Day 2:

Day 1:

Headline

Fed’s Powell: “Not far” from confidence needed to cut rates
Fed’s Powell: US banks are well-capitalized.
Fed’s Powell and Mester: Rate cuts likely this year, but inflation remains a risk
Fed’s Powell: We’re a long way from point of fiscal policy overwhelming monetary policy.
Fed’s Powell: I could see a case for shortening maturity of Fed holdings.
Fed’s Powell: I am waiting to be more confident, we are not far from it.
Fed’s Powell: I think we’re in the right place with policy.
Fed’s Powell: I expect there to be bank failures from CRE. But not big banks, there are more small and medium sized banks with biggest exposure.
Fed’s Powell: We are nowhere near recommending or adopting a central bank digital currency in any form.
Fed’s Powell: As the labor market cools, we have seen and will see food inflation flattening.
Fed’s Powell: The labor market is strong, and still quite tight.
Fed’s Powell: Inflation was too high.
Fed’s Powell: The US economy is growing at a healthy, sustainable, solid pace.
Fed’s Powell: Insurance of different kinds has been a significant source of inflation recently.
Fed’s Powell: The housing market is in a very very difficult situation.
Fed’s Powell: We should see the housing market start to heal as rates and inflation come down but it won’t fix long-term problem.
Fed’s Powell: The quantity of homes available for sale is incredibly low.
Fed’s Powell: When rates are normalized, the underlying housing shortage will still put upward pressure on prices.
Fed’s Powell: If the economy does as expected we think carefully removing restrictive stance of policy will begin over course of this year.
Fed’s Powell: The housing market is in a very very difficult situation.
Fed’s Powell: We should see the housing market start to heal as rates and inflation come down but it won’t fix long-term problem.
Fed’s Powell: The quantity of homes available for sale is incredibly low.
Fed’s Powell: When rates are normalized, the underlying housing shortage will still put upward pressure on prices.
Fed’s Powell: If the economy does as expected we think carefully removing restrictive stance of policy will begin over course of this year.

Speech

Chairman McHenry, Ranking Member Waters, and other members of the Committee, I appreciate the opportunity to present the Federal Reserve’s semiannual Monetary Policy Report_.

The Federal Reserve remains squarely focused on our dual mandate to promote maximum employment and stable prices for the American people. The economy has made considerable progress toward these objectives over the past year.

While inflation remains above the Federal Open Market Committee’s (FOMC) objective of 2 percent, it has eased substantially, and the slowing in inflation has occurred without a significant increase in unemployment. As labor market tightness has eased and progress on inflation has continued, the risks to achieving our employment and inflation goals have been moving into better balance.

Even so, the Committee remains highly attentive to inflation risks and is acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials, like food, housing, and transportation. The FOMC is strongly committed to returning inflation to its 2 percent objective. Restoring price stability is essential to achieve a sustained period of strong labor market conditions that benefit all.

I will review the current economic situation before turning to monetary policy.

Current Economic Situation and Outlook

Economic activity expanded at a strong pace over the past year. For 2023 as a whole, gross domestic product increased 3.1 percent, bolstered by solid consumer demand and improving supply conditions. Activity in the housing sector was subdued over the past year, largely reflecting high mortgage rates. High interest rates also appear to have been weighing on business fixed investment.

The labor market remains relatively tight, but supply and demand conditions have continued to come into better balance. Since the middle of last year, payroll job gains have averaged 239,000 jobs per month, and the unemployment rate has remained near historical lows, at 3.7 percent. Strong job creation has been accompanied by an increase in the supply of workers, particularly among individuals aged 25 to 54, and a continued strong pace of immigration. Job vacancies have declined, and nominal wage growth has been easing. Although the jobs-to-workers gap has narrowed, labor demand still exceeds the supply of available workers. The strong labor market over the past two years has also helped narrow long-standing disparities in employment and earnings across demographic groups.1

Inflation has eased notably over the past year but remains above the FOMC’s longer-run goal of 2 percent. Total personal consumption expenditures (PCE) prices rose 2.4 percent over the 12 months ending in January. Excluding the volatile food and energy categories, core PCE prices rose 2.8 percent, a notable slowing from 2022 that was widespread across both goods and services prices. Longer-term inflation expectations appear to have remained well anchored, as reflected by a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.

Monetary Policy

After significantly tightening the stance of monetary policy since early 2022, the FOMC has maintained the target range for the federal funds rate at 5-1/4 to 5-1/2 percent since its meeting last July. We have also continued to shrink our balance sheet at a brisk pace and in a predictable manner. Our restrictive stance of monetary policy is putting downward pressure on economic activity and inflation.

We believe that our policy rate is likely at its peak for this tightening cycle. If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year. But the economic outlook is uncertain, and ongoing progress toward our 2 percent inflation objective is not assured. Reducing policy restraint too soon or too much could result in a reversal of progress we have seen in inflation and ultimately require even tighter policy to get inflation back to 2 percent. At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment. In considering any adjustments to the target range for the policy rate, we will carefully assess the incoming data, the evolving outlook, and the balance of risks. The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.

We remain committed to bringing inflation back down to our 2 percent goal and to keeping longer-term inflation expectations well anchored. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run.

To conclude, we understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We at the Federal Reserve will do everything we can to achieve our maximum employment and price stability goals.

Thank you. I am happy to take your questions.

Q&A Excerpts

Q: We can’t make that we can’t make that mistake again, Mr. Chair at the expense of workers of the Fed waits until unemployment starts increasing, it may be too late to cut rates and time to save American jobs. Why shouldn’t the Fed act now to prevent workers from losing their jobs rather than rather than reacting after the fact?

Powell: So we’re well aware of that risk, of course and very conscious of avoiding it. And what we said is if what we expect and what we’re seeing is continued strong growth, strong labor market and continuing progress and bringing inflation down, if that happened, that path, then I do think that the process of carefully removing the restrictive stance of policy will will can and will begin over the course of this year.

Powell: the story is, I think broadly, this it is that there was a very significant increase in the size of the workforce last year and it was happening all during the year and we were wondering what it was, and the answer was it was really two things. It was labor force participation, but it was also immigrate immigration. And if you look at the Congressional Budget Office numbers, it kind of makes sense because there was a lot of growth. Wages were coming down. The economy is bigger. And that’s those are probably in partly part affected. This is without making any judgments on immigration or immigration policy.

Q: Let me turn to another question, in my view, the sticky inflation we’ve been seeing in the housing sector is principally due to the massive reductions in front of this committee, and I understand your desire to stay as neutral as possible with regard to the politics involved in an election year. But I do have some questions here specifically with regard to the Basel 3 end game proposal, and analysis of that proposal found that 97% were either opposing it or expressing substantial concerns. In the hearing last March on the monetary policy report, you stated that the Federal Reserve is a consensus organization and you said and I quote, I will do everything I can possibly do. I will do everything I can possibly to bring people together in consensus and have a capital framework that couldn’t be broadly supported. My question to that is do you currently believe that there is a consensus on this capital framework?

Powell: I believe that we will have one, I’m fairly confident that we will have such a consensus when we do move forward.

Q: So we could expect that you will probably not call a vote on the proposal until you believe that there is a consensus.

Powell: I think that’s right. I mean, we’re just in the process of digesting the comments and then making the appropriate changes.

Q: to take action on the housing supply side, but I’m interested in how you see this dynamic.

Powell: So we’re not you know, we’re not focused so much on housing and housing inflation. We’re really focused on the aggregate which is also good to know housing services. That’s that’s way more than half of the PCE inflation, the thing there are things in the housing sector that that we didn’t fully anticipate one was one of them just was that people in very low interest rate more homes with very low interest rate mortgages aren’t selling. So the quantity of homes that’s available is incredibly low, and that’s why it’s very little in the way of of existing home sales, and that drives up existing home sale prices, but also new new home sale prices. So that that again, there’s two sets of factors is the longer run issue, but then there’s the factors associated with the pandemic and the inflation and our response to it. I think as the overall inflation continues to come down and rates then come down, you’ll see the housing markets start to heal and get better and housing affordability should go up again, but you’re still going to be left with with with the longer term problem of supply.

Q: From your perspective, where is the economy at now and where is it going?

Powell: You know, the economy is growing at a healthy, sustainable, solid strong pace. And that’s that’s one thing. Second thing I’d say is the labor market is very strong and quite tight, still 3.7% unemployment for the last 24 months. That’s the longest period since you know, 50 years. And the third thing is inflation. Inflation was too high. It’s come down very sharply since the beginning of last year. If you look at the 12 month number, the headline number has come down from the fives down to 2.4. And the the core number is a 2.8. I think it was at 4.9 a year ago. So these are big declines. So we’re in a very different place and a healthy place. We’re going to use our tools to try to keep that strong economy keep that strong labor market while we continue to make progress on inflation.

Q: So my question is this if the inflation rate reaches 2%, would that be considered a return to the target rate on a sustainable basis? Or is it still the case that inflation would need to more or less overcorrect well below 2% before the Fed makes the rate cut adjustments?

Powell: It would take us a while to really get comfortable that inflation had said settled in sustainably at 2% But that’s not our test for for changing interest rates. Interest rates right now are still under restrictive territory. They’re well above neutral. And we’ve said we would not wait for inflation to get down to 2% because if you wait that you know monetary policy works with long and variable legs. So we’ve said for some years that that we would start restoring the federal funds rate to a more normal almost neutral level. We’re far from neutral now. And so you know, we do plan assuming the economy moves along the lines we expect we do plan on on starting the process of dialing back restrictions.

Q: and you don’t seem to see that same abrupt dynamic coming the other way.

Powell: No I think, look, I think we’re in the right place, which is we’re waiting to see we’re waiting to become more confident that inflation is moving sustainably at 2%. And when we do get that confidence and we’re not far from it, it will be appropriate to begin to dial back the level of restriction so that we don’t you know, drive the economy into recession rather than normalizing policy as the economy gets back to normal.

Q: Can we go to the balance sheet and talk about that we’ve seen and I think we’re now at a point where your objectives may be very much at odds with the behavior of our fiscal policy. Am I missing something here, Mr. Chairman, or does it increase net issuance by the Treasury lead to higher rates?

Powell: I mean, in principle, more supply should lead to modestly higher rates, but that’s not going to affect what we do. That’s not a problem for us. We’re, you know, our balance sheet normalization is running very much as expected. We’ve decreased the size of our holdings by almost one and a half trillion dollars.

Q: Another component of this topic, your colleague, Governor Waller said he’d liked the Fed to shift its holdings toward a larger share of short term treasuries. Back prior to the financial crisis. About a third of the Feds holdings were in bills now they’re around 3% of your total securities holdings. Do you share the goal was with Governor Waller? If so, how long would it take us to get there?

Powell: Take a while. You know, that’s that’s an issue. We’re in our FOMC meeting and a couple of weeks, we’re going to have our first really deep dive on what to do with the balance sheet. That’s one of the issues I don’t think we’ll deal with that at this meeting. But over time, you know, you’d love not to own a lot of MBS. And I could see a case for shortening the maturity but it’s not something you know, it’s not something that would happen quickly. And it’s you know, we’re not, we’re not actively looking at that. That’s sort of a longer term aspiration that I think he was just…