economy and inflation. We will continue to make our decisions meeting by meeting and communicate our thinking as clearly as possible.
Excerpts of Jerome Powell’s responses as indicated to various questions:
STEVE LIESMAN. Thank you, Mr. Chairman, Steve Liesman, CNBC. Can you talk about how you factor in the variable lags on inflation and the extent to which the outlook for rates should be seen as linear in the sense that you keep raising rates. Well, can you envision a time when there’s a pause to kind of look at what has been wrought in the economy from the rate increases? Thank you.
CHAIR POWELL. Sure, so of course monetary policy does famously work with long and variable lags. The way I think of it is our policy decisions affect financial conditions immediately, in fact, financial conditions have usually been affected well before we actually announce our decisions. Then changes in financial conditions begin to affect economic activity fairly quickly, within a few months. But it’s likely to take some time to see the full effects of changing financial conditions on inflation. So, we are very much mindful for that. And that’s why I noted in my opening remarks that at some point, as the stance of policy tightens further, it will become appropriate to slow the pace of rate hikes while we assess how our cumulative policy adjustments are affecting the economy and inflation. So that’s how we think about that. Your second question, sorry, was?
STEVE LIESMAN. Is there a point in time you could see pausing? Is it linear when you keep raising rates, or is there, oh sorry– I should know better than to not talk with a microphone.
CHAIR POWELL. I should know better than to answer your second question.
STEVE LIESMAN. Well there you go. Is it linear? Do you keep raising rates or is there a pause that you could envision where you kind of figure out what has happened to the economy and give time to catch up in the real economy, the rate increase time to catch up with the real economy? Thank you.
CHAIR POWELL. So I think it’s very hard to say with a precise certainty the way this is going to unfold. As I mentioned, what we think we need to do and should do is to move our policy rate to a restrictive level that’s restrictive enough to bring inflation down to 2 percent, where we have confidence of that. And what you see in the SEP numbers is people’s views as of today, as of this meeting, as to the kind of levels that will be appropriate. Now those will evolve over time and I think we’ll just have to see how that goes. There is a possibility certainly that we would go to a certain level that we’re confident in and stay there for a time. But we’re not at that level, clearly today we’re just, we’ve just moved I think probably into the very lowest level of what might be restrictive and certainly in my view and the view of the Committee, there’s a ways to go.
CRAIG TORRES. Craig Torres from Bloomberg. Chair Powell, you talked about some ways the higher interest rates are affecting the economy, but we’ve also seen a resilient labor market with durable consumption, strong corporate profits, and I’m wondering what your story is on the resilience of the economy, after all, you and your colleagues said well, we started tightening in March when we were talking about interest rates in the future, and indeed, treasury rates moved up, so we should have had a lot of tightening taking affect. Why is the economy, in your view, so resilient and does it mean that we might need a possibly higher terminal rate.
CHAIR POWELL. You’re right, of course, the labor market in particular has been very strong. But there are, the sectors of the economy that are most interest rate sensitive are certainly showing the effects of our tightening and of course the obvious example is housing, where you see declining activity of all different kinds and house price increases moving down. So we’re having an effect on interest sensitive spending, I think through exchange rates we’re having an effect on experts and imports, I think so, all of that’s happening but you’re right, and we’ve said this, this is a strong, robust, economy, people have savings on their balance sheet from the period when they couldn’t spend and where they were getting government transfers, they’re still very significant savings out there, although not as much at the lower end of the income spectrum, but still, some savings out there to support growth that the states are very flush with cash, so there’s good reason to think that this will continue to be a reasonably strong economy. Now the data, the data sort of are showing that growth is going to be below trend this year. We think of trend as being about 1.8 percent or in that range. We are forecasting growth well below that and most forecasters are. But you’re right, there’s certainly a possibility that growth can be stronger than that. And that’s a good thing because that means the economy will be more resistant to a significant down turn. But of course we are focused on the thing I started with, which is getting inflation back down to 2 percent. We can’t fail to do that, I mean if we were to fail to do that, that would be the thing that would be most painful for the people that we serve. So, for now, that has to be our overarching focus and you see that, I think, in the SEP, in the levels of rates that we’ll be moving to, reasonably quickly, assuming things turn out roughly in line with the SEP. So that’s how we think about it.
MICHAEL MCKEE. Thank you, Mr. Chairman. In a world of euphemisms that we live in here, with below trend growth and modest increase in unemployment, I’m wondering if I can ask you a couple of direct questions for the American people. Do the odds now favor, given where you are and where you’re going with interest rates, favor a recession, 4.4 percent unemployment is about 1.3 million jobs, is that acceptable job loss? And then, given that the data you look at is backward looking, and the lags in your policy are forward looking and you don’t know what they are, how will you know, or will you know, if you’ve gone too far?
CHAIR POWELL. So, I don’t know what the odds are. I think that there’s a very high likelihood that we’ll have a period of what I’ve mentioned is below trend growth, by which I mean much lower growth and we’re seeing that now. So the median forecast now I think this year among my colleagues and me, was 0.2 percent growth. So that’s very slow growth. And then below trend next year I think the median was 1.2, also well below so that’s a slower, that’s a very slow level of growth and it could give rise to increases in unemployment but I think that’s, so that is something that we think we need to have and we think we need to have softer labor market conditions as well. We’re never going to say that are too many people working, but the real point is this, inflation, what we hear from people when we meet with them is that they really are suffering from inflation. And if we want to set ourselves up really light the way to another period of a very strong labor market, we have got to get inflation behind us. I wish there were a painless way to do that, there isn’t. So, what we need to do is get rates up to the point where we’re putting meaningful downward pressure on inflation, and that’s what we’re doing. And we don’t certainly, certainly don’t hope, we certainly haven’t given up the idea that we can have a relatively modest increase in unemployment, unless we need to complete this task.
MICHAEL MCKEE. But how will you know, or will you know if you’ve gone too far?
CHAIR POWELL. It’s hard to, hypothetically deal with that question. I mean again, our really tight focus now continues to be ongoing rate increases to get the policy rate up where it needs to be. And as I said, you can look at this SEP as today’s estimate of where we think those rates would be, of course they will evolve over time.
NICOLE GOODKIND. Thank you, Chairman Powell. Nicole Goodkind, CNN Business. Existing home sales have fallen for seven months straight, mortgage rates are at their highest level since 2008, yet mortgage demand increased this week and housing prices are still elevated. At the end of your June press conference, you mentioned plans to reset the housing market. I was wondering if you could elaborate on what you mean when you say reset and what you think it will take to actually get there.
CHAIR POWELL. So when I say reset, I’m not looking at a particular, specific set of data or anything, what I’m really saying is that we’ve had a time of a red hot housing market, all over the country, where famously houses were selling to the first buyer at 10 percent above the ask, before even seeing the house. That kind of thing. So, there was a big imbalance between supply and demand and housing prices were going up at an unsustainably fast level. So the deceleration in housing prices that we’re seeing should help bring sort of prices more closely in line with rents and other housing market fundamentals and that’s a good thing. For the longer term what we need is supply and demand to get better aligned so that housing prices go up at a reasonable level, at a reasonable pace, and that people can afford houses again, and I think we, so we probably in the housing market have to go through a correction to get back to that place. There’s also, there are also longer run issues though with the housing market. As you know, we’re, it’s difficult to find lots now close enough to cities and things like that, so builders are having a hard time getting zoning and lots, and workers and materials, and things like that. But from a sort of business cycle standpoint, this difficult correction should put the housing market back into better balance.
NICOLE GOODKIND. [ Inaudible ] Shelter made up such a large part of this hot CPI report that we saw. Do you think that there is lag and that we will see that come down in the coming months? Or do you think that there’s still this imbalance that needs to be addressed?
CHAIR POWELL. I think that shelter inflation is going to remain high for some time. We’re looking for it to come down, but it’s not exactly clear when that will happen. So, it may take some time, so I think hope for the best, plan for the worst. So I think on shelter inflation you’ve just got to assume that it’s going to remain pretty high for a while.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 3678.58 as this post is written