On Wednesday, February 1, 2023 FOMC Chair Jerome Powell gave his scheduled February 2023 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 February 1, 2023, with the accompanying “FOMC Statement.”
Excerpts from Chairman Powell’s opening comments:
Today, the FOMC raised our policy interest rate by 25 basis points. 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 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 slowed significantly last year, with real GDP rising at a below-trend pace of 1 percent. Recent indicators point to modest growth of spending and production this quarter. Consumer spending appears to be expanding at a subdued pace, in part reflecting tighter financial conditions over the past year. Activity in the housing sector continues to weaken, largely reflecting higher mortgage rates. Higher interest rates and slower output growth also appear to be weighing on business fixed investment.
Despite the slowdown in growth, the labor market remains extremely tight, with the unemployment rate at a 50-year low, job vacancies still very high, and wage growth elevated. Job gains have been robust, with employment rising by an average of 247,000 jobs per month over the last three months. Although the pace of job gains has slowed over the course of the past year and nominal wage growth has shown some signs of easing, the labor market continues to be out of balance. Labor demand substantially exceeds the supply of available workers, and the labor force participation rate has changed little from a year ago.
Inflation remains well above our longer-run goal of 2 percent. Over the 12 months ending in December, total PCE prices rose 5.0 percent; excluding the volatile food and energy categories, core PCE prices rose 4.4 percent. The inflation data received over the past three months show a welcome reduction in the monthly pace of increases. And while recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path.
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’s not grounds for complacency. Although inflation has moderated recently, it remains too high. 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:
COLBY SMITH. Just as a quick follow-up. How are you viewing the kind of balance of risk between those two options of, you know, the likelihood of maybe falling short of that or going beyond that level?
CHAIR POWELL. I guess I would say it this way. I continue to think that it’s very difficult to manage the risk of doing too little and finding out in 6 or 12 months that we actually were close but didn’t get the job done, inflation springs back and we have to go back in. And now, you really do worry about expectations getting unanchored and that kind of thing. This is a very difficult risk to manage, whereas I — of course, we have no incentive and no desire to overtighten. But we — You know, if we feel like we’ve gone too far, we can certainly — if we could certain — and inflation is coming down faster than we expect, then we have tools that would work on that. So, I do think that in this situation where we have still the highest inflation in 40 years, you know, the job is not fully done. As I mentioned — started to mention earlier, we have a sector that represents 56 percent of the core inflation index where we don’t see this inflation yet. So, we don’t see it. It’s not happening yet. The inflation in the core services X housing is still running at 4 percent on a 6- and 12-month basis. So, there’s not — nothing happening there. In the other two sectors representing, you know, less than 50 percent, you actually, I think, now have a story that is credible, that’s coming together, although you don’t actually see this inflation yet in housing services, but it’s in the pipeline, right? So, for the third sector, we don’t see anything here. So, I think it would be premature, it would be very premature to declare victory or to think that we’ve really got this. We need to see — Our goal, of course, is to bring inflation down. And how do we get that done? There are many, many factors driving inflation in that sector and they should be coming into play to have inflation — the disinflationary process begin in that sector. But so far, we don’t see that. And I think until we do, we see ourselves as having a lot of work left to do.
MICHAEL MCKEE. Michael McKee from Bloomberg TV and Radio. I’d like to pick up on what you were just saying about a substantial downturn and ask with the full weight of your tightening not in place yet and with the progress against inflation, there’s still a lot of talk about very, very slow growth going forward in 2023. And the recession indicators are all suggesting that we are going to see recession this year. So, I’m wondering if you’ve changed your view or you have a more nuanced view of what you think the danger to economic growth is going forward and whether you’re very close to perhaps tipping it into the wrong place, which calls for more restraint on your part.
CHAIR POWELL. So, I do think you most forecast and, you know, my own assessment would be that that growth will continue, positive growth will continue, but at a subdued pace as it did last year. We had growth of — GDP growth of 1 percent last year and also final sales growth, which we think is a better indicator of about 1 percent. I think, you know, most forecasts, and certainly, my assessment would be that growth will continue at a fairly subdued level this year. There are other factors, though, that need to be considered. You will have seen that the global picture is improving a bit and that will matter for us, potentially. The labor market remains very, very strong and that’s job creation, that’s wages. As inflation does come down, sentiment will improve. You also, state local governments are really flush these days with, you know, money and many of them are considering tax cuts or even sending checks. So, I think that’s going to support. They’re also spending a lot. There’s a lot of spending coming in the construction pipeline, both private and public. And so, that’s going to support economic activity. So, I think there’s a good chance that those factors will help support positive growth this year. And that’s my base case is that there will be positive growth this year.
NANCY MARSHALL-GENZER. Hi, Chair Powell. Nancy Marshall-Genzer with Marketplace. I wanted to go back to another thing that Fed Vice Chair Lael Brainard said recently. She said she doesn’t see signs of a wage price spiral, and I’m wondering if you agree with that.
CHAIR POWELL. I do. Yeah, I do. You don’t see that yet. But the whole point is, you know, if you — once you see it, you have a serious problem. That means that effectively, in people’s decision-making, inflation has become a really salient issue. And once that happens, that’s what we can’t allow to happen. And, you know, so that’s why we worry that the longer we’re at this and the longer people are talking about inflation all day long, every day, you know, the more risk of something like that. But no, there’s not much — It’s more of a risk. It always has been more of a risk than anything else. By the way, I think it’s becoming less salient. And people are — You know, we pick that up in conversations. And I’ve seen some data, too, that show people are, you know, gradually — they’re glad that inflation is coming down. People really don’t like inflation. And as we see it coming down, that could also add a boost to economic activity. You look at the sentiment surveys now, and they’re very, very low with three and a half percent unemployment and, you know, high wage increases nominally by historical standards. Why can that be? It has to be inflation, right? So, I think once inflation is seen to be coming down in coming months even you will also see a boost to sentiment, I hope.
NANCY MARSHALL-GENZER. So that’s what you’re looking at most closely is consumer expectations?
CHAIR POWELL. That’s at the very heart, is consumers and businesses that, you know, are the — essentially, we believe that expectations of future inflation are very important part of the process of creating inflation. That’s a sort of bedrock belief, in one way or another it has to be. We think it’s important. And in this case, I would say the risk eight months ago or so, longerterm inflation expectations had moved up. We moved quite vigorously last year. Expectations are seemed to be well-anchored, including at the shorter end now, not just the longer end. So, it’s, you know — and that’s — I think that’s very reassuring. I think, you know, the markets have decided, and the public has decided that inflation is going to come back down to 2 percent and it’s just a matter of us following through that’s immeasurably helpful to the process of getting inflation down. The fact that people now do generally believe that it will come down, that’ll be part of the process of getting it down. And it’s a very positive thing.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 4193.07 as this post is written