Power Lunch - Decision Day 2/1/23

Episode Date: February 1, 2023

The Federal Reserve just raised interest rates by a quarter point, and said ‘ongoing’ increases will remain appropriate. It also noted that inflation “has eased somewhat, but remains elevated.�� We’ll explain what the decision means for you and your money, where markets and the economy go from here, and how you can position. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

Good afternoon, everybody, and welcome to a what promises to be a very eventful power lunch, along with Kelly Evans. I'm Tyler Matheson. We're glad you can join us. We're a few minutes away, as you probably know, from the release of the Fed's statement on interest rates, the central bank's taper timeline, Kelly, in focus today. Before we get to our panel of experts, let's get a quick check on the markets. We're looking at the Dow down 307, so a little off session low is almost a 1% decline. But the S&P is only down 4 tenths of a percent, and the NASDAQ down just two-tenths right now. as we await this big decision. Let's bring in David Kelly of JPMorgan Asset Management,

Jim Karan and Morgan Stanley Investment Management, and Cameron Dawson of New Edge Wealth. Great to have you guys all with us. David, I'll start with you. You know, we've got the move itself. We've got the press conference. What in the statement will you be watching? Well, first of all,

they're going to have to acknowledge that there actually has been a slowdown in both consumption and production because industrial production fell for the last three months and real consumer spending fell for the last two months. So they'll have to acknowledge that right off the bat. And that's the first sentence of the statement.

The thing I'm going to be watching is, are they going to change the language about future increases? Can they say, well, there may be some further tightening in the federal funds range or something like that because they've got to get, I think they need to back out of the idea that they're locking in two more rate increases after today. We get 25 basis points today. I think that's unwise,

but I think it would be even more unwise to do another two rate hikes in March and May. Cameron, I know that all three of you basically agree that a quarter point is baked into the cake here, but I want to pick up on something David just said, when is this all going to end, Cameron? When are they really going to stop this rate increases? Is it this meeting? Is it next? Is it May when? Well, if we believe what the Fed says, it would look like May, because the Fed has given guidance that they want to see rates above 5%, which would,

imply another hike in May. And I really think it's the question of how much they want to push back against the rate cut bets in the back half of this year, because we still have about 50 basis points baked in for the back half. I think that's the real question mark for markets, is that pushback against cuts. Jim? Look, I mean, the Fed has a very difficult job today. In one sense, they have to decide that they're slowing the pace of rate hikes to 25 basis points. On the other hand, they don't want to let people think that the terminal rate is already baked into the cake and that they need to keep that an open, hotly debated question that they're thinking about. That way they introduce two-sided risk into the markets.

So look, I think they go 25 today. They probably do another 25 in March. That will, in my view, that's probably where they end the cycle. But overall, the key message for them that they're going to have to communicate is how wage inflation and the tightness in the labor market are really key factors. that they're keeping an eye on because the worst thing that can happen to them is have inflation not come down enough, become unanchored and start to rise, and then they have to restart their hiking cycle. So they've got to skirt that line. David, you said something very interesting.

Fed would be wise to call a halt to rate increases right now. Why? Because this is, you know, the economy is like a big cruise ship. And when you're bringing it into porch, you're supposed to cut the engines and just drift in. Instead, they're sort of revving up and heading for the pier here. It makes no sense to over-tighten and then actually project that they're going to have to cut rates in both 2024 and 2025. That's what they're saying right now. And there's nothing in economic theory, which says the right way to stabilize the economy is to overshoot an interest rates and then cut. So I think they're playing with fire here. We could end up with a recession in the second half of this year, an absolutely unnecessary recession because they over-titened.

Do you agree with that, Cameron? Not necessarily, because we think that we're starting to see some early signs that, maybe the deceleration we saw in inflation in the back half of 22 could actually start to abate, meaning inflation could re-accelerate mostly because of energy prices, which are starting to climb again. And because we've seen so much resilience within the labor market, look at that joltz number today, we don't think it really gives the Fed much wiggle room in order to become accommodative because the Fed is very afraid of inflation coming back, which means that they've continued to say there are greater risks of under tightening versus over tightening.

Jim, I'm going to save the first word after the decision for you. We've got about nine seconds left before we can go to Steve Leasman. The Dow right now down 300 points, and let's go to Steve with the Fed's decision. Federal Reserve raising by 25 basis points to a new range of four and a half to 475. This is the eighth straight hike by the Federal Reserve since March, up by a quarter to 4.5 to 475. The Federal Reserve sees ongoing increases as appropriate so that phrase that some thought might come out remains in. The Fed is still en route to a level it calls a sufficiently restrictive level of the funds rate. One little bit of dovish commentary here. It says inflation

as ease somewhat. However, it says it still remains elevated. The Fed is signaling a new focus on the extent of rate increases and not necessarily the pace. So it says in determining what it now says is the extent of increases, that word had been paced previously. So it's not thinking about it going up by 25. It's thinking about how far it goes at this point. On the economy, it sees modest growth in spending of production, says job grades have been robust, the unemployment rate is low, all language from the prior statement. The decision was unanimous with the four new voters replacing the prior four who were out there. So Kelly, back to you up a quarter. Still thinking about ongoing increases, still heading to a sufficiently restrictive level.

sense, Steve? That's a pretty big deal that they left in the word ongoing. Wow. Yeah, they left in ongoing means they have more to go. I guess that's pretty clear. And they're not backing off anyway. This idea of going to it, where they call a sufficiently restrictive level, which tells you that they don't feel like they're there yet. Right. And as we can imagine, Steve, thank you. We'll come back to you in just a moment. Markets are reacting about as poorly as you might expect. Although we were all saying all week long, we're probably bracing for a hawkish surprise. You can see stocks taking a leg lower and bond yields perking up a bit. Let's bring back our panel, along with Bob Bassani and Rick Santee.

Rick, I'll turn to you first. What are your thoughts? Well, you know, we do see two-year notes spike, but they're already coming back down. We saw 10 spike. They're coming back down a bit, and the Dow Jones Industrial Average drop, but it's coming back. There's a lot of mean reversing going on there. Listen, after listening to Steve's highlights of what the Fed has in the statement, it seems to me that the guardians of the U.S. economy, which is the Federal Reserve, aren't going to be happy. until they give birth to a recession. We've seen economic contractions like PMIs,

and I see sections of the economy slowing, but we have a strong labor market, and labor is a pain that the Fed doesn't want to occur. They want to induce weak labor pains, and to do that, they're going to keep higher for longer. So no matter how you slice this, I do believe that the markets are going to continue to look beyond the rhetoric,

Rick, look beyond trying to give birth to a recession and the cleansing breath that may need for pricing after we've gone through COVID and all those issues. But in the end, it certainly seems to me like all the momentum in pricing has reversed. And the only thing left is for the Fed not to blink too early because there is no good reason in their minds, in my opinion, that they should ease back. They should keep rates up. But I can. certainly don't believe that there's going to be a March increase. My personal feeling is is that this is going to be it for now. I don't know. They just said ongoing rate increases will still be by the way the Dow's down about 400 points right now. David Kelly, we know, I should say Jim,

actually, we promised to turn to you. What are your kind of knee-jerk reactions here? What jumps out to you? Yeah. So look, I think that another hike in March is probably on order. I think it's going to be very important to hear what they say in the press conference in the sense that wage inflation, the tightness in the labor market, I think is what's concerning them the most. It's service sector inflation. And one of the biggest feed-ins to higher prices and wages, obviously, clearly, is the tightness in the labor market. So this needs to be addressed. And I think the way the Fed is reading this is they're saying that, look, the terminal rate is not a done deal yet. We're still going to debate whether it's five or even 5.25 percent. And what they're trying to,

avoid as a type two error where they don't do enough right now when they've got inflation on the run, and then all of a sudden inflation starts to resurge again later this year, and then they have to restart their cycle, and that hurts markets more. I'm going to go to Bob now, and then I'm going to come back to you, David Kelly, and remind David of something he said that is stuck in my head since before this rate tightening cycle began. But Bob, we were at 300 points down on the Dow as we headed into this result. Right now, we are down, 367, how are stocks reacting? It would seem sort of they got what they expected.

Yeah, ongoing increase is appropriate. I think doesn't surprise anybody down here. The big debate right now, and you see that the S&P's lost about five points, six points maybe since this started, but the debate here is just how much more hawkish can Powell possibly sound? He's made it pretty clear where he stands on this. They're going to keep raising rates. They're going to keep them higher for longer.

The market thinks they've got one, maybe two small rate increase. and then they're going to cut rates by the end of the year. Fed futures are four and a half percent, not at five or five in an eighth. So who's right? You know, the Fed apologists constantly say, don't fight the Fed. But I talk to bond market people, they've got their own cliches out there. And one of the ones I hear from the bond market guys is the Federal Reserve tells the market when it's going to raise rates, but the market tells the Fed when it's going to cut rates.

And right now, the bet is exactly what David said, that the Fed is going to induce some kind of recession that's going to force them to acknowledge that and cut rates later in the year. That's what the bond market says. And FOMC is 12 people, but the bond market is more than 12 million people. And that's one of the reasons I tend to spend a lot of time talking to the bond market guys at this point. So you see the dollar up right here and pretty modest reaction on the S&P. David, before this whole rate tightening cycle began, I remember you specifically saying that traditionally, Typically, the Fed starts too late, goes too high, and stays too long.

I assume that you would stick by that statement and say that that's exactly what, in your view, the Fed is doing now. Exactly. I mean, they say that they acknowledge the long lags by which monetary policy affects the economy, but with inflation coming down with consumption spending falling, with industrial production falling, they're still raising rates. So, you know, that's obviously waiting too long. And, you know, on inflation, inflation's not going to get going again. You know, even I get it that energy prices picked up a little bit in January.

Okay. But by the middle of this year, rent instead of being a headwind is going to be a tailwind, it's going to be pushing inflation down. So I think, you know, at the middle of this year, we're going to be someone with a three handle on inflation, middle next year, two handle or lower. We could well, but, you know, eventually we're going to end up with inflation below 2% and the Federal Reserve is going to be trying to push it back up again. And there's no need to get into a recession in between now.

and then. But you think that that cruise ship that you talked about before the top, you think the ship's going to hit the dock? Yeah, at the moment, yes, unfortunately, I think it is. I mean, there's just so much pressure on this economy, particularly on consumers. There are a lot of lower and middle income consumers who had money through the pandemic because of the government aid. They racked up credit card debt last year to try to stave off the tough day where they're going to have to cut back. Now they're going to cut back. And with, you know, exports being hurt by a high dollar, with housing being crushed by high interest rates, that's enough to push this economy into recession, even if the Fed did nothing at this stage. And if the Fed keeps on tightening, then it just

makes it worse. Does anyone on our panel, including you, Steve, you Bob, does anyone want to agree with Rick that this is it? I see shaking of heads, Rick. Let me, let me jump in, Tyler. Let me go to Steve first. Then I'll come to you, Rick. Let me tell you how the market is priced, because there's been some interesting movement. in the post-statement period here in terms of probabilities. The market is baked in 50% probability right now of a quarter point in May with a 43% probability of a 50 in May. So the market has taken this.

I think what's happening right now is you're shaking the doves out of the market here. That sounds like a dance or something like that. But there was definitely a doveish bid on this idea that maybe the ongoing increases was amended, perhaps, to further increases. There's some talk in some of the pre-meeting statements. That did not happen. The Fed signaled a resolute next several months. There is one piece of dovish news you should not ignore,

which is this idea of the change of the word. I don't know it's hard to get excited about the change of a single word, but it is out there. They're talking about now determining the extent of rate hikes, not the pace of rate hikes. So there is an ongoing, discussion now, acknowledged in the statement about where that stopping point is. So Rick is conceptually not wrong. What he might be wrong about, at least from the market standpoint,

is the timing of it. Now, what I think is, and I'll let Rick speak for himself, is behind that statement is, you get a whole lot more inflation decline, you get some jobless claims increases and jobless increase in unemployment increases. Yeah, the Fed might change his mind, but I think they're pretty much for sure going to do at least one more hike here. That's how the market is priced. Nasdaq's gone positive, by the way. Go ahead, Rick. Yeah, I will stick to my guns. I think this is the last hike, but I will say this. I don't necessarily agree that there's an ease anytime soon. I really think that the tone of the Federal Reserve for the rest of the year is going to be higher for longer. I think that's the mantra. And remember, the Phillips curve, the tenuous relationship

between GDP, labor and prices. The market doesn't believe those relationships are as solid as the Fed does. Cameron, let me give you a sort of a final thought here. Do you see anything in either the statement or in your spidey sense? Do you feel anything that would suggest that the Fed might cut rates before the end of this year? No, there really isn't anything in the statement where they're expressing a great concern that the economy is weak enough or inflation is low enough in order to justify the cuts that are already being priced in. And we really think that's the only scenario where the Fed is willing to ease policy, which is very low inflation and very low growth because that would reduce the risk of inflation coming back. But there is nothing in this statement that acknowledged that, which just means that the bond market will likely have to be pulled into the Fed's camp that they're going to stay higher for longer. Bob, what were you going to say?

Here's what I would say. The question is, what would Powell say at the press conference that would make him even more, hawkish and the only thing that seems striking to me is he could make some comment about being concerned about the what looks like the easing of financial conditions and he could say financial conditions should not be easing in some way it could be much more aggressive in the general press conference than he could be in the actual statement maybe you could say something financial indications indicate excesses could lead to a resurgence of inflation something like that i'm trying to think of a way he could again reassert that aggressiveness and the terms of

to keep rates up, and that's potentially where it could be. But Jim, he's come across, I mean, I thought of Jay Powell as a rather, I mean, to use the cliche, we're dovish chairman for a good long portion of certainly his first term. Now he seems to be squarely in the more hawkish side of things. I'm not giving up on crushing inflation. He's really flexing his muscles here. Well, I think this statement was hawkish relative to market expectations. I think market expectations was quite dovish.

Rick was alluding to that. He's got a view that this might be the end for the Fed in terms of their hiking cycle. So I think a lot of people in the markets were thinking along those same lines and have a lot of sympathy for what David Kelly's talking about as well. So all Powell is saying is pretty much exactly what he said at the December summary of economic projections at the December Fed meeting, which is at the terminal rate is probably going to be somewhere in the 5 to 5.25% area. And he wants to keep that alive right now. There's no summary of economic projections at this meeting.

We have to wait until March for that to happen. So his hands are really tied to really make a forecast for the economy. So I think he's really just carrying on the same tune that he had back in December, but the market expectations have become a lot more dovege. So this may just seem hawkish relative to market expectations. But have the facts change, David? I mean, just this morning, the ISM manufacturing number was horrible again. And it's a leading indicator.

The services was also in contraction last month. We are no leading indicators have rolled over. It's the labor market where we're really still seeing the strength. So have the facts change enough that you think the Fed should at least kind of wink at that? Oh, absolutely. I mean, to me, the biggest thing here is I know we've got a tight labor market, of course. You've got the lowest unemployment rate in over 50 years. But it's not that strong.

In other words, in terms of momentum. I don't think, you know, 71% of Americans think we're either in recession right now or we will be in the next year. So workers aren't demanding huge pay increases. So I don't see an awful lot of strength in wages. I think we could actually get by with a lower unemployment rate than it appears right now. So I don't think there's that much strength actually in the labor market. And meanwhile, as you say, there are plenty of indicators that things are slowing down. And when you think about the May meeting, they're going to be looking back, I think, at a negative first quarter for real GDP growth at that May meeting.

and that certainly should give them pause for thought. Well, cause to pause. There's the phrase that pays. Pause patrol. I think I've seen people talking about. Steve, quick final word then is the pause off the table? For now it is. They're definitely discussing it.

I think that's the key. And I think Bob poses an interesting question we've been talking about all week. Does Powell have a need to redirect this market to tighten financial conditions? Or is he okay? with letting it roll in the sense that, hey, in six months time, we'll figure out who's right, and there's no reason to really to jawbone the market any tighter than it is right now.

Let the data do the talking from here on out. Because the problem in the summer, Kelly, we've talked about this, is that the market may have misunderstood the Fed. There was a disagreement about the reaction function of the Fed. I don't think anybody thinks Powell's not serious about fighting inflation. I think now it's a disagreement over the outlook, and the truth will out. No, but Steve, it's funny because even if he were trying to tighten financial conditions, we have a better, we have the NASDAQ now positive, the Dow is less negative.

Everything looks better than it did before the statement came out, if that's the effect he was trying to have. You have to wonder if he's watching this and then deciding what tone to walk into the 230 press conference with. I hope not. All right, we'll leave it there, everybody. We appreciate it very much today. Thank you all for joining us. And there's a whole lot more still to come.

Oh, yeah. We're just about 15 minutes away from Fed Chair J Powell's news conference. That's often even more of a market-moving event than the statement itself. Before that, we're going to speak with former Fed Governor Robert Heller about what he expects to hear. A Power Lunch on a Fed day rolls on next. I welcome back to Power Lunch, everybody. Stock's giving back some losses in today's session after a pretty good month of January. This is following the Fed's decision to raise interest rates as expected by 25 basis points,

a quarter of 1%. Fed Chair Powell's press conference is just about 11 minutes away. Joining us now, Robert Heller, former Federal Reserve Governor. Governor Heller, welcome. It's always good to see you. What is your reaction to what the Fed did

and what it said in its statement? No great surprise for me. Everybody expected 25 basis points as the Fed is slowing down its tightening process. The big question is whether they're really done or not. If you look at the money supply, which is a very important variable that the Fed does not tend to look at, it's actually negative. So that is another indicator, in addition to the inverted yield curve, that the economy is slowing down and that we will be facing a recession in the middle of this year. So that is your base case, is that there will be some sort of recession by mid-year.

does that then argue that the stock market has got it wrong? The market has been rising here for the past three or four months generally, and it had it put in a very nice month of January. Do you expect that to cease if, as you just said, the telltales of recession become more evident? Well, Tyler, we all agree. The markets tend to be forward-looking. And in a forward-looking market, they may have priced in,

that small recession already. I'm not the great stock market guru that a lot of the other guests are, but I would see the stock market improving as a very positive sign that the recession will be relatively mild and not of a long duration. What's going to happen to inflation, you think? Inflation will continue to come down. And the reason for that is, again, that we see the money supply shrinking at the present time. It's going down, and that is still the best indicator for inflation, half a year, a year, year and a half in the future. So inflation will be more contained. Talk to us a little bit, if you would, about the tightening of Fed policy with respect to its balance sheet, and how important that is, even after

the Fed stops raising interest rates, presumably they will continue to reduce their balance sheet by selling into the market the securities that they own. That is another form of tightening, isn't it? Exactly. And it's very important. But here, you also bring then up implicitly the government policy. The Federal Reserve has financed the enormous increase in the federal deficits in the past. And that was, in my view, a mistake. But now we need the federal government to also tighten, to stop spending, to have smaller deficits, and that will help monetary policy to achieve the goals that we all have. So the ball, I mean, the ball is really in the congressional and the administration realm.

There we've got to see the tightening and have good fiscal policy so that the debt doesn't continue to increase, which is now at more than 100% of GDP. These are levels in which weeks used to go broke. It's no problem. We'll just hit the debt ceiling. It'll be fine. That's how we'll stop it.

Serious question. And what do you think is the lag with which monetary policy hits the economy? Because I often wonder when we're talking about the market pricing in this versus that, let's say the market sees three to six months out, but monetary policy is going to hit 12 to 18 months from now. Is there a mismatch there that the stock market can't quite see around the corner of what's coming? And didn't we see that where the biggest expansions in NGDP were probably at the end of 2021, even though a lot of the stimulus hit in March of 2020, maybe January of 21.

What's the lag that you think we should expect for all of the rate hikes that we're experiencing right now? Well, that's a very tough question. Milton Friedman would answer the lags are long and variable. And I think he was a very, very smart man. So monetary policy legs, I would say, between 12 and 18 months in that ballpark. 12 to 18 months still. So you just wonder, can the market really see that far ahead? Maybe the bond market can, but I wonder about stocks.

Well, there are a lot of smart people in the stock market. There's money to be made. Whoever gets it right makes the most money. So it's a self-correcting scheme in a way. Typically, I think the markets do not look that far ahead. They want to see sort of what is just in front of the windshield. Is it raining? People in the market will get a bit more depressed. So you may well be right that the legs are different between the stock market and the monetary policy.

Governor Heller, it's always a privilege to talk to you. Thank you for joining us today. Good to see you, Tyler. You bet. Robert Heller. And again, the NASDAQ positive after the Fed's decision. We are six minutes away from Fed Chair Powell's news conference. That could be the bigger market mover. We'll see.

stay with us. We'll have a preview coming up next. Welcome back to Power Lunch to our coverage of the Fed decision. We got the statement at 2 p.m. Eastern time. We're seeing the market reaction to that. They hiked a quarter point. And in a couple minutes, we'll go live to Washington for Chair Powell's news conference. Let's bring in Mike Santoli, Mike, with some thoughts on the market reaction here. Initially, a hawkish reaction. Now, I don't know, should we call it a doveish one? I think, Kelly, it's certainly not too much of a surprise relative to what we had previously. priced. I mean, that's at minimum what you can say. I do agree that the idea that they kept the

language in there about the potential for ongoing increases in rates, maybe is slightly more hawkish, although I do agree with those who have said that because they're already on record with the December consensus outlook for where Fed funds is going, saying it's getting above 5%. I don't know if this was the forum for them to completely undo that just yet. So, you know, the market seems okay with things right now. I'm not convinced that Jay Powell says, you know, So inflation coming down and price stability is okay only if financial conditions are a certain level of tightness. In other words, do you need to target the markets? What's the theory of the case if the S&P is at 4,100 and triple B bond yields are at 5.2% that somehow we're going to rehire all these people and somehow we're going to kind of get inflation cooking again?

I don't know. And that's what the press conference might clarify, is you think there's a level of unemployment we need to get the job done. And I guess does he want the market to essentially be more on guard about exactly how many rate hikes can come? Where are you, Mike, as you analyze the various people we've had on and various other people that you read and talk to, on what seems to be a consensus that we are going to have a mild recession later this year? Yeah. You know, I buy into why that is the consensus because of all the offsets. we have, you know, consumer and household balance sheets in good shape.

Companies not super overextended. But I'm a little bit cautious because that's always the consensus before a recession. And also the hope for a soft landing usually starts to actually gather some steam before you actually have a recession. So I've opened to how this can veer off. But I get that if we do get a technical recession, it doesn't have to be particularly deep right now. By the way, the market pricing rate cuts in the second half of this year, I think is all about this, the probability spectrum. If we really do have a really sharp downturn,

no matter what the Fed says right now, they'll be cutting. But you don't find a lot of people coming on our air saying, I personally predict there will be two rate cuts in the second half of the year. It's much more about the market trying to price in the probability weighted outcome. So let's talk a little bit about what could be an ongoing way of tightening the money supply of taking money out of the system. And that is quantitative tightening. Which is well underway. We're down a half trillion dollars on the Fed balance sheet since the spring. The S&P 500 is about at the level it was before that started. So I think they want that to be secondary and kind of just occurring in the background. I think more assertive forward guidance

would be the first step is basically try to call the market out and say we, you know, we've revised our estimate for where we think rates have to stay for a long time. All right, here comes Jay Powell. Thank you, Mike. Good afternoon and welcome. My colleagues and I understand the hardship that high inflation is causing, and we are strongly committed to bringing inflation back down to our 2% goal. Over the past year, we've taken forceful actions to tighten the stance of monetary policy. We've covered a lot of ground, and the full effects of our rapid tightening so far are yet to be felt. Even so, we have more work to do. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy.

Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of labor market conditions that benefit all. Today, the FOMC raised our policy interest rate by 25 basis points. We continue to anticipate that ongoing increases will be appropriate, in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time. In addition, we are continuing the process of significantly reducing the size of our balance sheet. Restoring price stability will likely require maintaining a restrictive stance for some time. I will have more to say about today's monetary policy actions after briefly reviewing economic developments.

The U.S. economy slowed significantly last year. with real GDP rising at a below-trend pace of 1%. Recent indicators point to modest growth of spending and production this quarter. Consumer spending appears to be expanding at a subdued pace, in part reflecting tighter financial conditions over the past year. Activity in the housing sector continues to weaken, largely reflecting higher mortgage rates. Higher interest rates and slower output growth also appear to be weighing on business-fixed investment.

Despite the slowdown in growth, the labor market remains extremely tight, with the unemployment rate at a 50-year low, job vacancies still very high, and wage growth elevated. Job gains have been robust, with employment rising by an average of 247,000 jobs per month over the last three months. Although the pace of job gains has slowed over the course of the past year and nominal wage growth has shown some signs of easing, the labor market continues to be out of the balance. Labor demand substantially exceeds the supply of available workers, and the labor force participation rate has changed little from a year ago. Inflation remains well above our longer-run goal of 2 percent. Over the 12 months ending in December, total PCE prices rose 5.0 percent. Excluding the volatile food and energy categories, core PCE prices rose 4.4 percent. The inflation data received over the past three months show a welcome reduction in the monthly pace of increases.

And while recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path. Despite elevated inflation, longer-term inflation expectations appear to remain well-anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measured. from financial markets. But that's not grounds for complacency. Although inflation has moderated recently, it remains too high. The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched. The Fed's monetary policy actions are guided by our mandate to promote maximum employment and stable prices for the American people. My colleagues and I are acutely aware that high inflation imposes significant hard,

hardship, as it erodes purchasing power, especially for those least able to meet the higher costs of essentials, like food, housing, and transportation. We are highly attentive to the risks that inflation poses to both sides of our mandate, and we are strongly committed to a returning inflation to our 2 percent objective. At today's meeting, the committee raised the target range for the federal funds rate by 25 basis points, bringing the target range to 4.5 to 4.3 quarters percent. And we are continuing the process of significantly reducing the size of our balance sheet. With today's action, we have raised interest rates by four and a half percentage points over the past year. We continue to anticipate that ongoing increases in the target range for the federal funds rate will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time. We are seeing the effects of our policy actions on demand in the most interest-sensitive sectors.

of the economy, particularly housing. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation. In light of the cumulative tightening of monetary policy and the lags with which monetary policy affects economic activity and inflation, the committee decided to raise interest rates by 25 basis points today, continuing the step down from last year's rapid pace of increases. Shifting to a slower pace will better allow the committee

to assess the economy's progress toward our goals, as we determine the extent of future increases that will be required to attain a sufficiently restrictive stance. 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. We have been taking forceful steps to moderate demand

so that it comes into better alignment with supply. Our overarching focus is using our tools to bring inflation back down to our 2% goal and to keep longer-term inflation expectations well anchored. Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run. The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done. 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 Fed will do everything we can to achieve our maximum employment and price stability goals. Thank you, and I look forward to your questions. Chris Ruegebert, Associated Press. Thank you for doing this. As you know, financial conditions have loosened since the fall, with bond yields falling,

which has also brought down mortgage rates, and the stock market posted a solid gain in January. Does that make your job of combating inflation harder? And could you see lifting rates higher than you otherwise would to offset the increase in or to offset the easing of financial conditions? So it is important that overall financial conditions continue to reflect the policy restraint that we're putting in place in order to bring inflation down to 2%. And of course, financial conditions have tightened very significantly over the past year. I would say that our focus is not on short-term moves but on sustained changes to broader financial

conditions, and it is our judgment that we're not yet at a sufficiently restrictive policy stance, which is why we say that we expect ongoing hikes will be appropriate. Of course, many things affect financial conditions, not just our policy. and we will take into account overall financial conditions along with many other factors as we said policy hi chair Powell thank you for taking our questions rachel seagull from the washington post over the last quarter we've seen a deceleration in prices in wages and a fall in consumer spending all while the unemployment rate has been able to stay at a historic low does this at all change your view of how much the unemployment rate would need to go up if at all to see inflation come down to the

levels you're looking for. So I would say it is a good thing that the disinflation that we have seen so far has not come at the expense of a weaker labor market. But I would also say that that disinflationary process that you now see underway is really at an early stage. What you see is really in the good sector, you see inflation now coming down because supply chains have been fixed. demand is shifting back to services and shortages have been abated. So you see that. In the housing

services sector, we expect inflation to continue moving up for a while, but then to come down, assuming that new leases continue to be lower. So in those two sectors, you've got a good story. The issue is that we have a large sector called non-housing service, core non-housing services, where we don't disinflation yet. But I would say that so far what we see is progress but without any weakening in labor market conditions. Has your expectation for where the unemployment rate might go change since December? You know, we're going to write down new forecasts at the March meeting and we'll see at that time. I will say that it is gratifying to see the disinflationary process now getting underway

and we continue to get strong labor market data. labor market data. So, but, you know, we'll update those forecasts in March. Hi, Chair Powell, Neil Irwin with Axios. You and some of your colleagues have emphasized the possibility that job openings could come down and that that would let some of the air out of the labor market without major job losses. We saw the opposite in the December jolts this morning, job openings actually rising. That also has coincided with slow down in wage inflation.

Do you believe that openings are an important indicator to be studying to understand where the labor market is and where wage inflation might be heading. So you're right about the data, of course. What we did see, we've seen average hourly earnings and now the employment cost index abating a little bit, still off of their highs of six months ago and more, but still at levels that are fairly elevated. The job openings number in jolts has been quite volatile recently.

And I did see that it moved up back up this morning. I do think that it's probably an important indicator. The ratio I guess is back up to 1.9 job openings to to unemployed people, people who are looking for work. So it's an indicator, but nonetheless you're right we do see wages moving down. If you look across the rest of the labor market, you still see very high payroll job creation and quits are still at an elevated level so many many, by many, many indicators the job market is still very strong.

Thank you. Colby Smith with the Financial Times. Given the economic data since the December meeting, is the trajectory for the Fed funds rate in the most recent SEP still the best guidepost for the policy path forward, or does ongoing now mean more than two rate rises now?

So you're right. At the December meeting, we all wrote down our best estimates of what we thought the ultimate level would be, and that's obviously back in December, and the median for that was, between 5 and 5 and a quarter percent. At the March meeting, we're going to update those assessments.

We did not update them today. We did, however, continue to say that we believe ongoing rate hikes will be appropriate to attain a sufficiently restrictive stance of policy to bring inflation back down to 2%. We think we've covered a lot of ground, and financial conditions have certainly tightened. I would say we still think there's work to do there. We haven't made a decision on example. where that will be. I think, you know, we're going to be looking carefully at the incoming data between now and the March meeting and then the May meeting. I don't feel a lot of certainty about where that will be. It could certainly be higher than we're writing down right now if we come to the view that we need to write down

to you know to move rates up beyond what we said in December. We would certainly do that at the same time if the data come in in the other direction and we'll you know we'll make data dependent decisions at coming meetings. I'll you know, we'll make data dependent decisions at coming meetings. of course. Just as a quick follow-up, how are you viewing the kind of balance of risk between those two options of, you know, the likelihood of maybe falling short of that or going beyond that level? I guess I would say it this way. I continue to think that it's very difficult to manage the risk of doing too little and finding out in six or 12 months that we actually were close but didn't get the job done. Inflation springs back and we have to go back in.

Now you really do worry about expectations getting unanchored and that kind of thing. This is a very difficult risk to manage. Whereas, of course, we have no incentive and no desire to over tighten, but if we feel like we've gone too far, we can certainly, and inflation is coming down faster than we expect, then we have tools that would work on that. So I do think that in this situation where we have still the highest inflation in 40 years, you know, the job is not fully done. As I mentioned, I started to mention earlier, we have a sector that represents 56% of the core inflation index where we don't see disinflation yet. So we don't see it. It's not happening yet. Inflation in the core services X housing is still running at 4% on a six and 12 month basis. So there's nothing happening there. In the other two sectors representing, you know, less than 50%, you actually, I think, now have a story that is credible. that's coming together, although you don't actually see disinflation yet in housing services,

but it's in the pipeline, right? So for the third sector, we don't see anything here. So I think it would be premature. It would be very premature to declare victory or to think that we've really got this. We need to see our goal, of course, is to bring inflation down. And how do we, how do we get that done? There are many, many factors driving inflation in that sector, and they should be coming into play to have inflation, the disinflationary process begin in that sector. But so far we don't see that. And I think until we do, we say ourselves as having a lot of work left to do. Howard Schneider, with Reuters, and thanks as usual. So I just wanted to connect a couple of dots here. The statement's made a number of changes that seem to be saying things are getting better.

You're saying inflation has ease, that's new. You've taken out references to the war in Ukraine as causing price increases, you've taken out references to the pandemic, you've eliminated all the reasons that you said prices were being driven higher, yet that's not mapping to any change in how you describe policy. We still have ongoing increases to come. So I'm wondering why is that the case, and does it have more to do with uncertainty around the outlook or more to do with you not wanting to give a very over-eager market a reason to get ahead of itself and overreact?

So I guess I would say it this way. We can now say, I think, for the first time, that the disinflationary process has started. We can see that. And we see it really in goods prices so far. Goods prices is a big sector. This is what we thought would happen since the very beginning, and now here it is actually happening. And for the reasons we thought, it's supply change, its shortages, and its demand revolving back towards services.

So this is a good thing. This is a good thing. But that's, you know, around a quarter of the PCE. price index, core PCE price index. So the second sector is housing services, and that's driven by very different things. And we, as I mentioned, with housing services, we expect, and other forecasters expect that measured inflation will continue moving up for several months, but will then come down, assuming that new leases continue to be soft. And we do assume that. So we think that that's sort of in the pipeline. And we actually see disinflation in the good sector, and

we see it in the pipeline for two sectors that amount to a little less than half. So this is good. And we note that when we say inflation is coming down, this is good. We expect to see that that disinflation process will be seen, we hope, soon, in the core goods X housing. Sorry, the core services X housing sector that I talked about. We don't see it yet. It's seven or eight different kinds of services, not all of them that are the same. And, you know, we have a sense of what's going on in each of those different subsections.

Probably the biggest part of it, probably 60% of that is, you know, research would show is sensitive to slack in the economy. And so the labor market will probably be important. Some of the other ones that's the labor market's not going to be important. Many other factors will drive it. In any case, we don't see disinflation in that sector yet. And I think we need to see that. It's the majority of the core PCE index, which is the, is the thing that we think is the best predictor of headline PCE, which is our mandate.

So it's not that we're not, we're neither optimistic or pessimistic. We're just telling you that we don't see inflation moving down yet in that large sector. I think we will fairly soon, but we don't see it yet. Until we do, I think we, you know, we see ourselves, we've got to be honest with ourselves, we see ourselves as having perhaps more persistent, we'll see more persistent inflation in that sector, which will take longer to get down. and we're just going to have to complete the job. I mean, that's what we're here for.

Nick Timmeros, the Wall Street Journal. Chair Powell, you observed several years ago that we learned we can have a low unemployment rate without above-target inflation, and we have learned lately that inflation can come down from its uncomfortably high level despite a historically low unemployment rate. Given that, and given how much you did over the last year, why do you think further rate increases are needed? Why not stop here and see what transpires in the cut? coming months before raising rates again.

So we've raised rates four and a half percentage points, and we're talking about a couple of more rate hikes to get to that level, we think, is appropriately restrictive. And why do we think that's probably necessary? We think because inflation is still running very hot. We're, of course, taking into account long and variable lags, and we're thinking about that. It really, the story we're telling about inflation is to ourselves, and the way we understand it, basically the three things that I've just gone through a couple times. And again, we don't see it affecting the services sector X housing yet. But I mean, I think our assessment is that we're not

very far from that level. We don't know that, though. We don't know that. So I think we're, you know, we're living in a world of significant uncertainty. I would look across the rate, the spectrum of rates and see that real rates are now positive, right, by, you know, by an appropriate set of measures are positive across the yield curve. I think policy is restrictive. We're trying to make a fine judgment about how much is restrictive enough. That's all. And we're going to, you know, that's why we're slowing down to 25 basis points. We're going to be carefully watching the economy and watching inflation and watching the progress of the disinflationary process. Did you or your colleagues discuss the conditions for a pause at this meeting this week?

Well, you know, you'll see the minutes will come out in three weeks and we'll give you a lot of detail. You know, we spent a lot of time talking about the path ahead and the state of the economy. And I wouldn't want to start to drive the, describe all the details there. But that was the sense of the discussion was really talking quite a bit about the path forward. Hi, Chair Powell. I wanted to ask about the debt ceiling. Given that we've now hit up against it, I was wondering if the U.S. goes past the X date, will the Fed do whatever the Treasury directs as it relates to making payments as the fiscal agent, or will it do its own analysis of any legal constraints? So your question is, would we say your question again? Will the Fed do what Treasury

directs as it relates to making payments, or will it do its own analysis of any legal constraints? So you're really asking about, but you're asking about prioritization in effect, is what you're yes, yes. So I feel like I have to say this. There's only one way forward here, and that That is for Congress to raise the debt ceiling so that the United States government can pay all of its obligations when due. And any deviations from that path would be highly risky and that no one should assume that the Fed can protect the economy from the consequences of failing to act in a timely manner. In terms of our relationship with the Treasury, we are their fiscal agent, and I'm just

going to leave it at that. Are you actively doing any planning of what might happen in the event that that would happen? I'm just going to leave it at that. This is a matter that's to be resolved between. I mean, really, it's really Congress's job to raise the debt ceiling, and I gather there are discussions happening, but they don't involve us. We're not involved in those discussions, so we're the fiscal agent.

Gina, and Gina Smilick from the New York Times. Thanks for taking our questions. I wonder, was there any discussion today of the possibility of pausing rate increases and then restarting them? Lori Logan from the Federal Reserve Bank of Dallas seemed to suggest that that would be a possibility in a recent speech. And I wonder if that views broadly shared on the committee. So the committee, obviously, did not see this as a time to pause.

We judged that the appropriate thing to do with this meeting was to raise the federal funds rate by 25 basis points, and we said that we continue to anticipate that ongoing increases in the target range will be appropriate in order to attain that stance of sufficiently restrictive monetary policy that will bring inflation down at 2%. So that's the judgment that we made. You know, we're going to write down new forecasts in March and we'll certainly be looking at the incoming data as everyone else will. Sorry, I should have been clear. I mean, would it be possible to take a meeting off, for example, and then resume? You know, could you, rather than just doing at every meeting a move, go a little bit more slowly, take some gaps in between moves? I mean, I think this is not something that the committee is thinking about or exploring in any kind of detail.

In principle, though, you know, we used to, the thing we used to do was go every other meeting, if you remember, 25 basis points, and that was considered a fast pace. So I think a lot of options are available, and, I mean, you saw what the Bank of Canada did, and, you know, they left it that they're willing to raise rates after pausing. But this is not something that, this is not something that the Federal Open Market Committee is on the point of deciding right now. Steve. Steve Leasman, CNBC. Mr. Chairman, the SEC has the PCE inflation rate in

2023 at 3.1%. Meanwhile, the three-month annualized PCE is 2.1%. And you've achieved this without going to your 5.1% funds rate, which is what you have penciled in for this year. And you've also achieved it

without the 1% percentage point increase in the unemployment rate, which you have penciled in for this year. I'm wondering if you've considered the idea whether or not your understanding of the inflation dynamic may be wrong, and it's possible to achieve these things without raising rates that high, and also without the surge of unemployment. And specifically, I wonder if you might comment on the speech given by Vice Chair L. Lail Brannard, who said to the extent that inputs other than wages may be responsible in part for important price increases for some non-housing services,

an unwinding of these factors. In other words, it may not be wages, the idea that it may not require unemployment rising to get this sector of inflation under control. Thanks. So a couple things. First, on the forecast, you're right, if you take very short-term three months, say, measures of PCE, core PCE inflation, they're quite low right now. But that's because that's driven by, you know, significantly negative readings from goods inflation. Most forecasters would think that the significantly negative readings will be transitory, and that goods inflation will move up fairly soon back up to its longer-run trend of something around zero,

something like that. So a lot of forecasts would call for core PCE to go back up to 4 percent by the middle of the year, for example. So that's really where the sustainable level is, is more like at 4 percent. So that would suggest there's work left to do. you know, let's say inflation does come down much faster than we expect, which is possible, as I mentioned. You know, obviously, our policies data dependent, we would take that into account. In terms of the non-sort, sorry, the core non-housing services, as I mentioned earlier, it's a very

diverse sector, six or seven sectors. And so sectors that represent 55 or 60 percent of that sub-sector, so the sub-sector, of that sector, we think, are sensitive to slack in the economy, sensitive to the labor market in a way. But some of the other sectors are not. And for example, financial services is a big sector. That's really not driven by labor, labor markets, wages. So that's why I said there are a number of things that will affect. Take restaurants, right? So clearly labor is important for restaurants, but so are food prices. And, you know, transportation services. Is it a is going to be driven by fuel prices, for example.

So there are lots of things in that mix that will drive inflation. I would say overall, though, my own view would be that you're not going to have a sustainable return to 2% inflation in that sector without a better balance in the labor market. And I don't know what that will require in terms of increased unemployment, your question. I do think there are a number of dimensions

through which the labor market can soften, And so far, we've got, as I mentioned, in goods, we have inflation moving down without the softening in the labor market. I think most forecasters would say that unemployment will probably rise a bit from here, but I still think, I continue to think, that there's a path to getting inflation back down to 2 percent without a really significant economic decline or a significant increase in unemployment. And that's because the setting we're in is quite different. The inflation that we originally got was very much a collision between very strong demand

and hard supply constraints, not something that you really have seen in prior business cycles. And so now we see goods inflation coming down for the reasons we thought, and we understand why housing inflation will come down. And I think a story will emerge on the non-housing services sector soon enough. But I think there's ongoing disinflation. and we don't yet see weakening in the labor market, so we'll have to see. Can we get there with 25 percent? Certainly possible.

Yeah, absolutely. It's possible. You know, it's a question no one really knows. I think it's because this is not like the other business cycles in so many ways. It may well be that as it will take more slowing than we expect than I expect to get inflation down to 2%. But I don't I don't that's not my base case my base case is that The economy can return to two percent inflation without a really significant downturn or a really big increase in unemployment I think that's that's a possible outcome

I think many many forecasters would say it's not the most likely outcome, but but I would say there's a there's a chance of it Michael Michael McKee from Bloomberg TV and radio I'd like to pick up on what you were just saying about a substantial downturn and ask with the full weight of your tightening not in place yet. And with the progress against inflation, there's still a lot of talk about very, very slow growth going forward in 2023. And the recession indicators are all suggesting that we are going to see recession this year. So I'm wondering if you've changed your view or you have a more nuanced view of what you think, the danger to economic growth is going forward and whether you're very close to perhaps

tipping it into the wrong place which calls for more restraint on your part. So I do think most forecasts and my own assessment would be that growth will continue, positive growth will continue, but at a subdued pace as it did last year. We had growth of GDP growth of 1% last year and also final sales growth, which you which we think is a better indicator of about 1%. I think most forecasts, and certainly my assessment would be that growth will continue at a fairly subdued level this year.

There are other factors, though, that need to be considered. You will have seen that the global picture is improving a bit, and that will matter for us, potentially. The labor market remains very, very strong, and that's job creation, wages. As inflation does come down, sentiment will improve. You also, state and local governments are really flush these days with money, and many of them are considering tax cuts or even sending checks. So I think that's going to support. They're also spending a lot. There's a lot of spending coming in a construction pipeline, both private and public. And so that's going to

support economic activity. So I think there's a good chance that, that those factors will help support positive growth this year. And that's my base case is that there will be positive growth this year. Rich? Thank you. Rich Miller from Bloomberg. First of all, how are you doing? Fine, thanks.

Fine. Good. Second off, I think earlier on in the conference, you said you need to see substantially more evidence of inflation coming down. Can you give us some idea of what you're thinking of? You mentioned three months, that we've seen three months in a row. Governor Wilders suggested he might want to see six months. Is it just the inflation data, or do you have to see the labor market coming back into better balance to have that substantially more evidence?

So I don't think there's going to be a light switch flipped or anything like that. I think it's just an accumulation of evidence. So, of course, we'll be looking, by the time of the March meeting, we'll have two more employment reports, two more CPI reports, and we'll be looking at those carefully as all of us will, and we'll be asking ourselves, what are they telling us? And soon after that, we'll have another ECI wage report, which, as you know, is a report that we like because it adjusts for composition, and it's very complete.

And, you know, the one we got, I guess it was yesterday, was constructive. It shows wages coming down, but still at a high level. They're still at a level that's way above where they were before the pandemic. So I don't want to put a number on it in terms of months, but as the accumulated evidence comes in, it's going to be reflected in our assessment of the outlook, and that will be reflected in our policy over time. But I will say, though, it is our job to restore price stability and achieve 2% inflation for the benefit of the American public. We're not, market participants have a very different job.

It's a fine job. It's a great job. I'm Vic. I did that job for years, but in one form or another. But, you know, we have to deliver that. And so we are strongly resolved that we will, you know, complete this task because we think it has benefits that will, you know, support economic activity and benefit the public for many, many years. Thank you, Michelle. Thank you, Fed Chairman, for taking the questions. So you've talked about we had solid job growth, I'm Everlarence from Fox Business, by the way. We had solid job growth, a slight falling in the increase in consumer spending.

It seems so far it's been relatively mild from the economy to go to from a 9.1% CPI inflation to 6.5% CPI inflation. Is the hard part yet to come to go from 6.5 to 2? I don't think we know, honestly. you know the so we of course expected goods inflation to start coming down by the end of 2021 and it didn't it didn't come down all through 22 and now it's coming down and it's coming down pretty fast so I would say these are this is not a standard business cycle where you can look at the last 10 times there was a global pandemic and we shut the economy down and Congress did what it did and we did it's just it's unique so I think certainty is just not appropriate here. Inflation, it's just harder to forecast inflation. It may come down faster. It may take longer to come down.

And, you know, our job is to deliver inflation back to target, and we will do that. But I think we're going to be cautious about declaring victory and, you know, sending signals that we think that the game is won. Because, you know, we've got a long way to go. It's just, it's the early stages of disinflation. And it's most welcome to be able to say that, that we are now in. disinflation. But that's great. But we just see that it has to spread through the economy and that it's going to take some time. That's all. How long do you see then the federal funds rate remaining at this elevated level?

You know, so again, my forecast and that of my colleagues, as you will see from the SEC, and I mean, there are many different forecasts, but generally it's a forecast of slower growth, some softening in labor market conditions, and inflation moving down steadily, but not quickly. And in that case, if the economy performs broadly in line with those expectations, it will not be appropriate to cut rates this year, to loosen policy this year. Of course, other people have forecasts with inflation coming down much faster. That's a different thing. You know, if that happens, if inflation comes down much faster, you know, then we'll be seeing that and it will be incorporated into our thinking about policy. Thank you, Chair Powell.

Simon Rinovich with the economist. I may ask a further question about the language around ongoing increase. That, of course, implies at least two further rate rises. If you look at Fed Fund and futures pricing, the implication is that you'll raise rates one more time and then pause. Are you concerned about that divergence, or do you think if everything breaks right? Is that a plausible outcome? I'm not particularly concerned about the divergence.

No, because it is largely due to the market's expectation that inflation will move down more quickly. I think that's the bigger part of that. So again, as I just mentioned, you know, our forecasts, there are different participants have different forecasts, but generally those forecasts are for continued, subdued growth, some softening in the labor market, but not a recession, not a recession. And we have inflation moving down,

you know, into somewhere in the mid threes or maybe lower than that this year. We'll update that in March, but that's what we thought in December. Markets are past that. They show inflation coming down in some cases much quicker. than that. So we'll just have to see. And we have a different view and a different view to different forecast really. And given our outlook, I just, I don't see us cutting rates this year if we get our outlook turns true. As I mentioned just now, if we do see inflation

coming down much more quickly, that'll play into our policy saying, of course. Hi, Chair Powell. Scott Horstay from NPR. One of the changes in the statement this this month is that the committee is no longer listing public health as among the data points you'll consider in assessing conditions. What should we make of that? Does the Federal Reserve no longer see the pandemic as weighing on the economy? That's the general sense of it. Look, we understand, I personally understand well that COVID is still out there, but that it's no longer playing an important role in our economy. And, you know, we kept that statement in there for for quite a while. And I think we just, we knew we would take it out at some point. There's never a

perfect time. But we thought that, you know, people are handling it better in the economy and the society are handling it better now. It doesn't really need to be in a, you know, in the Fed's monthly, you know, post-meeting statement as an ongoing economic risk as opposed to, you know, a health issue. Nancy. Hi, Chair Powell. Nancy Marshall Ginsburg, with Marketplace. back to another thing that Fed Vice Chair Lael Brainer said recently, she said she doesn't see signs of a wage price spiral. And I'm wondering if you agree with that.

I do. Yeah, I do. I don't see that yet. But the whole point is, you know, once you see it, you have a serious problem. That means that effectively in people's decision-making, inflation has become a really salient issue. And once that happens, that's what you, that's That's what we can't allow to happen. And so that's why we worry that the longer we're at this and the longer people are talking about inflation all day long every day, the more risk of something like that. But no, there's not much, it's more of a risk. It always has been more of a risk than anything else.

By the way, I think it's becoming less salient. And people are, you know, we pick that up in conversations and I've seen some data too that show people are, you know, gradually, they're glad that inflation's coming down. people really don't like inflation. And as we see it coming down, that could also add a boost to economic activity. You look at the sentiment surveys now, and they're very, very low. With 3.5% unemployment and high wage increases nominally by historical standards, why can that be? It has to be inflation, right?

So I think once inflation is seen to be coming down in coming months, even, you will also see a boost to sentiment, I hope. So that's what you're looking at most closely is consumer expectations. That's at the very hard. Consumers and businesses, essentially, we believe that expectations of future inflation are very important part of the process of creating inflation. That's sort of a bedrock belief. In one way or another, it has to be. We think it's important.

And in this case, I would say the risk, eight months ago or so, longer-term inflation, expectations had moved up. We moved quite vigorously last year. Expectations are, it seemed to be well anchored, including at the shorter end now, not just the longer end. So it's, you know, and I think that's very reassuring. I think, you know, the markets have decided, and the public has decided that inflation is going to come back down to 2%, and it's just a matter of us following through. That's immeasurably helpful to the process of getting inflation down. The fact that people now do generally believe that it will come down, that'll be part of the process of getting it down, and it's a very positive thing.

Thank you, Chair Powell, Greg Robb from Market Watch. In the minutes of the December meeting, there was a couple sentences that struck people as important. When the committee said participants talked about this unwarranted easing of financial conditions was a risk, and it would make your life harder to bring inflation down. I haven't heard you talk much about that today or in the statement, so I was wondering, Has that concern eased among members, or is that still something you're concerned about? Thank you.

I would put it this way. It's something that we monitor carefully. Financial conditions didn't really change much from the December meeting to now. They mostly went sideways or up and down, but came out in roughly the same place. It's important that the markets do reflect the tightening that we're putting in place. As we've discussed a couple times here, there's a different difference in perspective by some market measures on how fast inflation will come down. We're just going to have to see. I mean, I'm not going to try to persuade people

to have a different forecast. But our forecast is that it will take some time and some patience and that we'll need to keep rates higher for longer. But we'll see. Go to Brendan for the last question. Hi, Chair Powell. Brendan Peterson with Punchbowl News. I wanted to ask if the Fed takes into account at all

the debt ceiling when it comes to quantitative tightening, given the fact that rapid or faster quantitative tightening, could bring us closer, faster to that drop-dead debt ceiling deadline? Could it play in effect as we get closer to that drop-dead deadline this summer? Look, it's very hard to think about all the different possible ramifications. And I think the answer is basically, I don't think there's likely to be any important interaction between the two, because I believe Congress will wind up acting, and as it will and must in the end, to raise the debt ceiling in a way that doesn't, risk the progress we're making against inflation and the economy and the financial sector.

I believe that that will happen. I believe it will happen. You know, we, of course, will monitor money market conditions carefully as the process moves on. For example, the Treasury General account will shrink down and then it will grow back up. And we understand there'll be lots of flows between there and the overnight repo facility and reserves. We understand all that. We're watching it carefully. will just be monitoring. Thank you very much.