On Wednesday, December 14, 2022 FOMC Chairman Jerome Powell gave his scheduled December 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 December 14, 2022, with the accompanying “FOMC Statement” and “Summary of Economic Projections” dated December 14, 2022.
Excerpts from Chairman Powell’s opening comments:
Today, the FOMC raised our policy interest rate by 1/2 percentage point. We continue to anticipate that ongoing increases will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. 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 policy stance 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. Although real GDP rose at a pace of 2.9 percent last quarter, it is roughly unchanged through the first three quarters of 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. As shown in our Summary of Economic Projections, the median projection for real GDP growth stands at just 0.5 percent this year and next, well below the median estimate of the longer-run normal growth rate.
Inflation remains well above our longer-run goal of 2 percent. Over the 12 months ending in October, total PCE prices rose 6 percent; excluding the volatile food and energy categories, core PCE prices rose 5 percent. In November, the 12-month change in the CPI was 7.1 percent, and the change in the core CPI was 6 percent. The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases. But it will take substantially more evidence to give confidence that inflation is on a sustained downward path. Price pressures remain evident across a broad range of goods and services. Russia’s war against Ukraine has boosted prices for energy and food and has contributed to upward pressure on inflation. The median projection in the SEP for total PCE inflation is 5.6 percent this year and falls to 3.1 percent next year, 2.5 percent in 2024, and 2.1 percent in 2025; participants continue to see risks to inflation as weighted to the upside.
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.
Excerpts of Jerome Powell’s responses as indicated to various questions:
HOWARD SCHNEIDER. Howard Schneider with Reuters. Thanks for taking the question. You describe GDP growth in the SEPs as moderate or modest, I believe. Yet, it’s really approaching stall speed. Half a percentage point is not much. You described labor market unemployment rate as representing some softening. But it’s nearly a full percentage point rise, and that’s well in excess of what has historically been associated with recession. Why wouldn’t this be considered a recessionary projection by the Fed?
CHAIR POWELL. Well, I’ll tell you what the projection is. I don’t think it would qualify as a recession, though, because you’ve got positive growth. The expectations in the SEP are basically, as you said, which is we’ve got growth at a modest level, which is to say that a half a percentage point, that’s positive growth. It’s slow growth. It’s well below trend. It’s not going to feel like a boom. It’s going to feel like very slow growth, right. In that, in that condition, labor market conditions are softening a bit. Unemployment does go up a bit. I would say that many analysts believe that the natural rate of unemployment is actually elevated at this moment. So it’s not clear that those forecasts or inflation are really much above the natural rate of unemployment. We can never identify its location with great precision. But that 4.7 percent is still a strong labor market. If you look — you know, you’ve got — the reports we get from the field are that companies are very reluctant to lay people off, other than the tech companies, which is, you know, a story unto itself. Generally, companies want to hold onto the workers they have because it’s been very, very hard to hire. So, you’ve got all these vacancies out there, far in excess of the number of employed people. That doesn’t sound like a — you know, a labor market where a lot of people will need to be put out of work. So that we — you know, there are channels through which the labor market can come back into balance with relatively modest increases in unemployment, we believe. None of that is guaranteed, but that is what their forecasts reflects.
NEIL IRWIN. Thanks. Hi, Chair Powell. Neil Irwin with Axios. Some of your colleagues have been pretty explicit that they can’t imagine rate cuts happening in 2023. That’s certainly not implied by the SEP. But futures markets have priced in some easing in the back half of next year. What’s your view of the likelihood of any kind of rate cuts next year? What circumstances might make that plausible?
CHAIR POWELL. You know, our focus right now is really on moving our policy stance to one that is restrictive enough to ensure a return of inflation to our 2 percent goal over time. It’s not on rate cuts. And we think that we’ll have to maintain a restrictive stance of policy for some time. Historical experience caution strongly against prematurely loosening policy. I guess I would say it this way: I wouldn’t see us considering rate cuts until the Committee is confident that inflation is moving down to 2 percent in a sustained way. So that’s the — that’s the test I would articulate. And you’re correct. There are not rate cuts in the SEP for 2023.
GRADY TRIMBLE. Thank you, Mr. Chair. Grady Trimble with Fox Business. You’ve reiterated today and the Committee has reiterated its commitment to that 2 percent inflation target. I wonder, is there ever a point where you actually reevaluate that target and maybe increase your inflation target if it is stickier than even you think it is?
CHAIR POWELL. That’s just — changing our inflation goal is just something we’re not — we’re not thinking about, and it’s something we’re not going to think about. It’s — we have a 2 percent inflation goal, and we’ll use our tools to get inflation back to 2 percent. I think this isn’t the time to be thinking about that. I mean, there may be a longer run project at some point. But that is not where we are at all. The Committee, we’re not considering that. We’re not going to consider that under any circumstances. We’re going to — we’re going to keep our inflation target at 2 percent. We’re going to use our tools to get inflation back to 2 percent.
NANCY MARSHALL-GENZER. Hi. Nancy Marshall-Genzer with Marketplace. What would you do if the economy slows so much that we enter a recession before we see strong consistent signs that inflation is slowing, in other words, stagflation?
CHAIR POWELL. So I don’t want to get into too many hypotheticals. But, you know, we’ll — it’s hard. It’s hard to deal with hypotheticals. So let me just say that we have to use our tools to support maximum employment and price stability. I’ve made it clear that right now, the labor market’s very, very strong, near a 50-year low where you’re at or above maximum employment. In 50-year low in unemployment, vacancies are very high, wages, nominal wages are very high. So the labor market’s very, very strong. Where we’re missing is on the inflation side. And we’re missing by a lot on the inflation side. So that means we need to really focus on getting inflation under control, and that’s what we’ll do. I think, as the economy heals, the two goals come more into play. But right now, clearly, the focus has to be on getting inflation down.
JENNIFER SCHONBERGER. Thank you, Chair Powell. Jennifer Schonberger with Yahoo! Finance. You say you expect growth of just 1/2 percent next year, given that you’ve said the process of raising rates and getting inflation back under control will be painful. Have you had discussions within the Committee and addressed how long and/or how deep of a recession you would be willing to accept?
CHAIR POWELL. No. I mean, what we do is we make — we make our forecasts, and we publish them quarterly. And, you know, if you look at those forecasts, those are — those are forecasts for slow growth, for a softening labor market, by which I mean unemployment goes up but not a great deal. And you see inflation coming down. You see rates going up. You see inflation coming down. Those are those forecasts, and that’s really what they show. We’re not — we — of course, we don’t talk about, you know, this kind of a recession and that kind of a recession. We just — we — you know, we make those forecasts. The staff runs, and you will see this if you look at the old Tealbooks, runs alternative simulations of all different kinds at every meeting, and we look at those too. And those will explore different things. But that’s just, you know, upside and downside scenarios. Of course, that’s a responsible practice that we’ve carried on for many decades. But no, we don’t — we haven’t asked ourselves that question.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 3894.18 as this post is written