On Wednesday, November 2, 2022 FOMC Chair Jerome Powell gave his scheduled November 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 November 2, 2022, with the accompanying “FOMC Statement.”
Excerpts from Chairman Powell’s opening comments:
Today, the FOMC raised our policy interest rate by 75 basis points, and we continue to 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. Restoring price stability will likely require maintaining a restrictive stance of policy for some time. I will have more to say about today’s monetary policy actions after briefly reviewing economic developments.
The U.S. economy has slowed significantly from last year’s rapid pace. Real GDP rose at a pace of 2.6 percent last quarter but is unchanged so far this year. Recent indicators point to modest growth of spending and production this quarter. 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, largely reflecting higher mortgage rates. Higher interest rates and slower output growth also appear to be weighing on business fixed investment.
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.
With today’s action, we have raised interest rates by 3-3/4 percentage points this year. We anticipate that ongoing increases in the target range for the federal funds rate will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. Financial conditions have tightened significantly in response to our policy actions, and we are seeing the effects on demand in the most interest-rate-sensitive sectors of the economy, such as housing. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation. That’s why we say in our statement that in determining the pace of future increases in the target range, we will take into account the cumulative tightening of monetary policy and the lags with which monetary policy affects economic activity and inflation. At some point, as I’ve said in the last 2 press conferences, it will become appropriate to slow the pace of increases, as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our 2 percent goal. There is significant uncertainty around that level of interest rates. Even so, we still have some ways to go, and incoming data since our last meeting suggest that the ultimate level of interest rates will be higher than previously expected. Our decisions will depend on the totality of incoming data and their implications for the outlook for economic activity and inflation. And 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:
NICK TIMIRAOS. Nick Timiraos of the Wall Street Journal. Chair Powell, core PCE inflation on a 3 or 6-month annualized basis and on a 12-month basis has been running in the high 4’s, close to 5 percent. Is there any reason to think you won’t have to raise rates at least above that level to be confident that you are imparting enough restraint to bring inflation down?
CHAIR POWELL. So, this is the question of [inaudible] does the policy rate need to get above the inflation rate? And I would say, there are a range of view on it. That’s the classic Taylor principle view. But I would think you’d look more at a forward, a forward-looking measure of inflation to look at that. But, I think the answer is, we’ll want to get the policy rate to a level where it is, where the real interest rate is positive. We will want to do that. I do not think of it as the single and only touchstone though. I think you put some weight on that, you also put some weight on rates across the curve. Very few people borrow at the short end, at the federal funds rate for example, so households and businesses, if they’re very meaningfully positive interest rates all across the curve for them, credit spreads are larger so borrowing rates are significantly higher and I think financial conditions have tightened quite a bit. So, I would look at that as an important feature. I’d put some weight on it but I wouldn’t say it’s something that is the single dominant thing to look at.
NICK TIMIRAOS. If I could follow-up, what is your best assessment or the staff’s best assessment right now of the current rate of underlying inflation?
CHAIR POWELL. I don’t have a specific number for you there. There are many, many models that look at that and I mean one way to look at it is that it’s a pretty stationary object and that when inflation runs above that level for sure, substantially above for some time, you’ll see it move up, but the movement will be fairly gradual. So I think that’s what the principle models would tend to say but I wouldn’t want to land on any one assessment. There are many different, as you know, many different people publishing assessment of underlying inflation.
RACHEL SIEGEL. Hi Chair Powell. Thank you for taking our questions. Rachel Siegel from The Washington Post. The statement points to lag times, I’m wondering if you can walk us through how you judge those lag affects, what that timeline looks like over the coming months or even a year and where you would expect it to show up in different parts of the economy.
CHAIR POWELL. So, the way I would think about that is it’s a commonly, for a long time, thought that monetary policy works with long and variable lags and that it works first on financial conditions and then on economic activity and then perhaps later than that even on inflation. So that’s been the thinking for a long time. There was an old literature that made those lags out to be fairly long. There’s newer literature that says that they’re shorter and the truth is, we don’t have a lot of data of inflation of this high in what is now the modern economy. One big difference now is that it used to be that you would raise the federal funds rate, financial conditions would react and then that would affect economic activity and inflation. Now, financial conditions react well before an expectation of monetary policy. That’s the way it has moved for a quarter of a century is in the direction of financial conditions, then monetary policy because the markets are thinking what’s, what is the Central Bank going to do? And there are plenty of economists that also think that once financial conditions change, that the effects on the economy are actually faster than they would have been before. We don’t know that, I guess the thing that I would say is, it’s highly uncertain, highly uncertain, and so from a risk management standpoint but we do need, it would be irresponsible not to, to ignore them. but you want to consider them but not take them literally. So, I think it’s a very difficult place to be but I would tend to be, want to be in the middle looking carefully at what’s actually happening with the economy. And trying to make good decisions from a risk management standpoint, remembering of course that if we were to over-tighten, we could then use our tools strongly to support the economy, whereas if we don’t get inflation under control because we don’t tighten enough, now we’re in a situation where inflation will become entrenched and the costs, the employment costs in particular, will be much higher potentially. So, from a risk management standpoint, we want to be sure that we don’t make the mistake of either failing to tighten enough, or loosening policy too soon.
RACHEL SIEGEL. And if I could follow-up, should we interpret the addition to the statement to mean that more weight is put into those lag affects than they would have been after previous rate hikes?
CHAIR POWELL. Well I think as we move now into restrictive territory, as we make these ongoing rate hikes and policy becomes more restrictive, it’ll be appropriate now to be thinking more about lag. Of course, we think about lag– the lags are just sort of a basic part of monetary policy, but we will be thinking about them, but we won’t be, I think we’ll be considering them but because it’s appropriate to do so. Let me say this, it is very premature to be thinking about pausing. So people, when they hear lags, they think about a pause. It’s very premature in my view to think about or be talking about pausing our rate hike. We have a ways to go, our policy, we need ongoing rate hikes to get to that level of sufficiently restrictive. And we don’t, of course we don’t really know exactly where that is. We have a sense and we’ll write down in September– sorry, in the December meeting, a new summary of economic projections which updates that. But I would expect just to continue updated based on what we are seeing with incoming data. Thanks,
The Special Note summarizes my overall thoughts about our economic situation
SPX at 3734.20 as this post is written