Editors note: click on each paragraph to jump to the corresponding part of the video. Please forgive that the timestamp is a fuzzy match. The models are getting dumber this time for no obvious reason imo.

Q&A

Arvin Murphy: Thanks, thank you very much, Chair, for those remarks and for taking some time to be with us and talk to us today. There's a lot of stuff going on in the world today. I think we have a lot of stuff to talk about, so I'm going to get right into it. Before I get started, I just want to also thank you to the audience for sending questions over. What I've done is I've tried to organize the conversation around two themes: one, we'll start by talking about the macroeconomy, and then you have been shared through a very tumultuous period over the last 5 years, and I want to talk about the leadership challenges around that.

Arvin Murphy: Let me just dive right into it, pick up on something you started talking about, which is inflation. Two years ago, we had inflation readings close to 6-7%. We've come down to 3%. Last Friday, the PCE inflation index, the personal consumption expenditure inflation index, which is something the Fed often speaks about, came at 2.8%. We had, we have, we've had a conversation about this. There's so many factors that have been play in the economy over the last couple years. I wonder if you can just spend a some time talking to us about what do you think are the key factors that have brought inflation down over the last two years?

Chair Powell: Sure, so I think I'll start with where we think the inflation came from, so what is actually different this time, at the risk of making that statement. This inflation wasn't strictly just a question of demand overheating and the Fed coming in and having to suppress demand. That's been the more typical pattern, perhaps on the back of a shock such as oil price shock and that kind of thing. This episode actually also involved, as everyone will recall, the collapse of the supply side in a lot of ways. Supply chains stopped working. There were shortages of critical things like semiconductors, which turned out you couldn't make cars. I think many of us might not have realized how many semiconductors go into a car. In addition, there was a major labor force shock, so we lost several million people out of the labor market, so that we had a very severe labor shortage. So it was a supply side issue as well as overheated demand from the closing and then reopening of the economy at a time when rates were low and fiscal policy was very supportive of demand. So we had both of those things, and therefore, if those were the causes, what we needed to see was both the unwinding of the pandemic-related distortions to both supply and demand in the economy and also the effects of monetary policy. So today, what we think we're seeing as inflation has come down sharply over the last year is those two factors working together, and they do work together. We think that tight monetary policy weighing on demand actually gives the supply side better chance to recover, and 2023, of course, was a year, as I mentioned, of very significant supply side recovery and expansion.

Arvin Murphy: What are the factors that you're keeping an eye on, say, over the next few years, maybe next year or two, that might play out in the inflation picture?

Chair Powell: I should also mention inflation expectations, which in our framework and in the thinking of most monetary economists, people think that having the public expect inflation to return to 2%, despite it moving up, that that's a very important factor in bringing inflation back down. In a sense, if people believe that price setters and wage setters in the economy, if they believe that inflation will be 2%, then that'll actually happen. So as we look ahead though, one question is how much more juice is there to come out of the supply side recovery. We also got a very large increase in population last year, which may have helped with inflation. It certainly helped with output and increased the potential output. At the same time, the economy is growing 3.1% last year, around that. We also had inflation coming down sharply. So there may be more supply side gains to be had. Surveys of business still show difficulties in hiring people, different difficulties in getting the inputs that they need for their businesses, so there's some more benefit there. We also think that monetary policy is tight. It's weighing on interest-sensitive spending in the economy. So for example, durable goods surveys of consumers will say that it's a tough time to buy durable goods because rates are high. You also see the labor market rebalancing because you can look at demand in the labor market as well as supply, but you see demand reflected in lower job openings, a very small increase in unemployment, in wages moving back down toward more sustainable levels. So we think those two forces that I mentioned will be the ones we'll be looking for, and the thing we'll be looking at, of course, is the incoming data on inflation as those affect the outlook and the same thing about the labor market. What's happening in the labor market? Does it suggest that the labor market is continuing its progress, and it's made substantial progress to get back to a sustainable level of wage growth and balance between supply and demand.

Arvin Murphy: Can I just dig into the inflation expectations point you mentioned? The analogy that people drew a couple years ago was to the high inflation episode of the 70s, where we had a high inflation period that then ended up shifting expectations and, through the wage price mechanism, ended up leading to a sustained period of high inflation. In the current situation, I guess I two questions: how concerned are you about maybe inflation getting stuck in the upper twos, around three? Could that last mile be very hard because inflation expectations getting stuck? And then relatedly, are there things you're looking at to tell you, to signal to you, that that is an issue or isn't an issue?

Chair Powell: Right, so as I mentioned, inflation expectations, we think, are an important part of driving actual inflation, and we want them to be at levels that are consistent with 2% inflation over time, not 3%, but 2%, not 2.5%. The good news is that that's where they are right now and pretty much have been for some time, and we look at surveys of businesses, households, forecasters. We look at other kinds of measures of inflation expectations, model based and things like that. We also look at market based. The market is always buying and selling inflation protection, and you can get from that expectation of or assessment of what markets expect, and all of those are pretty consistently saying that the public does believe, and it's a good thing because it's true, that inflation will go back down to 2%. So that's very assuring, but that's partly because of the very strong action that we took and also because of our ongoing commitment to actually return inflation to 2% over time. And that is our commitment, by the way. We're, but over time. So I would say it would be a concern if inflation expectations were not to be consistent with the outcome that we seek, but the good news is they're not, and I think our commitment is understood and respected and believed by the public, and that's as it should be.

Arvin Murphy: Let me flip to the other side of the equation. We've had employment, economic activity that remained quite strong. The unemployment rate is really, it's remained below 4% for the last 2 years, and this is during a period in which you've took the funds rate from 0% to 5.3% in about as fast a rate hike cycle as we've seen in history. A year ago, many people were talking about possibility of recession. That hasn't happened. Again, you made some remarks about this, but I wonder if you can just go a little bit more into this. Why hasn't this happened? Why have we achieved what looks like a soft landing, which is inflation coming down, unemployment remaining low? What are the factors that have played out? And then the related question: do we think this will continue to happen over the next year or two?

Chair Powell: Yeah, so I guess it's, I've always had the view and always said that because of the unusual origins of this inflation and its differences from other prior episodes, there was a path to getting inflation back down, restoring price stability, get inflation back down sustainably to 2% without the kind of large job losses and increases in unemployment that have been typical of prior tightening cycles. And the reason again was that some part of this was independent of demand. When, if you have to get all of the inflation reduction gains from suppressing demand, then the chances are that that will involve, that will weigh on employment and economic activity pretty significantly. But here we had the situation for tack against semiconductors. You couldn't buy a car at the very time when people wanted cars because they were moving to the suburbs, because they didn't want to ride on public transportation because of COVID. At that precise time, the supply of cars went down dramatically because of this shortage. So what happened is the prices went way up. That's how the market clears in our economy. So on the other side of that though, without respect to demand, once this semiconductor supply comes back, you should come right back down that curve, and you could, in principle, get inflation down significantly without just ignoring demand for a second. So I always thought that was possible, and I would say something like that is appearing to be happening.

Chair Powell: Sorry, so then your question is, how did that happen? So more recently, in 2023, we expected that to happen at the very beginning, and that's why we thought the inflation was transitory, meaning it would go away quickly without much effort from us. That turned out not to be the case, and we thought then in 2021 and 2022 we thought the supply side would recover more. It really didn't, and we began, I certain began to wonder whether that was going to happen. And then it really happened in 2023, right about the time we were almost ready to give up on supply side recovery. You got this significant increase in labor force participation, accompanied by a significant move up in immigration, and you also got the unwinding of the supply side problems. So what's happening is when that happens, potential output is going up significantly, the economy's productive capacity. So you have a situation where productive capacity is going up even more than actual output, and so the economy actually isn't becoming tighter, which it ordinarily would, it's actually becoming a little looser, and you're seeing inflation come down. Very unusual situation. The pandemic has been a textbook of unusual, unexpected developments and situations. But that really is the story, and then, Arvin, the question is, how much more are we going to get out of the supply side recovery, and how much will fall to demand? And we just don't know the answer to that.

Arvin Murphy: You had mentioned immigration has been a big part of the last year or two in terms of the supply side. Can you just expand on that? Is that, how important is that relative to supply chain? Where do you see that playing out in the next year or two?

Chair Powell: So I need to start by saying that the Fed is not an immigration policy maker and don't comment on those who do have that assignment and or the policies that they make. It's really just, we're just calling the balls and strikes on the economy as we see them. And so from that standpoint, our economy has been short labor, and probably still is. If you talk to, and we do talk to a lot of business people, it's still difficult to hire for many, many companies. So we've needed more people. But what happened over the course of last year is, to a much greater extent than had been thought, immigration moved up quite a bit over the last two years. And this is, typically the Census Bureau does all this estimating. The Congressional Budget Office actually went and took a different path and talked to border, the people who work at the border and that kind of thing, and got much higher estimate, which now many groups have gone out to validate, and it's, I would say it's clear there's something there. The numbers are actually higher, and that actually explains what we've been asking ourselves, which is, how can the economy have grown over 3% in a year where almost every outside economist was forecasting a recession? An overwhelming majority, anyway, were forecasting a recession for 2023. Not only did that not happen, we had better than 3% growth. So really a remarkable performance, and some part of that is that there are significantly more people working in the country. And they've, but then how does inflation come down? It's because potential, the capacity of the economy has actually moved up perhaps more than the actual output. So it's a bigger economy, but not a tighter one. Really an an unexpected and unusual thing. Again, we don't make judgment calls, but that's what we're seeing.

Arvin Murphy: So it's interesting, in this discussion we've had about inflation and unemployment, we have talked about real factors: immigration, supply chain healing. That's the stuff that seems to have played out. We haven't really talked about interest rates per se, which is of course the primary tool of the Federal Reserve. I want, it looks from the outside like the interest rate sensitivity of the economy in this cycle has been very muted, very different than in the past. There's also, you look at the economy, they look like there's very differential impacts across different parts of the economy. The housing market, people have long-term fixed rate mortgages, so interest rate pass through there is very low. Here in Silicon Valley, we have early stage growth businesses where the cost of capital is affected by the higher rates, and there we, you, we, it looks like we have a much bigger impact. How, so I wonder if you can speak about the interest rate sensitivity of the economy in the cycle, and then another question, a related question, which is, we have differential impact across the economy. How do you think about balancing the impact of interest rate hikes on different sectors?

Chair Powell: So I guess the headline for me would be that I do think monetary policy is working and working broadly as expected. I think you can point to sectors of the economy, and you mentioned a couple. So if you're a household that has a low interest, interest mortgage, you're not feeling the effect of higher mortgage rates, and many companies as well took the opportunity to term out their debt before rates went up. So you have a lot of companies that have longer term fixed rate debt at pretty low rates, and they're not as affected by it. That's all true. At the same time, again, if you look at interest sensitive spending, either in housing or durable goods, you're seeing very significant effects there. And I do think you see the economy rebalancing. So I don't, I think it's not right, and maybe too soon to conclude that there's some significant disconnect there in terms of monetary policy transmission. I would, so, but it still leaves the question of how the economy can have grown over 3% during a year in which monetary, the federal funds rate is at a quarter century high. Why wouldn't growth have been lower? And to me, the answer to that is the supply side recovery. I think that's what people need to understand, is that you have this force from outside, it's not just interest rates and demand, you've got a supply side recovery that is creating new demand and new supply, and that's why you get a number like 3.1% at the same time inflation is coming down. One of the reasons why. So it, I think that that's really the story, it's not that the policy isn't restrictive and it's not that the economy is not responsive to rates, it's that we've had this outside force that is temporarily affecting that.

Arvin Murphy: So if I benchmark Fed policy right now, we have rates at 5.3%, inflation is running a little bit under three, that's like a 2.5% real interest rate. That's really the real cost of borrowing. Compared this to pre-pandemic, we had real rates of close to zero, maybe half a percent, sometimes negative. That's, so we've gone from a very low rate environment to a very high rate environment. Policy looks tight right now. Another benchmark, I don't know if my colleague John Taylor is here, but the Taylor rule is a typical benchmark we use for thinking about central bank policy, and by the Taylor rule, policy rates right now should be around four. So policy does look quite restrictive right now. And I think in talking about where policy is right now, you've said that the risks are balanced. Why continue to have tight policy in an environment in which the risks are balanced?

Chair Powell: So we do think that policy is restrictive, we think it's doing its job. I would go back to what I said in my remarks to start, which is, the we think the risks are two-sided. So there's a risk if you cut too soon, the risk is that the progress on inflation will stop or that even it will reverse. And we've seen that some in some historical, particularly in the 70s. We don't think that's what's happening here at all, but that's a risk that we have to manage. The other risk is that we wait too long or move too slowly once we do move, and in that case, you have weakening in the labor market and economic output. So we, you know, we're trying to steer between those two risks, obviously. We're trying to be in the middle and get the timing right. It's very challenging. There is no risk-free path, but we're trying to, and I think we're in a position to address the economy moving in either of those directions. The risk though of moving too soon really is that the economy, you know, really does, the inflation does move up, and then that's, it really would be quite disruptive if we were to have to then come back in. We will do what we have to do to get inflation down to 2%, but again, it's about balancing those risks. It's never the case that you can confidently look at the baseline and say, "This is what we're going to do." It's always about having a baseline understanding, but then knowing what the risks are and and having the committee be in a position to be able to address those should they materialize. And I think, I think we're very much in that position now.

Arvin Murphy: Maybe I can, I can just follow up on that. So is, is there a signal or a data point that you're paying particular attention to over the next year? And I'm going to ask it this way. So if you had a crystal ball that you knew could perfectly answer one question about the next 12 months, what question would you ask? What's the thing you really want to know?

Chair Powell: Sorry, there isn't any, there's no one thing. It really is, we have a dual mandate. You're asking me to be single-minded about the dual mandate.

Arvin Murphy: Just, just a kind of a data point that you think is, is will guide you.

Chair Powell:Can't do that. No, I mean, we, we have to, the, I, I would say this. In our framework, the two goals, price stability and maximum employment, are equal under the law. But our framework literally says that if you're very far from achieving one of the goals and the other one is pretty much at goal or even better than goal, then you focus on the one that's far from goal. This is obvious, right?

So and that's what we did after inflation came up in March of '21, and then we, we really had a very tight focus, and you heard us, you heard us talking about getting inflation under control. But as they, as inflation has come down, the two things are moving back into balance, and, you know, we're, we're not a single mandate bank. The key thing I'll end with though is price stability is, it gives us the ability to achieve both goals. If we don't have price stability, then we're not going to have these long periods of tight labor markets which benefit everyone. What we saw in the 10-year expansion that ended with the pandemic was, for the last two or three years, the people at the lower end of the income spectrum were getting the largest wage increases, and you saw the gaps between black and white unemployment go to historic lows. So a tight labor market over a long period of time does enormous social good, and that's what we all want to do, is we want to get back to that. For that, you need price stability, but they were, so the two of them actually are quite complementary.

Arvin Murphy: I'm going to shift tack and talk about some of the challenges of leading the Fed through the last five years. So, you know, just in our discussion, and it's clear from looking at the world, you've had so many different shocks. Economies behaved in so much unusual ways over the last few years. You were appointed Fed Chair in 2018. I remember pre-pandemic, the dominant concern of the Fed was low inflation, not high inflation, it was hitting, having inflation below target, below the 2% target. COVID happened, we've gone in a completely different direction. So can you just speak about the challenges of taking an organization that was focused on one thing to focusing on something completely different?

Chair Powell: Yes, it's certainly been a turbulent time. I will say, to Dean Levin's points, it's been really a lot of things and things that weren't expected. For 20 plus years around the world, economies suffered from lower interest rates, lower inflation, slow growth, low productivity, bad demographics. And a lot of monetary economists were working on, how do you make your tools work at a time when you're going to be bounded by zero and you won't be able to cut and make and support the economy? So this was a big, and that was a big thing. And then so that, then the inflation that came, it really arrived in the first quarter of 2021, was a surprise to most people. And again, the macroeconomists generally thought that it would go away over time, not everyone, there were some concerns expressed. And ultimately, it is coming down significantly. So that was, you know, we had to, we had to pivot on that, and we did. When it became clear, really in the fall of 2021, it became clear through the labor market data, the inflation data, the growth data, that the economy was not moving back toward price stability, and we pivoted. And when we pivoted, we really moved, so, because, I, that was the right thing to do. So the good news about monetary policy is it can move quickly. The emergency tools we have, as I mentioned, are agile compared to other government policies, and they have a significant effect on the economy. So I think we've gotten to what is, knock on wood, a pretty good place. We're using our tools now to try to bring inflation down the rest of the way to 2% while keeping the economy strong and the labor market strong as well.

Arvin Murphy: I mean, the other side of the tumultuous period that we've been through is the external pressure from the Fed, from outside, over where to set interest rates. And you have faced this pressure over the last 6 years, including from the former president. So how do you navigate the decision making of the Fed in the larger scheme of pressures coming in from the outside?

Chair Powell: So the thing is, internally, we have peace of mind on this because everybody who works at the Fed knows that we're going to do what we're going to do and we're going to do it for economic reasons, and that's it. As I mentioned in my remarks, and I mean, I think you can go back and look, anybody can read the verbatim transcripts of the things that we discuss during, it doesn't matter what the election calendar is saying, whatever is happening in the economy, those are the decisions we make decisions based on the analysis that I described in my remarks. So I think we know that. So it becomes, but it's a communication issue that people need to understand that that's what we do. It's always what we do. If you look at the modern historical record, you'll see that the Fed has been prepared to move or not move and do what it thinks is the right thing for the economy in the medium and longer term without regard to kind of outside considerations. And it's important to just have people know that, which is why I brought it up. I'm not, I don't have concerns that, you know, that it's going to be a problem for us because we're going to do what the right thing is for the economy over time, and my colleagues and I are tightly focused on that.

Arvin Murphy: Maybe you can just say a little bit more about that. I mean, you're praised by many people and your ability to build consensus. You've served in different White House administrations with different political ideologies. How do you do that in practice? Do you have any advice for all of us?

Chair Powell: So it boils down to two things. One is, you know, we have a specific mandate. Stick to that mandate, focus on that mandate, and don't be dragged into partisan political fights around, I mean, when I testify, people are always trying to get me and my colleagues to support their perspective on fiscal issues or immigration issues, and they try, they think of an economic hook and they try to, but we just don't do that. We stay, that's part of it. The other part of it just is, I spent a lot of time with, in our system of government, oversight comes through Congress. In a parliamentary system, it's through the government, but because those, that's also, that's the same people who are in the parliament. But for us, it's not the administration that has legal oversight responsibility, it's the Congress, it's the House and the Senate, and particularly the two oversight committees, one in the House, one in the Senate. And so my colleagues and I spend a lot of time, and we, you know, we don't go up there to blast talking points to people. We want to hear what they're thinking, and we want to listen carefully and respectfully and tell them what we're thinking. And I think people appreciate that. That's the thing, same thing internally. You know, I think when you listen respectfully and understand what people are saying and try to think about how to incorporate that thinking into what you're doing, for most people, most of the time, that's going to be enough. And so they can go along with things that they don't 100% support, but they feel like they were heard, or they're not going to, you know, maybe criticize quite as harshly as they would because they realize, is that you're doing this in good faith, to the absolute best of your ability, and with and based on the actual facts and what we know about the ever-evolving economy.

Arvin Murphy: And can I, can I just ask about how your own background has helped in this process? So you are a person who has shifted between the public and the private sector over the course of your career. And you, you are a lawyer by training, you don't have an economics PhD, you're running an organization which is mostly PhD or many PhD economists. So can you just speak about how your background has helped you navigate this?

Chair Powell: Sure. So I, when I graduated from college, I had no plan other than this idea that I liked what I saw of the careers of people like George Schultz or Cyrus Vance, for example. And that the idea was, these are people who had had a mainly private sector career but served in the government at intervals and were able to do public service. And I, I grew up in Washington, D.C. My family was not involved in any of this really, but this is what I observed, and I thought that's, that would, I would like to do that. And by some miracle, that's kind of what happened. It wasn't careful planning. So I wanted, I always wanted to do public service, and I wind up doing that. I was, I served as an a on the Hill, I was at a walk, all these different things that I've done. So that's how that happened.

Arvin Murphy: And then I'll ask one last question for this. Do you have any advice for the students in this room whose interests are to move between public and private sector?

Chair Powell: So I think it's, I think that's a great plan for people. People have different tolerance levels for volatility. So I mean, I quit the law and went into investment banking, quit investment banking, went into private equity, quit private equity and went into public service. So if you're willing to tolerate volatility and steep learning curves, I mean, then if you're that person, then that's a great way to go. The other thing I'll say though is, I have really found that when I was a partner at a private equity firm, I asked that the head of the investment area, what do you look for, I mean, it's all about picking good CEOs and good business models, what do you look for in a good CEO? And the answer was, you know, there's no one model, and that's really important, that there, I have seen very different people be successful in leadership roles, very, very different people. And you, it's, it's in, I don't know if it's in every person, but it's in a lot of people to find your own way to lead. And it, you don't have to be one way or another. I can think of one person at the Fed who was, she had a way of being a very soft talker, and by the end of the meeting, everyone was leaving there thinking, "How do I do her, how do I do what she said?" You know, it's like, "I want to do that." It's just, it's, it's in everybody, and you should have the self-confidence. What I experienced when I first had to lead things was complete lack of self-confidence. Oh my God, I'm not ready to do this, and that's, I think that's very common for people. I think people get more coaching now, but I would just say, be confident in your own abilities to lead and take things on and take risk, because that, that, that will, that's, if I could say that to my, something to my younger self, I think that would be it.

Arvin Murphy: Jay, we're running on time here, and there's lots more stuff we could talk about, but I'm mindful of time. So let me just first of all thank you on behalf of Stanford for being here, engaging us in this conversation. It's been very stimulating. I know I learned a lot and I hope we all learned a lot, and again, so thanks very much for your time.

Chair Powell: Thanks. Thank you. Thank you.