On Wednesday, January 30, 2019 Jerome Powell gave his scheduled January 2019 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 January 30, 2019, with the accompanying “FOMC Statement.”

From Chairman Powell’s opening comments:

CHAIRMAN POWELL: Good afternoon, everyone, and welcome. I will start with a recap of our discussions, including our assessment of the outlook for the economy, and the judgments we made about our interest rate policy and our balance sheet. I will cover the decisions we made today, as well as our ongoing discussions of matters on which we expect to make decisions in coming meetings. My colleagues and I have one overarching goal: to sustain the economic expansion, with a strong job market and stable prices, for the benefit of the American people. The U.S. economy is in a good place, and we will continue to use our monetary policy tools to help keep it there. The jobs picture continues to be strong, with the unemployment rate near historic lows and with stronger wage gains. Inflation remains near our 2 percent goal. We continue to expect that the American economy will grow at a solid pace in 2019, although likely slower than the very strong pace of 2018. We believe that our current policy stance is appropriate at this time. 

Despite this positive outlook, over the past few months we have seen some cross-currents and conflicting signals about the outlook. Growth has slowed in some major foreign economies, particularly China and Europe. There is elevated uncertainty around several unresolved government policy issues, including Brexit, ongoing trade negotiations, and the effects from the partial government shutdown in the United States. Financial conditions tightened considerably late in 2018, and remain less supportive of growth than they were earlier in 2018. And, while most of the incoming domestic economic data have been solid, some surveys of business and consumer sentiment have moved lower, giving reason for caution.

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In addition, the case for raising rates has weakened somewhat. The traditional case for rate increases is to protect the economy from risks that arise when rates are too low for too long, particularly the risk of too-high inflation. Over the past few months, that risk appears to have diminished. Inflation readings have been muted, and the recent drop in oil prices is likely to push headline inflation lower still in coming months. Further, as we noted in our post-meeting statement, while survey-based measures of inflation expectations have been stable, financial market measures of inflation compensation have moved lower. Similarly, the risk of financial imbalances appears to have receded, as a number of indicators that showed elevated levels of financial risk appetite last fall have moved closer to historical norms. 

In this environment, we believe we can best support the economy by being patient in evaluating the outlook before making any future adjustment to policy.

Jerome Powell’s responses as indicated to the various questions:

HEATHER LONG. Heather Long from the Washington Post. Last week, the IMF said risks are clearly skewed to the downside for the U.S. and global economy. Can you clarify, does the FOMC see risks as skewed to the downside, particularly after you removed the statement about risk being balanced? 

CHAIRMAN POWELL. We had an extensive discussion of the baseline and also of the risks to the baseline and the risks are of course the fact that financial conditions have tightened, that global growth has slowed, as well as some, let’s say, government related risks like Brexit and trade discussions and also the effects and ultimate disposition of the shutdown. So we looked at – we look at those. And the way we think of it is that policy, we will use our policy and we have to offset risks to the baseline. So we view the baseline as still solid and part of that is the way we adjusted our baseline to address those risks. So that’s the way we’re thinking about that now. 

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STEVE LIESMAN. Steve Liesman, CNBC. Mr. Chairman, did the Committee discuss an actual change to the runoff policy or the runoff schedule right now? If so, is that under consideration right now and when might we know? The second thing is, I have to nail down this thing. You guys, Fed folks, keep mentioning the market average or the market outlook for the size of the balance sheet. Are you endorsing the market average, which is 3-1/2 trillion? And if you’re not endorsing it, why do you keep mentioning it? 

CHAIRMAN POWELL. Okay. So, today I’m here to talk about decisions and also discussions about decisions that haven’t been made. So we’re talking about the latter thing, which is discussions and so I can’t get ahead of where decisions are. But so the Committee is — what we’re looking to do is create a whole plan that will bring us to our goal, our longer run goal which is a balance sheet no larger than it needs to be for us to efficiently conduct — efficiently and effectively conduct monetary policy, but to do so in a way that doesn’t put our goals at risk or result in unnecessary market turmoil. So there are a lot of pieces to that and we’ve learned over time that it’s — when making these — when designing these plans, like for example the original normalization plan, it’s good to take your time. Let the best ideas rise to the top. Let them stand the test of time and argument and then move when you’re really comfortable with what you’ve got and when you feel you can communicate it clearly. So I don’t want to get ahead of that process today. 

So we’ve discussed — there are a number of pieces to that puzzle. There are several different pieces to them and I think they’re coming and I’m very pleased with the progress that we’ve made and, you know, the piece that you mentioned is something that is in those discussions. That’s the first question. I’m not going to give our estimate or ratify anybody else’s estimate of what the equilibrium balance sheet is here today. There are estimates out there but I’m not at a point today where I’m going to be giving out numbers on that. But there are estimates and I think they’re consistent with what I said, broadly speaking.

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BINYAMIN APPELBAUM. Binyamin Appelbaum, New York Times. I am struggling a little bit to understand what has changed since we sat here with you six weeks ago. You’ve said today that you think that inflation would be the reason that the Fed would need to continue raising rates. Has the inflation outlook shifted that dramatically in the last six weeks? Can you speak specifically to why you’ve moved from a posture of saying we expect to keep raising rates this year to a posture of standing still? 

CHAIRMAN POWELL. I’d point to a couple of things. First, the narrative of slowing global growth continues, if you will. The incoming data have shown more of that. We’ve seen that both in China and in Western Europe, and so that’s an important — that has important implications for us and that story has — let’s just say it continues. 

And in addition — I mean, I think important — possibly less important now, probably less important now but has been the shutdown, which will leave some sort of imprint on first quarter GDP. We don’t know the ultimate resolution of it. If that’s all there is and the shutdown is gone and there isn’t another shutdown, then we’ll get most of that back in the second period — second quarter. 

So those things — in addition, you know, you have to look back. Financial conditions began to tighten in the fourth quarter and they now have persisted and remain tighter — significantly tighter, let’s say — than they were and that’s something that we have to take into account as well. So that’s where we are. 

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EDWARD LAWRENCE. Edward Lawrence from FOX Business News, thank you Mr. Chairman. The long-term federal funds rate is 2.8 percent. I’ve talked in the last year with a number of Fed presidents who worry that under 3 percent is not enough to handle the next recession. You say that’s your first tool. That’s your primary means of adjusting monetary policy. So with a larger balance sheet — with a larger balance sheet, could you — how could you handle that next recession then with the combination of those two? 

CHAIRMAN POWELL. I guess the sense of your question is that we could be in a situation in the future — we hope not — but we could be in a situation where we’d like to cut rates more than we can effectively and we hit the zero lower bound. We don’t think anything like that is in the cards. Now there’s no reason to think that it would be. But, as we said in today’s release, if that happens, then we’ll use the full range of our tools and that includes the balance sheet. But we would use it after using our conventional tools, which would be the interest rate and forward guidance about the interest rate. 

EDWARD LAWRENCE. Even if you have a large balance sheet, 4 trillion? Above four trillion? 

CHAIRMAN POWELL. Yes. There would be room to do substantially more. 

also:

COURTENAY BROWN. Hi, Mr. Chairman. Courtenay Brown from Axios. A data dependency question, has there been a prioritization of market data over the economic data? How do you balance those two things? 

CHAIRMAN POWELL. I would say that, you know, our mandate is maximum employment and stable prices and that’s about, you know, hard, real-side economic data. As I mentioned earlier, we — our tool, you know, our interest rate tool operates on the economy through financial conditions. 

So financial conditions matter and they matter in the way that I suggested earlier, which is to say broad financial conditions changing over a sustained period, that has implications for the macro economy — it does. So if you lower interest rates and they stay low, every borrower in the country ultimately has a lower interest rate. That will have an effect on — over time — an effect on the economy. But again, the entire focus we have is on maximum employment and stable prices, not on any particular financial market or financial conditions generally. 

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2699.90 as this post is written

On Wednesday, December 19, 2018 Jerome Powell gave his scheduled December 2018 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 19, 2018, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2018“ (pdf).

From Chairman Powell’s opening comments:

Over the past year, the economy has been growing at a strong pace, the unemployment rate has been near record lows, and inflation has been low and stable. All of those things remain true today. Since the September meeting of the FOMC, however, some crosscurrents have emerged. I’ll explain how my colleagues and I are incorporating those crosscurrents into our judgments about the outlook and the appropriate course of policy. 

Since September, the U.S. economy has continued to perform well, roughly in line with our expectations. The economy has been adding jobs at a pace that will continue bringing the unemployment rate down over time. Wages have moved up for workers across a wide range of occupations, a welcome development. Inflation has remained low and stable, and is ending the year a bit more subdued than most had expected. Although some American families and communities continue to struggle and some longer-term economic problems remain, the strong economy is benefiting many Americans. 

Despite this robust economic backdrop and our expectation for healthy growth, we have seen developments that may signal some softening relative to what we were expecting a few months ago. Growth in other economies around the world has moderated somewhat over the course of 2018, albeit to still-solid levels. At the same time, financial market volatility has increased over the past couple of months, and overall financial conditions have tightened–that is, they have become less supportive of growth. 

In our view, these developments have not fundamentally altered the outlook. Most FOMC participants have, instead, modestly lowered their growth and inflation forecasts for next year. The projections of Committee participants released today show growth continuing at healthy levels, the unemployment rate falling a bit further next year, and inflation remaining near 2 percent. The projections also show a modestly lower path for the federal funds rate, which should support the economy and keep us near our goals. As the economy struggled to recover from the financial crisis and the subsequent recession, the Committee held our policy rate near zero for seven years to give the economy the best chance to recover. And the economy did recover steadily, if slowly at times. Three years ago the Committee came to the view that the best way to achieve our mandate was to gradually move interest rates back to levels that are more normal in a healthy economy. Today, we raised our target range for short-term interest rates by another quarter of a percentage point. As I’ve mentioned, most of my colleagues expect the economy to continue to perform well in the coming year. Many FOMC participants had expected that economic conditions would likely call for about three more rate increases in 2019. We have brought that down a bit and now think it is more likely that the economy will grow in a way that will call for two interest rate increases over the course of next year.

Jerome Powell’s responses as indicated to the various questions:

BINYAMIN APPLEBAUM. Binyamin Applebaum, The New York Times. You’re about to undershoot your inflation target for the seventh straight year. Your new forecasts say that you’re going to undershoot it for the eighth straight year. Should we interpret the dot plot is suggesting that some members of your Committee believe that policy should be in a restrictive range by the end of next year? And if so, can you help us to understand why people would be advocating restrictive monetary policy at a time of persistent inflation undershoots?

CHAIRMAN POWELL. Well, we, as a Committee, we do not desire inflation undershoots. And you’re right, inflation has continued to surprise to the downside, not by a lot though, I think. We’re very close to 2 percent, and you know, we do believe it’s a symmetric goal for us. Inflation is symmetric around 2 percent, and that’s how we’re going to look at it. We’re not trying to be under 2 percent. We’re trying to be symmetrically around 2 percent, and I don’t, you know, I’ve never said that I feel like we’ve achieved that goal yet. The only way to achieve inflation symmetrically around 2 percent is to have inflation symmetrically around 2 percent, and we’ve been close to that. We haven’t gotten there yet, and we have not declared victory on that. So, that remains to be accomplished.

JEANNA SMIALEK. Hi, Jeanna Smialek, Bloomberg News. Just following up on Binyamin’s question. I guess if you haven’t achieved 2 percent inflation and you don’t see an overshoot, which would be sort of implied by a symmetrical target, what’s the point in raising rates again at all? 

CHAIRMAN POWELL. So again, I go back to the health of the economy. When you look at 2018, as I mentioned, this the best year since the financial crisis. You’ve had growth well above trend. You’ve got unemployment dropping. You’ve got inflation moving up to 2 percent. And we also have a positive forecast, as I mentioned, and in that context, we think this move was appropriate for what is a very healthy economy. 

Policy at this point does not need to be accommodative. It can move to neutral. It seems appropriate that it be neutral. We’re now at the bottom end of range of estimates of neutral. So that’s the basis upon which we made the decision. I also think we took onboard, you know, the risks to that, and, you know, we’re certainly cognizant of them. 

also:

NANCY MARSHALL-GENZER. Nancy Marshall-Genzer with Marketplace. Do you still think core PCE is a good measure of whether the economy is overheating? What do you think of other measures like setting a target for economic growth and relying more on that? 

CHAIRMAN POWELL. Well, I think we look at both, but core PCE is a good indicator. It has, what’s happened over really 50 years is that inflation has become much less reactive to changes in growth. There was a time when inflation reacted really quickly to changes in growth and changes in unemployment. And that time is behind us. And that is often attributed to the success of central banks in anchoring inflation expectations so that people believe that inflation will come back to the target or around the target so it doesn’t go down as much, inflation doesn’t go down as much, and a downturn doesn’t go up as much when the, you know, when the economy is strong.  It’s really true, though, that inflation has not reacted a lot on a road from 10 percent unemployment to now 3.7 percent unemployment. Now it did move up last year. But in terms of just targeting growth, you know, I think actually think our dual mandate works very well, which is maximum employment and stable prices. Most of the time, those two things work together. When they work temporarily in different ways, we take a balanced approach. But I think that approach has served us well, and I think we can work well with it.

also:

COURTENAY BROWN. Hi Chairman, Courtenay Brown from Axios. I’m wondering if you could clear up what’s become a little bit of a debate in the financial community. You said in October in an interview with PBS that interest rates were a long way from neutral. A month later you said interest rates were just below neutral. And I think a lot of people interpreted that as a shift in tone from you. Were they right to interpret it that way? 

CHAIRMAN POWELL. You know, monetary policy is a forward-looking exercise, and I’m going to, I’m just going to stick with that. It’s, where we are right now is we’re at the lower end of the range of neutral. We’ve arrived effectively at the bottom end of that range. And, you know, there are implications of that. For that, as I mentioned, going forward, there’s real uncertainty about the path, the pace rather, and the destination for further rate increases. And we’re going to be letting incoming data inform our thinking about the appropriate path.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2470.23 as this post is written

On Wednesday, September 26, 2018 Jerome Powell gave his scheduled September 2018 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 26, 2018, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, September 2018“ (pdf).

From Chairman Powell’s opening comments:

Our economy is strong.  Growth is running at a healthy clip.  Unemployment is low, the number of people working is rising steadily, and wages are up.  Inflation is low and stable.  All of these are very good signs.  Of course, that’s not say that everything is perfect.  The benefits of this strong economy have not reached all Americans.  Many of our country’s economic challenges are beyond the scope of the Fed, but my colleagues and I are doing all we can to keep the economy strong, healthy, and moving forward.  That is the best way we can promote an environment in which every American has the opportunity to succeed.

also:

Both household spending and business investment are expanding briskly, and the overall growth outlook remains favorable.  Several factors support this assessment:  Fiscal policy is boosting the economy, ongoing job gains are raising incomes and confidence, and overall financial conditions remain accommodative.  These conditions are consistent with our Summary of Economic Projections for this meeting.  The median of Committee participants’ projections for the growth of real GDP is 3.1 percent this year and 2.5 percent next year.

Job gains averaged 185,000 per month over the last three months, well above the pace needed in the longer run to provide jobs for new entrants to the labor force.  The unemployment rate stood at 3.9 percent in August, and has been near that level since April.  Smoothing through month-to-month variations, the labor force participation rate remains about where it was in late 2013–a positive sign, given that the aging of our population is putting downward pressure on participation.  We expect the job market to remain strong.  And the median of Committee participants’ projections for the unemployment rate later this year is 3.7 percent, and a bit lower than that in 2019.

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Today the Committee raised the target range for the federal funds rate by 1/4 percentage point, bringing it to 2 to 2-1/4 percent.  This action reflects the strength we see in the economy, and is one more step in the process that we began almost three years ago of gradually returning interest rates to more normal levels.  Looking ahead, today’s projections show gradual interest rate increases continuing roughly as foreseen in June.  The median of the participants’ views on appropriate policy through 2020 are unchanged since the June meeting.

Jerome Powell’s responses as indicated to the various questions:

SAM FLEMING. Thanks very much. Sam Fleming from the Financial Times. The Fed has recently been saying that financial stability risks are moderate. What kind of developments could prompt a change in that assessment to elevated risks? And is there an argument for moving the counter cyclical capital buffer, even when risks are moderate, rather than waiting until the risks are seen as elevated, which arguably could be too late? Thanks.

CHAIRMAN POWELL. So, I think one of the most important lessons from the financial crisis is really the importance of the stability of the financial system. And so, we — since the financial crisis, as you’re aware, we’ve had a major focus on building up our monitoring of financial conditions and financial stability issues. We’ve also put in place many, many initiatives to strengthen the financial system through higher capital, and better regulation, more transparency, central clearing, margins on unclear derivatives, all kinds of things like that, which are meant to strengthen the financial system. We’ve done many of those things, and we feel that the financial system is in a much better place.

As we look at — as we look at conditions most recently, and this was at our last meeting and it was in our minutes for the last meeting, quarterly, we have a briefing at the FOMC, and also at the Board, of the staffs’ views on financial stability, and the staff judged the overall vulnerabilities to be moderate. If you dig into the different aspects of that question, households or balance sheets are in good shape. You know, employment is high, wages are rising, that sort of thing. The banking system, as I mentioned, is, you know, much higher capital, much higher liquidity, is much stronger. If you look at asset prices, it is true that some asset prices are in the upper range of their historical — upper reach of their historical ranges. And then if you look at non-financial corporates, you get — there is the story of leverage there. So, it’s not that there aren’t any vulnerabilities, but we see them as moderate.

Now you ask about the counter cyclical capital buffer. The counter cyclical capital buffer is a tool that we added to our toolkit I think finally back in 2016. We said that we would deploy it when vulnerabilities were meaningfully above normal. We revisit that on a regular schedule and the last time we revisited it was I think last year — sometime last year and concluded that the test was not met. As I mentioned at the last briefing, the — you know, the assessment was that vulnerabilities were moderate, but it remains a kit — a tool for our toolkit that we can deploy, you know, when and as we feel appropriate.

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GREG ROBB. Thank you, Mr. Chairman. Greg Robb from MarketWatch. The 10-year anniversary of the bankruptcy of Lehman Brothers got a lot of attention over the last month. I was wondering if you thought there were any lessons from the crisis that you want to share and two points on that. You go to Congress a lot and talk to members of Congress. Now Secretary Paulson and Mr. Geithner and Chair Bernanke have said that Congress made a mistake when it took away the Fed’s emergency powers in Dodd-Frank. And then one other thing is that are you confident that all these non-banks didn’t – you know, non-banks never got put into the, you know, the FSOC, you know, system. So, are you confident that the — you can see the risks in the financial system? Thank you.

CHAIRMAN POWELL. So, three things there. The first thing is the single biggest thing I think that we learned was the — as I mentioned I think earlier, the importance of maintaining the stability of the financial system. So, I think if you look — if you look back at the way the models worked, and the way people thought about risk in the economy, that’s what was missing, and I think it’s not missing anymore. So, we — you know, we put a tremendous focus on that. We raised capital, liquidity. We have stress tests, which force banks to understand — the largest banks particularly — to understand and better manage their risk and have enough capital to survive a really substantial shock that’s at least as bad as the financial crisis. And if all that doesn’t work, we’ve got resolution plans, which we’ve, you know, through many cycles, have made really substantial progress, more than I had thought was likely. So, we’ve done a lot.  Nobody’s — you know, nobody is I think overconfident that we solved every problem. And, you know, now we’re going back and kind of taking a hard look at everything, and, you know, trying to make — trying to — trying to keep at it.

So, I think those are the really important lessons and, you know, we — we’re determined not to, you know, not to forget them, and that’s I think a risk now is to — is to forget things that we — that we learned. That’s just human nature over time.

I saw the article you’re talking about, the question is, did Congress take things away, emergency powers from the Fed? So, there was sort of a trade for taking away our power under 13, section 13(3) to provide support to individual non-banks, which is really holding companies and other companies. In exchange for that, we got order liquidation authority and a resolution authority. Was it a mistake? I don’t think there’s any sense that Congress would seriously look at changing that. I have real doubts about whether it was wise to take away our crisis-fighting tools. I think you put them away, and you hope you never need them, and I certainly strongly oppose efforts to take away more of our tools.

You know, the third thing you mentioned is the designation power, so it’s a really important power. In my mind, it should be used — my thinking, it should be used sparingly, and that means, you know, in situations where you have — I mean, in principle, you could have another Lehman Brothers come up out of the ground that’s not a bank, and it could be very threatening — or it could be capable of creating systemic risk, and so I think it’s a critical power to have. But, again, I would use it — I would tend to use it fairly sparingly.

also:

VIRGINIE MONTET. Virginie Montet with Agence France Presse. You mentioned earlier a possible, not probably correction, and I want to come back to the high level of the stock market. Are there any participants to the FOMC to think that we are witnessing an episode of irrational exuberance or rational exuberance? And if there was a steep correction, would it provoke financial stability concerns?

CHAIRMAN POWELL. So, I don’t comment on the appropriateness of the level of stock prices. I can say that by some valuation measures they’re in the upper range of their historical value ranges. But, you know, I wouldn’t want to — I wouldn’t want to speculate about what the consequences of a market correction should be. You know, we would — we would look very carefully at the nature of it and I mean it — really, really what hurts is if consumers are borrowing heavily and doing so against, for example, an asset that can fall into value, so that’s a really serious matter when you have a housing bubble and highly levered consumers, and housing values fall. We know that that’s a really bad situation. A simple drop in equity prices is, all by itself, doesn’t really have those features. It could certainly feature — it could certainly affect consumption and have a negative effect on the economy though.

 

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2923.15 as this post is written

On Wednesday, June 13, 2018 Jerome Powell gave his scheduled June 2018 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 June 13, 2018, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, June 2018“ (pdf).

From Jerome Powell’s opening comments:

Good afternoon and thank you for being here. I know that a number of you will want to talk about the details of our announcement today, and I am happy to do that in a few minutes. But because monetary policy affects everyone, I want to start with a plain-English summary of how the economy is doing, what my colleagues and I at the Federal Reserve are trying to do, and why. The main takeaway is that the economy is doing very well.

Most people who want to find jobs are finding them, and unemployment and inflation are low. Interest rates have been low for some years while the economy has been recovering from the financial crisis. For the past few years, we have been gradually raising interest rates, and along the way, we have tried to explain the reasoning behind our decisions. In particular, we think that gradually returning interest rates to a more normal level as the economy strengthens is the best way the Fed can help sustain an environment in which American households and businesses can thrive. Today, we have taken another step in that process by raising our target range for the federal funds rate by a quarter of a percentage point.

also:

After many years of running below our 2 percent longer-run objective, inflation has recently moved close to that level. Indeed, overall consumer prices, as measured by the price index for personal consumption expenditures, increased 2 percent over the 12 months ending in April. The core PCE index, which excludes the prices of energy and food and tends to be a better indicator of future inflation, rose 1.8 percent over the same period. As we had expected, inflation moved up as the unusually low readings from last March dropped out of the calculation. The recent inflation data have been encouraging, but after many years of inflation below our objective, we do not want to declare victory. We want to ensure that inflation remains near our symmetric 2 percent longer-run goal on a sustained basis. As we note in our Statement of Longer-Run Goals and Monetary Policy Strategy, the Committee would be concerned if inflation were running persistently above or below our 2 percent objective. Of course, many factors affect inflation, some temporary and others more lasting, and at any given time inflation may be above or below 2 percent. For example, the recent rise in oil prices will likely push inflation somewhat above 2 percent in coming months. But that transitory development should have little if any consequence for inflation over the next few years. The median of participants’ projections for inflation runs at 2.1 percent through 2020. Relative to the March projections, the median inflation projection is a little higher this year and next.

Jerome Powell’s responses as indicated to the various questions:

STEVE LIESMAN. Steve Liesman, CNBC. Mr. Chairman, you said there’s a difference of opinion among economists. But looking at the longer-run GDP growth rates for the members of the Committee, there’s not a whole lot of differences. It’s one 8 to 2, or one 7 to 2, 1, depending upon how you count it. Is that showing us that not a single member of the Committee, including yourself, Mr. Chairman, agrees with economists over at the White House that they can achieve long-run sustained growth rates above or at 3 percent or higher? Do you believe in that?

CHAIRMAN POWELL. You know, first of all, that’s a — that’s a reasonable range, I think, of — it’s not that we’re all on the same number. But there are a range of views about potential growth. And there’s so much uncertainty around this. You know, we don’t — the thing about fiscal policy is, you don’t have thousands of incidents to, you know, to — you don’t have big data, in a way. You have very small data. You’ve got only a few instances here, so you have a lot of uncertainty around what the effects will be. They could be large. We hope they’re large. But I think our approach is going to be to watch and see and hope that in fact, we do get significant effects to, you know, to potential growth out of the tax bill and we’re just going to have to see. I think we’re looking at a reasonable range of estimates and we’re putting every — different participants are putting different estimates in and we’re going to be waiting and seeing.

also:

MARTIN CRUTSINGER. Marty Crutsinger, Associated Press. At this meeting, you hiked your — the funds rate, you changed the dot plot to move from 3 to 4 for this year, and you took out a sentence that you’d been using for years about how long rates might stay low. But you say that none of this signals a change in policy views. But shouldn’t we see from this combination of things that the Fed is moving to tighter policy?

CHAIRMAN POWELL. I think what you should see is that the economy is continuing to make progress. The economy has strengthened so much since I joined the Fed, you know, in 2012 and even over the last couple of years. The economy is in a very different place. We — unemployment was 10 percent at the height of the crisis. It’s 3.8 percent now and moving lower. So, really what you — the decision you see today is another sign that the U.S. economy is in great shape. Growth is strong, labor markets are strong, inflation is close to target, and that’s what you’re seeing. For many years, as I mentioned, many years, we had interest rates held low to support economic activity. And it’s been clear that as we’ve gotten closer to our statutory goals, we should normalize policy, and that’s really what we’ve been consistently doing for some years now.

HEATHER LONG. Heather Long from the Washington Post. Can you give us an update on what the FOMC thinks about wages? Are we finally going to see that wage growth pick up this year? I know you’re forecasting a little bit more inflation, but is that going to translate through to wage growth?

CHAIRMAN POWELL. You know, wages have been gradually moving up. Earlier in the recovery, they were — there are many different wage measures, of course, but — so just — but just the generalized wages were running roughly around 2 percent and they’ve moved gradually up into between 2 to 3 percent, as the labor market has become stronger and stronger. I think it’s fair to say that some of us — and I certainly would have expected wages to react more to the very significant reduction in unemployment that we’ve had, as I mentioned, from 10 percent to 3.8 percent. Part of that can be explained by low productivity, which is something we’ve talked about at the Committee and elsewhere. But nonetheless, I think we had anticipated and many people have anticipated that wages — that in a world where we’re hearing lots and lots about labor shortages — everywhere we go now, we hear about labor shortages, but where is the wage reaction? So, it’s a bit of a puzzle. I wouldn’t say it’s a mystery, but it’s a bit of a puzzle. And frankly, I do think there’s a lot to like about low unemployment. And one of the things is, you will see pretty much people who want to get jobs — not everybody — but people who want to get jobs, many of them will be able to get jobs. You will see wages go up. You’ll see people at the — sort of the margins of the labor force having an opportunity to get back in work. They benefit from that. Society benefits from that. So, there are a lot of things to really like, including higher wages, as you asked. Our role though, is also to, you know, to make sure that that maximum employment happens in a context of price stability and financial stability, which is why we’re gradually raising rates.

also:

VICTORIA GUIDA. I have a couple of regulatory questions. First of all, on the counter cyclical capital buffer, I was wondering, what are the chances that the Fed is going to need to use that in the next year or two? And then my second question is, there’s been a lot of talk lately in Congress about the ability for banks to serve marijuana businesses, and I was wondering if you think that banks should be able to serve those businesses in states where marijuana is legal?

CHAIRMAN POWELL. So, the counter cyclical capital buffer gives us the ability to raise capital requirements on the largest institutions, when financial stability vulnerabilities are meaningfully above normal, that’s the language that we’ve used. And that’s certainly a possibility. I wouldn’t say that — I wouldn’t look at today’s financial stability landscape and say that risks are meaningfully above normal. I would say that they’re roughly at normal. You have — you know, households are well — you know, are in good shape. They’re — they’ve pay down their debt, incomes are rising, people have jobs. So, households are not really a concern. And banks are highly capitalized, so that’s not really a concern. We see — there’s some concern with asset prices in a couple of pockets. But overall, if you if you bake it all in, I think we see generally financial vulnerabilities as moderate. Could that change, you asked, over a couple of years? Yeah, they could. You also asked about marijuana businesses. So, this is a very difficult area because we have state law — many state laws permit the use of marijuana and federal law still doesn’t. So, it puts, you know, federally chartered banks in a very difficult situation. I think it would be great if that could be clarified. We don’t have, you know — it puts the supervisor in a very, very difficult position. And, of course, this isn’t — our mandate has nothing to do with marijuana, so we don’t really — we just would love to see it clarified, I think.

also:

STEVEN BECKNER. Steve Beckner, Mr. Chairman, freelance journalist reporting for NPR. About financial conditions, which worries you more, warnings that rising short-term rates are bringing the yield curve closer to inversion, or the fact that long rates have risen very slowly and in fact are nearly 20 basis points below their recent high? How do you account for the fact that long rates have been so slow to rise? And what does it say about the inflation outlook as well?

CHAIRMAN POWELL. So, let me — let me briefly mention the yield curve. I mean, I — the yield curve is something that people are talking about a lot, including FOMC participants. And I — they have a range of views. It’s something we’re going to continue to be talking about, it’s — but it’s only one of many things, of course, that we talk about. I think that that discussion is really about what is appropriate policy, and how do we think about policy as we approach the neutral rate. How do we understand what the neutral rate is? How do we know where it is? And what are the consequences of being above or below it? That’s really what — when people are talking about the slope of the yield curve, that’s really what they’re talking about. We know why – we know why the yield curve is flattening, it’s because we’re raising the federal funds rate. It makes all the sense in the world that the short end would come up. I think you asked the harder question is, what’s happening with long rates. And there are many things that move long rates around. Of course, there’s an embedded expectation of the path of short rates. There’s the term premium, which has been very low, by historical standards, and so arguments are made that a flatter yield curve has less of a signal embedded in it. In addition, I think what you saw most recently that you referred to, Steve, was just risk-on risk-off. In a risk-off environment, people want to own U.S Treasuries and you see, you know, Treasury prices go up, rates go down quite a lot. So — but I think ultimately, you know, what we’re — what we really care about is what’s the appropriate stance of policy. And there’s a — there may be a signal in that long-term rate about what is the neutral rate and I think that’s why people are paying attention to the yield curve.

NANCY MARSHALL-GENZER. Nancy Marshall-Genzer with Marketplace. Companies are buying back their shares at a record rate. Corporate debt is up. Consumer debt is rising. Are we in a credit bubble? Is that something that you’re worried about?

CHAIRMAN POWELL. So, if you look at households, you do not see excess credit growth. You don’t see high levels of credit going out, so not so much households. And that really was where the problems were before the financial crisis was, particularly in — among household borrowing, and particularly around mortgages. With — if you take banks, then of course, their leverage is significantly lower, or to say it differently, their capital is significantly higher. If you ask about non-financial corporates, that’s really where leverage is at levels that are high relative to history. But defaults are low, interest rates are low, you know, so it’s something — that’s something we’re watching very carefully. But again, I don’t think we see it as — I think there are a range of views on that, but we are watching non-financial corporates. Households are in good shape though, and that is — that is so important because that’s where — you know, that’s where we got into trouble before. And that’s — it’s often around property and particularly housing, where you see real problems emerge. We don’t really see that now, so we take some solace from that.

 

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2772.86 as this post is written

On Wednesday, March 21, 2018 Jerome Powell gave his scheduled March 2018 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 March 21, 2018, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, March 2018“ (pdf).

From Jerome Powell’s opening comments:

Job gains averaged 240,000 per month over the past three months, well above the pace needed in the longer run to absorb new entrants into the labor force.  The unemployment rate remained low in February at 4.1 percent, while the labor force participation rate moved higher.  Over the past four years, the participation rate has remained roughly unchanged.  That’s a sign of improvement, given that the aging of our population is putting downward pressure on the participation rate, and we expect that the job market will remain strong.

Although the growth rates of household spending and business investment appear to have moderated early this year, gains in the fourth quarter were strong and the fundamentals underpinning demand remain solid.  Indeed, the economic outlook has strengthened in recent months.  Several factors are supporting the outlook: fiscal policy has become more stimulative, ongoing job gains are boosting incomes and confidence, foreign growth is on a firm trajectory, and overall financial conditions remain accommodative.

Jerome Powell’s responses as indicated to the various questions:

MICHAEL DERBY. I’m Mike Derby from Dow Jones Newswires. I have a question about the future of the mechanics of monetary policy. I wanted to know whether you favor sticking with the system that you have now of keeping interest on excess reserves and reverse repo–the reverse repo rate to control interest rates, or do you want to shift back to the old way of doing things at some point of targeting the fed funds market? And, do you have any concern that if you do stick with the current system that as rates rise that you might see issues where the Fed is under–is being criticized for paying out ever larger shares of money to banks, you know, to control interest rates that some might perceive as a subsidy to the banks that are getting this money?

CHAIRMAN POWELL. Sure. Our current framework for implementing monetary policy is working very well. We have excellent control over rates, and it’s working. And it’s–you described it accurately. We haven’t made a decision to keep that as our longer-run framework. We haven’t really addressed that question. We’ve had meetings where we’ve talked about it, and we’ve agreed that it’s working well. But it’s–and it’s not something I see us as needing to urgently address. I think we’re continuing to learn about this framework. For example, one, in the longrun, the size of the balance sheet’s going to depend on the public’s demand for our liabilities, including currency and reserves. So, we don’t know what the demand is for reserves in a world where you have, you know, you have regulations that require banks to hold lots of high quality liquid assets, and reserves are one of those. So, it’s not something we’re looking at resolving in the near-term.

You mentioned the question of interest on excess reserves, and I think it’s a little bit of a misnomer to think that there’s a subsidy there. We pay interest on excess reserves. We can’t pay interest in excess reserves that is above the general level of short-term interest rates. So, we’re paying rates that banks can get from other interest rates from any other investment in the shortterm money markets. In addition, remember that those liabilities–those are our liabilities. The assets that we have on the other side are treasury securities and mortgage-backed securities, which we yield much higher than interest on reserves. So, in fact, it’s not a subsidy, and it’s not a cost to the taxpayer.

also:

GREG ROBB. Over here. Thank you, Chairman. Thank you very much. Greg Robb from MarketWatch. Several of your colleagues recently have been speaking and expressing concern about financial imbalances and rising signs of financial imbalances. I was wondering if you could give us your view on the asset markets. Are–do you see any bubbles? And do you have the tools you need, you think, to combat those? Thank you very much.

CHAIRMAN POWELL. Since the financial crisis, we’ve been monitoring financial conditions and financial stability issues very carefully, and the FOMC receives regular briefings about the staff framework and sort of measures of various aspects of financial stability risks, and the current view of the Committee is that financial stability vulnerabilities are moderate, let’s say, and I’ll go through a couple of pieces of that.

So, if you look at the banking system, particularly the large financial institutions, you see higher capital. You see much higher liquidity. You see them more aware of their risks and better able to manage them with stress testing. And if one–if something does go wrong, you’ve got better ability to deal with the failure of those institutions. So, therefore, you don’t see high leverage. You don’t see excess risk-taking in great quantity the way you see before the crisis. If you look at households, household balance sheets are in much better condition. If you look at nonfinancial corporations, you see–you do see relatively elevated levels of borrowing, but nothing that suggests, you know, serious risks. And, of course, default rates are very low. So, those readings look okay. I should mention also that for large financial institutions, they’re no longer funded by a lot of short-term wholesale funding, which can disappear very quickly. So, they’re far less vulnerable to liquidity issues. Overall, those aspects, I think, suggest low levels of vulnerability.

You identified the, really, one area where, which is an area of focus, which is asset prices. So, in some areas, asset prices are elevated relative to their longer-run historical norms. You can think of some equity prices. You can think of commercial real estate prices in certain markets. But we don’t see it in housing, which is key. And so, overall, if you put all of that into a pie, what you have is moderate vulnerabilities in our view. In terms of whether we have the tools, you know, we have some tools, and I think we certainly will use them. We have–I think the stress test is a really important tool that we have for the largest financial institutions and for the smaller financial institutions. We regularly use that to–as a way to test against various, you know, market shocks, certainly for the larger institutions.

also:

NANCY MARSHALL-GENZER. Nancy Marshall-Genzer with Marketplace. Does the interest rate hike today suggest that Americans are being paid enough? Are you satisfied with the rate of wage growth right now?

CHAIRMAN POWELL. As I mentioned, you know, we’ve had unemployment decline sharply since, I guess, 2010, when it peaked at 10 percent and down to 4.1 percent now, and we’ve seen only modest increases in wages. So, on the one hand, what wages should in theory represent is inflation plus productivity increases. You should get paid for your productivity plus inflation, and productivity’s been very low. Inflation’s been low. So, these low wage increases, in a sense, they do make sense in that–from that perspective.

On the other hand, as the market is tightened, as labor markets have tightened, and we hear reports of labor shortages that we see that, you know, groups of unemployed are diminishing, and the unemployment rate is going down, we haven’t seen, you know, higher wages, wages going up more. And I would–I think I’ve been surprised by that, and I think others have as well. In terms of what’s the right level, I don’t think I have a view on what the right level of wages is, but I think we will know that the labor market is getting tight when we do see a more meaningful upward move in wages.

also:

MYLES UDLAND. Thanks. Myles Udland, Yahoo Finance. Chair Powell, I’m curious if the Fed would be willing to tolerate an inverted yield curve. We continue to see these spread between the two-year and the 10-year tighten, even with longer-term yields coming up since the beginning of the year. This is a dynamic that has typically preceded recessions, and we’re likely to see shorter-term rates come up as the Fed continues to increase rates. So, I’m just curious if you guys have discussed that, if you’d be willing to push back against that, or if that’s a dynamic you’d be comfortable with?

CHAIRMAN POWELL. You know, it’s an interesting question, and there are a range of views there. I think it’s true that yield curves have tended to predict recessions if you look back over many cycles, but a lot of that was just situations in which inflation was allowed to get out of control, and the Fed had to tighten, and that put the economy into a recession. That’s really not the situation we’re in now, so I don’t know that that’s–I don’t know that–I don’t think that recession probabilities are particularly high at the moment, any higher than they normally are. But, having said that, I think it’s–there are good questions about what a flat yield curve or inverted yield curve does to intermediation. It’s hard to find in the research data, but nonetheless, I think those are issues that we’ll be watching carefully.

 

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2686.76 as this post is written