Jerome Powell, Interview: The Economic Club of Washington D.C.

Inflation

“The message we were sending at the FOMC meeting last Wednesday was really that the disinflationary process, the process of getting inflation down, has begun. And it’s begun in the goods sector, which is about a quarter of our economy. But it has a long way to go. These are the very early stages of disinflation. The services sector really, except for housing services, pardon me, is not really showing any disinflation yet.”

“Our message really was this process is likely to take quite a bit of time. It’s not going to be, we don’t think, smooth. It’s probably going to be bumpy. So we think that we’re going to need to do further rate increases as we said, and we think that we’ll need to hold policy at a restrictive level for a period of time.”

“Then comes the labor market report for January. It’s very strong. It’s certainly stronger than anyone I know expected. We didn’t expect it to be this strong, but I would say it kind of shows you why we think that this will be a process that takes a significant period of time.”

“If you look at our forecasts, we expect 2023 to be a year of significant declines in inflation. It’s actually our job to make sure that that’s the case, but I would tell you that with inflation, headline PCE inflation is running about 5%. This is on a 12-month basis. Core is running in at 4.4. My guess is it will take certainly into not just this year, but next year to get down close to 2%.”

Fed Funds

“If the data were to continue to come in stronger than we expect and we were to conclude that we needed to raise rates more than is priced into the markets or than we wrote down at our last group of forecasts in December, then we would certainly do that. We would certainly raise rates more.”

“We have a significant road ahead to get inflation down to 2%. I think there’s been an expectation that it’ll go away quickly and painlessly. I don’t think that’s at all guaranteed. That’s not the base case. The base case for me is that it will take some time and we’ll have to do more rate increases and then we’ll have to look around and see whether we’ve done enough.”

Balance Sheet

“In terms of the target level of it, we haven’t put a specific dollar number on it. The idea is we are in a regime of ample reserves. Reserves are basically deposits at the reserve banks. And when we get close to that level where we feel that reserves are ample, kind of where we were before the pandemic, then we’ll slow down and we’ll sort of test where we are. But it’ll be a couple of years we think till we get to that level.”