Jerome Powell, Speech/Q&A: Semiannual Monetary Policy Report to Congress (Senate)
Q&A Segment —
Inflation
“We’ll be watching very, very carefully though at the larger service sector, which is 56% of consumer spending and more than that of what of what’s currently inflation. That’s one thing, we’ll be watching that very carefully. Also, we raised rates very quickly last year and we know that if monetary policy tightening policy has delayed effects, it takes a while for the full effects to be seen in economic activity and inflation.”
“Just quickly, at the end of last year, we saw a couple of very promising modest inflationary readings in November and December. But earlier this year, some of that improvement was revised away. In addition, we got a very strong reading on inflation in January. Also, a very strong jobs reading, also very strong retail sales. And so, as I pointed out in my testimony, we’re looking at a reversal really of what we thought we were seeing, to some extent, a partial reversal.”
“I’ll tell you it does. I guess it’s not obvious how that is, but 2% inflation, to have people believe that inflation’s going to go back to 2% really anchors inflation there because the evidence is, and the modern belief is that people’s expectations about inflation actually have an effect on inflation. If you expect inflation to go up 5%, then it will. If everyone expects that because that’s what businesses and households will be expecting, and it’ll happen because they expect it.”
“So we think it’s really important that we do stick to a 2% inflation target and not consider changing it. We’re not going to do that. People will be better off if the whole question of high inflation is just not part of their lives. That’s the definition of price stability, is if people live their lives without having to think about inflation all the time.”
Fed Funds
“Nothing about the data suggests to me that we’ve tightened too much. Indeed, it suggests that we still have work to do.”
“As I indicated in my testimony, I think the data we’ve seen so far and we still have other data to see, we still have significant data to see before the meeting, suggests that the ultimate rate that we write down may well be higher than what we wrote down in December.”
“We have two or three more very important data releases to analyze before the time of the FOMC meeting. Those are going to be very important in the assessment we have of this relatively recent data. We’ll be looking carefully at that. And all of that will go into making the decision, which we have not made, but making the decision that we’ll make about what to do at the March meeting.”
Jobs
“I think we’re very mindful of the lags with which our policy works. We don’t think we need a significant increase in unemployment and we’re certainly not aiming for one, but we do think there’ll be some softening in labor market conditions to get to 2% inflation.”
“I want to be clear that we do not seek, and we don’t believe we need to have a very significant downturn in the labor market. And it’s not just hope. I think if you look at the situation in the labor market, you’ve got all these job openings and in principle you could reduce the job openings without seeing a really significant increase in unemployment.”
Inflation Expectations
“So if inflation were to continue at some point, that will become the psychology. People and businesses will come to expect high inflation and that will make it more self-perpetuating. That will mean an up and down economy. It’ll mean something that looks more like what we’ve seen in periods of high inflation. Capital allocation is difficult in a world like that. It’s not a good time for the economy. What we want to do is restore price stability firmly at back at 2% so that we can have the kind of strong labor market for a sustained period that we had before.”
Speech/Opening Statement —
Inflation
“The data from January on employment, consumer spending, manufacturing production, and inflation have partly reversed the softening trends that we had seen in the data just a month ago. Some of this reversal likely reflects the unseasonably warm weather in January in much of the country. Still, the breadth of the reversal along with revisions to the previous quarter suggests that inflationary pressures are running higher than expected at the time of our previous Federal Open Market Committee (FOMC) meeting.”
“That said, there is little sign of disinflation thus far in the category of core services excluding housing, which accounts for more than half of core consumer expenditures. To restore price stability, we will need to see lower inflation in this sector, and there will very likely be some softening in labor market conditions.”
GDP
“Turning to growth, the U.S. economy slowed significantly last year, with real gross domestic product rising at a below-trend pace of 0.9 percent. Although consumer spending appears to be expanding at a solid pace this quarter, other recent indicators point to subdued growth of spending and production.”
Fed Funds
“In light of the cumulative tightening of monetary policy and the lags with which monetary policy affects economic activity and inflation, the Committee slowed the pace of interest rate increases over its past two meetings. We will continue to make our decisions meeting by meeting, taking into account the totality of incoming data and their implications for the outlook for economic activity and inflation.”
“As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time.”