Marketplace - “Hard to say” where interest rates will settle, Fed chair says

Episode Date: March 29, 2024

Federal Reserve Chair Jay Powell sat down with “Marketplace” host Kai Ryssdal to discuss inflation expectations, the central bank’s political independence, and humility in the face of national crises. The chairman also talked about how he consults with members of the rate-setting Federal Open Market Committee, why he worries when interest rates are covered like a “horse race,” and more.

Fetcher J. Powell on the program today in 4,000 words, more or less, from American public media. This is MarketFlex. In San Francisco today, the studios of KQED, I'm Kai Risdell. It is Friday, the 29th of March. Good as always to have you along, everybody. I will be the very first to admit that a macroeconomics and monetary policy conference at the Federal Reserve Bank of San Francisco sounds a bit niche. But then again, when they asked if I wanted 45 minutes on the record with Jay Powell this morning,

how do you say no? We started, the Fed chair and I did, with the macroeconomic news of the day that inflation, as measured by the Fed's favorite, you all know it, core PCE, personal consumption expenditure, came in this morning at 2.8%. That's year over year. So I'm going to jump right in with the data of the morning. PCE came out this morning. You had it yesterday, 2.8% at the core. Here's my question. You saw it yesterday. What was your first thought? My first thought was that the report that came out this morning is

pretty much in line with our expectations. So core PCE, as you mentioned, is at 2.8% on a 12-month basis. Headline is at 2.5%. That's what we were expecting. And it's good to see something coming in in line with expectations. So as you and your colleagues at the Fed and at the regional banks have been saying, we want more data, more good data. Is this that? Is this in that bucket? Well, so let's take a step back. Over the course of the second half of last year, we got what I would definitely consider good data over the course of seven months. And then in January of this year, we got a very high reading,

a much higher reading on inflation. And so February is lower, but it's not as low as most of the good readings we got in the second half of last year. But it's definitely more along the lines of what we want to see. So what we've said is that we don't see it as likely to be appropriate that we would begin to reduce interest rates until the committee, the Federal Open Market Committee, is confident that inflation is moving down to 2% on a sustained basis. And what do we need to get that confidence? It's just more good inflation readings, like the ones we were getting last year. With all possible respect, you all, all of you, have been saying the same thing for now six months, right? We want more good data.

What do you suppose it does to the listening public and to the professionals who are listening to this when you keep saying the same thing? So we're, you know, we're steady. Our hand is a steady hand in this. We've been saying all through last year and this year that we're making progress. We've noted that progress. We haven't overreacted to it. We didn't overreact to the good data we had in the second half of last year. You heard us saying that this is good, but we need to see more. And you won't hear us overreacting to these two months that are higher. The reason that's important is that the decision to begin to reduce rates is a very, very important one because the risks are two-sided. If we reduce rates too soon, there's a chance that inflation would pop back and we'd have to come back in, and that would be very disruptive. That would not be a good thing for the economy.

There's also a risk that we would wait too long and that that would – in that case, it could be unnecessary, unneeded damage to the economy and perhaps the labor market. Why would it be terrible if you reduce interest rates by 25 basis points, quarter percentage point, and then the data changes and you have to change your mind? Why is that terrible? It wouldn't need to be terrible. And you're right. We always have to be humble that we actually – the outlook is always much more uncertain than most people think, including us. The economy can and often has recently performed in unexpected ways. So we're ready for that.

And if that's what happens, that's what we'll do. But it's important to get this right. The other thing, though, is with the economy, growth is strong right now. The labor market is strong right now. And inflation has been coming down. We can and we will be careful about this decision because we can be. Say more about because you can be. You got nothing but time, basically?

Is that what? No, the economy is strong. We see very strong growth. We had growth for last year over 3%. Many forecasters see growth coming down to around 2% this year. That's about roughly what the first quarter looks like. That means that we don't need to be in a hurry to cut. It means we can wait and become more confident that, in fact, inflation is coming down to 2% on a sustainable basis. So this is kind of a subjective question, but then why then do you think people are screaming, not for your heads, but close, but for you to cut interest rates so much?

people are screaming, not for your heads, but close, but for you to cut interest rates so much? Well, I mean, we have, I would say we've divided our critics into sort of equal-sized piles at this point. There are plenty, there's plenty of people who think that, you know, that we shouldn't be cutting. But the point is this, we haven't reduced interest rates. What we've said is we want to be more confident before we take that step. And I actually think monetary policy is well placed to react to a range of different paths for the data. And that's really what you want. You want to be in a position where you can react not just to the base case, but if you get a case where inflation progress slows or where the economy weakens, you're also in a position to react to that. And we are. Can we talk briefly about that first cut, which you mentioned, right? That's going to be significant. It came up at your last press

conference after the meeting. How important is unanimity to you on that? Unanimity as such. So I don't know any Fed chairs who were hoping for dissents. It's not something you want. But at the same time, the way I think about it is this. You talk to people. I talk to all the people in the committee before each meeting in depth. And you listen to people.

You hear them. You try to get in their thinking and understand it. And you try to incorporate that to the maximum extent you can in the decision and the way we talk about it. And if you do that, people generally feel consulted. They feel that their views are being considered and reflected. And they may choose to dissent. That happens all the time. It's not a problem when people dissent. It happens and life goes on. Do you literally go knock on their doors or call them on the phone? Like you call Mary or whoever? Yes, I have. Well, I have scheduled

calls with every voter and non-voter on the FOMC before every meeting. And not infrequently, I'll have another round of calls before that. And not infrequently, I will have just calls. I just talk to various people on the committee during that six or seven week intermeeting period. You've talked previously about humility. You've said the word humble already this morning once. I was talking to Neil Kashkari at the Minneapolis Fed the other day, and he said, you know, this economy is really tough to diagnose,

so it's hard for us to know what's going on. Talk to me about humility in the face of, and we were talking about this backstage, about an economy that is still really, really hard to figure out what's going on. So economic forecasters are a humble lot, generally, with much to be humble about. That's funny. That's not my experience with economic forecasters.

with much to be humble about. That's funny. That's not my experience with economic foreclosures. So, but yeah, the pandemic era has of course been full of surprises. If you go back to the beginning, I think almost all of mainstream macro analysts thought that this was different and that because of the obvious supply side problems,

the collapse of supply chains and things like that, there was a group who didn't diagnose it that way. But if that's the case, then we thought that our very dynamic economy would recover pretty quickly, that people would go back to work, kids would go back to school, and the economy would be fine and there wouldn't be much of a need for us to intervene except sort of during that early period to get the economy would be fine and there wouldn't be much of a need for us to intervene except sort of during that early period to get the economy, you know, keep it from collapsing during the actual intense phase, acute phase of the pandemic.

So that didn't happen. Inflation came up, stayed up, and it took a long time to heal. And then it didn't really heal. The supply side didn't really heal in 2022. And we were thinking, well, maybe it's not going to heal. And then it didn't really heal. The supply side didn't really heal in 2022. And we were thinking, well, maybe it's not going to heal. And then it did. And so the labor force participation, workers came back into the labor force in 2023.

And also the supply chains healed in 2023. So right about the time we were thinking, maybe this isn't going to happen, it really happened a lot in 2023, which is part of the story of why the economy did so well last year was supply-side healing. So now we have – I mean, it's just – it's been surprising over and over again. So I think we have to be unusually humble about our ability to foresee the future and be ready for different plausible outcomes. I've told you this story, I think, last time you and I spoke about a conversation I had with then-civilian Yellen.

It was between her time as chair in the Treasury sector, and I asked her why the Fed hadn't been able to get inflation up to where it wanted, she wanted it to be, where the committee wanted it to be, and she literally looked at me and went, I don't know. And I guess my question is, is it,

would it be a bad thing for you to say, we don't know, we're doing the best we can? So we say that all the time in one way or another. I'll give you an example. We have, as I mentioned, high inflation in January, somewhat less high inflation in February. And we've been saying that we expect inflation to move down to 2%, but on a path that is sometimes bumpy. So the question then is, are those just bumps or are they something more than bumps? Is progress on inflation going to slow for more than two months? And that's a question. And honestly, we're just going to have to let the data tell us that. There isn't anybody who knows. And so our position is, we don't know.

We'll tell you what we will do if inflation does come down. And that's sort of the base case. That is what we expect. We expect inflation to come down on a sometimes bumpy path to 2%. But if that doesn't happen, then obviously our rate policy will be different. And, for example, we can hold rates where they are for longer. And that's what we would do, of course, if inflation doesn't come down, if we don't see the progress we're looking at. So we kind of say that all the time. Consensus now is rates are going to be higher for longer. They may or may not come down this year, depending on what the data says. Do you think this

economy is ready for a four and a half-ish percent inflationary sort of economy, right? Not inflation four percent, but your rates at 4.6%, which is where your projections happen. So this is one of the things, we've had our policy rate at 5.3%, which is the highest rate in more than two decades for some time. And all through the course of 2023,

we saw very strong growth. So it's, and that's partly because we, this has happened in a context of supply-side healing, which makes its own growth, you know, when potential output goes up. So we don't really know where rates are going to go back to when this whole thing is over. For many years, if you go back to before the global financial crisis, it wasn't unusual to see the longer-term rates in the fours. And so are we going to go back to, whereas in the sort of time between the global financial crisis and the pandemic, rates went lower and lower and lower, and it wasn't unusual

to see in other countries long-term rates below zero even in Europe. They never went that low in the United States, but they went very low. So are they going to go back up to those higher levels of the pre-global financial crisis? We really don't know. So we think that the factors that led rates that really came down over a 40-year period mostly related to big, slow-moving things

like demographics, aging population, which saves more, and productivity, low productivity, and things like that. Those things don't jump around. They're sort of slow-moving objects. But the truth is, we don't know. My own expectation is I don't think rates will go back down to the very, very low levels they were at before the pandemic. But where they will turn out to settle out, it's hard to say. This economy doesn't feel like it's suffering from the current level of rates. Although if you look at things like inflation-sensitive spending, then those parts of the economy are really feeling the high rates. Not to pick at a scab, but what I hear you saying is while inflation may or may not have been transitory, rates are not actually going to

be transitory. They're going to be higher for a while. People just need to get used to that. That might be the case. I don't know. I don't think rates will go back to the very historically low levels that they were at before the pandemic hit. I do think rates will come down from, are likely to be lower than they are, at least short-term rates are lower than they were right now. But I mean, we're going to let the data, we're going to have to let the data tell us the answer to that. What's the monster under your bed that would keep you up at night?

Other than inflation, you don't get to say inflation. Inflation. No, you can't do that. No, I would say this. We are at a place where the economy is strong without question. The labor market is in a good place. We've got unemployment under 4% for more than two years now, for the longest time in 50 years, and we've had progress on inflation.

So we want to use our tools in a way that keeps the strength in the the strength in the economy and in the labor market, but allows for further progress in inflation. That's our focus. And, you know, we clearly have a chance at that outcome. And, you know, we're all very, very focused on doing everything we can to deliver that outcome. It would be a great outcome for the American people. And it would be testimony to how unusual the circumstances are. come for the American people. And it would be testimony to how unusual the circumstances are. More from Chair Powell after the break on Wall Street today. Closed, as you might have heard. This is Marketplace. I'm Kai Risdahl.

Part two of my conversation with Jay Powell this morning starts with a vocabulary quiz. Soft landing, transitory, words that I imagine you don't let be said in your presence very much. Here's another one that hasn't been said at a press conference that you've had since December, recession. Do you think a recession's off the table? So there's always an unconditional probability of a recession in the next year. And so the real question is, if you look through history, it's not possible to rule a recession out for a long period of time. Granted, but you know what I meant. The real question is, is the possibility of a recession elevated at the current time? And I would say no.

I don't see forecasters disagreeing with that. Growth is strong, as I mentioned. The economy is in a good place. I don't see forecasters disagreeing with that. Growth is strong, as I mentioned. The economy is in a good place. And there's no reason to think the economy is in a recession or is at the edge of one. But humility.

Understood. Last time you were on the Hill, somebody asked you whether you were going to come out and declare victory. You were going to say, yeah, we did it. We're done. And you said, absolutely not. That's not what we do. Will you not at some point, though, when you get inflation to 2 percent, say inflation to 2 percent? We've done our job. Things are stable and life is good. I don't want to speculate about that. You know, we'll jinx it.

I'm such a superstitious person. But no, look, we'll always tell you what we're seeing in the economy. And if we get to that place, that'd be great. That would be a great outcome for the public. That's the main thing. We talked very briefly backstage about after the Fed, what you're going to do, because you have two years left, give or take. As we sit here in the Yellen Conference Center at the San Francisco Fed, where do you think the Powell Conference Center is going to be? And what do you think your legacy is going to be? First line of your New York Times obit. I'll tell you the thing that I care about the most,

and that is the Federal Reserve as an institution, as I mentioned, is an incredibly important American institution, especially right now, because we are that place. We aspire to be that place that transcends politics, divisive politics. And I think, in a way, we are helping hold this thing together by doing what we do the way we do it. And I want to be, I feel accountable and responsible for the institution and delivering it to the next generation of leaders and people in a way that it can still serve the American public the way the Fed does. So I wasn't actually going to go to politics this morning because you have a well-practiced answer to that question. But I feel like I kind of have to now that you brought it up twice.

It is possible that the Fed is likely even that the Fed is going to become more politicized this year. And the first time you and I spoke in 2018, you were in the crosshairs of the president and the administration. And I asked you about it and you said, you know what? Control the controllable. Can't do anything about it. So the question is not what are you going to do about the politics of it. The question is, what is your fear for the economy if the Fed becomes politicized? It just wouldn't.

We wouldn't be the Fed. But the good news is we are the Fed. Come on, no, no, no, no. That's not answering the question. The good news is we are the Fed. Come on, no, no, no, no. That's not answering the question. No, a central bank that is excessively responsive to,

you have to look at other countries, basically. And what you see is there's no credibility. Credibility on inflation and on sticking to your knitting is everything. Because if people believe that you will accomplish your goals and that you won't deviate from them for reasons like that, then it'll be easier to do so. Markets will react appropriately. And in people's thinking, inflation should be around 2%. And if they think that way, then it probably will be around 2%.

So if you look at other, I think, more emerging countries where they have weaker independence or a lack of independence, it's hard to have price stability or maximum employment. So that's what would happen if that were to happen. But I'll insist upon saying that's not the world we live in. Do you worry that the Fed gets covered too much, especially now when we're all trying to parse your every word, gets covered too much like a horse race kind of? There's a little bit of who's in front? Polls say this. What are they going to do? Yeah, I do worry about that. I think that the things that really matter for our economy over the long term are not the Fed's

interest rate decisions, which really have no impact over the things that matter on the longer term. Say that again. Seriously, say it for the cameras. Okay. The things that matter for the United States economy over the medium and longer term are not the decisions that the Fed makes. The Fed tries to guide the economy to maximum employment and price stability through a business cycle and can react. We do critical things during crises. We're very, very important in crises. But things that add to the productive capacity of the United States, things that give people more skills so they can contribute more to the economy, those things, investing in those things, that's what drives the longer-run growth and the longer-run economic well-being of our citizens,

not the things that the Fed does. What we do is very important in maintaining stability and smoothing out the business cycle and also crisis response, but we don't work on those really far more important longer-run issues. Apologies to those of you on the live stream and who are going to hear this later on the radio. Is Professor Swanson in the room? Sir, I'm sorry, I'm going to steal your thunder. There's a panel coming up this afternoon, sir, at 125, the title of which is Speeches by the Fed Chair Are More Important Than FOMC Announcements,

an Improved High-Frequency Measure of U.S. Monetary Policy Shocks by Professor Swanson at the University of California, Irma and some others. Agree or disagree? Pass. No, I look forward to it. I saw that on the agenda. I look forward to it.

I'm not going to come in here and embarrass you by being here, but I will read the paper. But to that general point, do you get too much press? It's not for me to say, but I do think I do. I absolutely think there's too much focus. If you think about the things that are really important in the economy, things like trade and what we should be doing, some of the things that we're doing that the administration has done, They're far more important over the medium and longer term than monetary policy is. Although it's important that there be a Fed that has a good framework of monetary policy that's well understood. Don't get me wrong.

It is important. But absolutely the other things are more important over a long period of time for the people we all serve. But the other things are more important over a long period of time for the people we all serve. Mary Daly in the introduction was talking about your special talent, that you're a listener, you're a consensus builder. What is your special talent? Why do you think you have this job? Why do I have this job? Don't ask me, man.

When I got to the Fed in 2012, of didn't, of course, I had no idea what was to come. You know, I will say what I try to do on listening is I think, again, if you do listen to people and they understand that you're hearing them and not just kind of explaining things to them. And they get that and they feel listened to and heard from. For most people, most of the time, that's going to be enough for them to go along, even if they don't like a decision. It also, it builds relationships. So, you know, I've spent, I spent a great deal of time with our oversight committees and beyond that on Capitol Hill, with our oversight committees and beyond that on Capitol Hill, more so than my predecessors. And I think they see the Fed as, I want them to see the Fed as what it is, which is this non-political agency that doesn't run talking points at them and isn't political and is

just doing our work and staying out of the political issues. And I'm in their offices listening to what they say, and I think they really appreciate that. Yeah, but do you think it's working? What? Your effort to get them not to see you as a political agency and just doing the best by the American people. Much better than you would think.

I mean, I think there's a certain amount of low noise on that subject. But if you talk to people privately, I think an independent that has very broad support in both parties on both sides of the hill. I'll appreciate you're going to want to be discreet on this question, but what's running through your head when you're at the Green table in front of a Senate or a House committee? I'm trying to listen hard to get the question. Sometimes the questions are more like speeches, or they're not really

questions, or they're not quite the right question. So I try to find the good question and give the good answer to that question. Also, respect. In our system of government, they are our oversight, and our democratic legitimacy runs right through transparency and right through their actions of holding us accountable and us explaining to them what we're doing and why. So we answer any and all questions that they may have.

So I work hard to get ready for those with a lot of help from people, and we take them very seriously. So as it turns out, a macroeconomics and monetary policy conference at the San Francisco Fed? Maybe not so bad. All right, we got to go. No final note today. Too much Jay Powell, just not enough time. Our theme music was composed by B.J. Liederman. Marketplace's executive producer is Nancy Fargali. Donna Tam is the executive editor.

Neil Scarborough is the vice president and general manager. Special thanks today to our friends here at KQED. I'm Kai Rizal. Have yourselves a great weekend, everybody. We will see you again on Monday, all right? This is APM. All over the country. We need to improve reading in Wisconsin.

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