Jerome Powell, Speech/Interview: Inflation and the Labor Market

Fed Funds

“It seems to me likely that the ultimate level of rates will need to be somewhat higher than thought at the time of the September meeting and Summary of Economic Projections. I will return to policy at the end of my comments, but for now, I will simply say that we have more ground to cover.”

“Monetary policy affects the economy and inflation with uncertain lags, and the full effects of our rapid tightening so far are yet to be felt. Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting. Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level. It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”

“My colleagues and I do not want to over tighten because I think that cutting rates is not something we want to do soon. That’s why we’re slowing down and going to try to find our way to what that right level is.”

GDP

“We are tightening the stance of policy in order to slow growth in aggregate demand. Slowing demand growth should allow supply to catch up with demand and restore the balance that will yield stable prices over time. Restoring that balance is likely to require a sustained period of below-trend growth.”

Inflation

“Let’s sum up this review of economic conditions that we think we need to see to bring inflation down to 2 percent. Growth in economic activity has slowed to well below its longer-run trend, and this needs to be sustained. Bottlenecks in goods production are easing and goods price inflation appears to be easing as well, and this, too, must continue. Housing services inflation will probably keep rising well into next year, but if inflation on new leases continues to fall, we will likely see housing services inflation begin to fall later next year. Finally, the labor market, which is especially important for inflation in core services ex housing, shows only tentative signs of rebalancing, and wage growth remains well above levels that would be consistent with 2 percent inflation over time. Despite some promising developments, we have a long way to go in restoring price stability.”

Inflation

“The other difficulty, of course, is that monetary policy works with long and variable lags in particular. Inflation is at the end of that train. So if you’re waiting for actual evidence that inflation is coming down, it’s very difficult not to over tighten if that’s all you’re doing. We have a risk management balance to strike and we think that slowing down at this point is a good way to balance the risks.”

Balance Sheet

“We’re in an ample reserves regime. What that means is that changes in the reserve level will generally not affect the federal funds rate. So there’s more than enough reserves in the system. We’re not close to reserve scarcity. What we said is that we would allow reserves to decline until we’re somewhat above the level that we think is consistent with scarcity … Then at a certain point, we’re just going to call it … stop at a place that’s safe. Having a lot of reserves in the system is really a good thing. It’s really a public benefit to have plenty of reserves, plenty of liquidity in the markets in the banking system and the financial system generally. So that’s how we would do it.”

Soft Landing

“The extent we need to keep rates higher or keep them higher longer, that’s going to narrow the path to a soft landing. On the other hand, if we get good inflation data and we get evidence that all the things that I talked about, if all those things start to swing the other way, then we could very much achieve this.”