Power Lunch - The Fed Decision 12/14/22

Episode Date: December 14, 2022

The Fed raises rates by half a point to the highest level in 15 years. We have the decision, reaction, market analysis and Fed Chair Powell’s press conference. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

Hi, everybody. Welcome to Power Lunch. I'm Kelly Evans, along with Dom Chu. Welcome. It's good to be here. It's going to be a quite busy afternoon here. Is there a Fed decision today? There is. We are just about five minutes away from the Fed's decision on interest rates. And a half-point hike is widely the expectation. We also get the dots. Those projections. They're going to offer us clues on how much further policymakers expect rates to go. Now, stocks are near recession highs right now. So so much for wait and see, the Dow, the S&P, and the NASDAQ, as you can kind of see, they're moving higher to the tune of a run. on maybe of half a percent or so at this stage here. We've got a big Fed panel today. JPMorgan Asset Management's David Kelly,

Mona Mahajun with Edward Jones, also John Bellows with Western Ascent Management Company, WAMCO, as we used to call it back in the day. Thanks everyone for being here as part of this program. Let's start perhaps Mona Mahajan with you with just the expectations that you have from an investment strategy standpoint on whether people need to do anything with their money

in the wake of what we're going to get from the Fed today. Yeah, you know, look, it's a great point. I don't think necessarily we need to move money before or after this Fed meeting. But what we will be watching for, of course, is that dot plot. And really what we're looking for is to see if the markets and the Fed are converging towards the same terminal rate. So right now markets are expecting this 5, 5.5 and a quarter percent terminal rate. If the Fed kind of implicitly blesses that level, you know, we see a dot plot that also leads to a five. five and a quarter percent terminal rate, that in fact may provide the market a bit of comfort that we are closer to the end of this Fed tightening cycle, but also perhaps after that we'll get this pause. And then what will be really interesting to see is if they start putting in any sort of rate cuts for 2024 and beyond. And we think the markets will really look forward to

when the Fed may not only pause, but move rates lower once again. And that will really stimulate the market rebound. But generally speaking, we think we're towards the end. end of potentially the spare market. Any volatility in the months ahead will provide that opportunity to position for what we think will be a better market backdrop and potential recovery in 2024. John, the market right now is pricing in a certain expectation. And we got a little bit of a movement, if you will, in some of those Fed Fund futures and the interest rate markets, given what we saw with the Consumer Price Index, softer than expected this past week here just yesterday. I wonder, do you, in your mind, feel as though the markets are appropriately positioned?

In other words, are the expectations correct for that so-called ending of the Fed cycle with a terminal or ending rate in that kind of, we'll call it, four and three-quarters percent at this stage? You know, I think you're right. CPI yesterday was important, and I think it was important for two reasons. You know, the first is that I think the Fed is moving towards a more forward-looking policy. Over the summer and through the early fall, they were just reacting. CPI was too high and they were constantly on their back foot and reacting to those numbers. You know, reactive policy is problematic. You know, looking in the rearview mirror is not the best way to do policy. And the Fed is very happy to finally be more forward-looking.

And so I think CPI yesterday and also the month before is going to allow them to be more forward-looking in their policy. I think you're going to hear that from Powell today. And I think that's generally a very positive thing. I think the other thing that's important about CPI yesterday is after today's hike, it'll be the case that the policy rate will likely be higher than the run rate for core inflation. That's the first time all year that's been true. And I think the Fed is going to look at that and have a little bit more confidence that policy is restrictive. You know, CPI may still be too high, although I think that's debatable.

But with a policy rate that's now higher than the run rate of core inflation, it becomes just a matter of time before inflation starts coming down. I think that's another big development. So I think generally speaking, you know, CPI yesterday was a lot of low. a big deal because it kind of enforces both those points. The Fed can be more forward-looking, and now after today's hike, we have the policy rate above the inflation rate, and that's a big development and important for forward-looking expectations. All right, and David, we've just got a few moments here left before the decision comes out. You've seen a lot of these decisions before

this year. The numbers suggest that there's been a lot more volatility around Fed rate decisions with the markets. Do you expect that today? Not really. I think people priced in 50 basis points. I think the dot plot will go up 25 basis points, but still a terminal rate of 475 to 5%. I think Jay Powell will actually smile during his press conference because there is better news on inflation. I think you'll have to admit it. That opens the window a little wider for soft landing. So I think this is, I think we're in a good place here.

And I think market expectations and the Fed's view are converging here. And I think that's a positive. All right. There's the 10-year yield 3.51 percent, let's call it, ahead of the Fed decision. With WTI oil at 2.5 percent, the S&P, up about three, quarters of 1%. And let's get to Steve Leaseman with the Fed decisions. The Federal Reserve raising interest rates by 50 basis points to a new range of 4.5% to 4.5% as expected. The Fed saying ongoing rate hikes will be appropriate. The Fed also raising the

2023 median forecast of Fed officials went up to 5.1%. It had been at 4.6%. This is higher than market expectations for a peak funds rate. It is, by the way, right in line. with the Fed survey at 5.15. 17 of the 19 officials are now above 5% in their forecast for the 2020 funds rate. None were above 5 in September forecast. Seven officials, in fact, are at 540, and there's one person who's at 563 all the way through 2025. The funds rate then see going down to 4.1% in 2024, 3-1 in 2025,

with a long-run rate eventually being reached of 2%. and a half percent. The Fed repeats it will take account of the cumulative effect of rate hikes and lags in setting policy. This is again from the statement. It will continue to reduce the balance sheet by $95 billion a month. It says growth has been modest, inflation elevated, unemployment low, and job gains robust. So it still sees that tight job market out there. It raised the GDP this year to 05 from 02. That's because of the strength we've seen in the fourth quarter, but it lowered it to just a half a point for next year from 1.2. Ratcheted up a bit. The unemployment rates of 4-6 from 4-4 for next year. It stays there for two years, by the way. And it sees inflation

gradually declining to 2% by 2025. So 50 basis points, Kelly, but pretty hawkish when it comes to the outlook. And good unanimity, by the way, the statement, the policy decision was unanimous. Good unanimity also, at least by the board right now on where rates are headed, and that is above 5%. Hawkish, Steve, is the conclusion from markets where we've seen stocks lose all of their gains, in some cases turn negative, and a 10-year yield up about three and a half basis points.

Again, this is the first reaction. It's going to be a long afternoon. We have maybe two hours until we're done hearing from Powell. That said, what's the most hawkish thing about this to you? Is it those rate hike projections, the dots, as we call them, especially into next year in 2024? So there's a discussion that I think we can have, Kelly, maybe in one of your regular terrific one o'clock shows, not the special,

about whether the Fed is now using the dots as more of a policy tool. And I think the Fed sends in a message here that while the market has taken all this very dovishly, loosened up financial conditions, that part of this is a message, hey, we're going above 5%. We intend to be very tough here when it comes to inflation. So that 5.1%, not just by itself, but the number of people, the change, from the September survey. None of them were above 5% before,

and many of them now being above. What did I say here? 17 officials now above 5.7 officials are at 540 or higher. So there was a pretty hawkish, sizably hawkish contingent on the Federal Reserve right now. It sure sounds like the consensus, so to speak, is changing around that, Steve. All right, so stick around, please.

We're going to talk with you a lot more, I'm sure, about this. Let's bring in our panel as well. Again, we've got a lot of folks out there, and let's bring in an introduced, Bassani as well. Also, Rick Santelli joins the conversation. So this group, as you can see in front of you here, has a lot of expertise. And maybe we'll send it out to Rick first with some of the reaction on the interest rate and macro side of things. It wasn't for sure, Rick. It was definitely movement in the marketplace. But it was nothing that was, I would characterize as being unexpected or out of the ordinary. Markets did move, but not by a whole heck of a lot. No, and when you set the table for interest rates, to give some context, they have been moving rather dramatically lower, considering the Fed's path. And today we see that two-year notes spiked up. They spiked up towards 426-ish, and they're coming back down a bit, but they're a little more sticky than tens, which popped up to right under 355, came back down a bit.

These are not huge moves. And in the context of the fact that we're even near 350 after having a four and a quarter high yield close for tens or 470 high yield close for two year and now hovering at what, 422, 423, these rates are low. And when you look at dot plots and how far out, they're predicting inflation is going to be stubborn.

Something isn't squaring here. And it's going to be interesting to hear the Q&A because the markets have definitely become very opinionated and investors are pushing back. More in the treasuries than they are in equities. Yes, the equity knee-jerk reaction was down, but it wasn't huge. And if you look at the spreads, Tuesday tens inverted to several basis points more, and the dollar index improved a bit.

That latter, I think the dollar index will be a good tell during the Q&A. And we go to Bob Bassani for more on these stock moves that we're seeing. Bob, what do you make of it? Well, I think Dom's got it right. We were down about 300-point peak to trough in the few minutes. after the Fed announcement came back, and we're now flattish, essentially, on the Dow. So the market has been looking to break out of 4,100 on the S&P.

Why? Because that would break the downtrend, this pattern of lower lows and lower highs we've had all year. But we've had a lot of resistance there. We've failed several times. We had a strong PPI last week. We went to 3,900. So the whole period, you either breakout above 4,100,

or you grind around at 3,900 or so, because that seems to be where there's a lot of support. And it looks like grinding around might be the thing to do at this point. The real problem here is Wall Street is dramatically lowering the earnings estimates for 2023 because inflation is a 2022 story. Recession is the 2023 story. What side of the recession debate are you on? And most major strategists now anticipate flat to negative earnings.

Zero to down 10 percent is the range of the estimates for strategists on Wall Street. The average is about down 5 percent. So this is the problem. for higher stock prices from here when you're in the middle of what Wall Street thinks is going to be a fairly mild earnings recession. Let's put it this way. Down 5% on earnings would be a mild earnings recession. Down 20% would be a harder landing in terms of recession. But how do you argue the S&P should be higher six months from now or even eight months from now when you're potentially down six to 10% on earnings in 2023? That's a hard case to make right now. You'd have to argue for

a multiple expansion. And Dom knows perfectly well. that's a pretty thing to argue, pretty hard thing to argue, in a downward trending economic environment. You know, Bob, it's an excellent point and one that many traders have been talking about for maybe weeks now at this point, is to see whether there is that kind of a breakout. This data, this Fed rate decision did not do anything to change anything from that trend standpoint. David Kelly, I'd like to bring you and the rest of the panel back into the discussion here. David, the markets are reacting, no doubt about it, and equities are softer. they've moved to the downside.

We've seen rates spike higher. But it all in the context of where we've been over the last several weeks seems as though the markets were kind of anticipating this. What does this nans say about the way that the landscape sets up for the early part of 2023 and whether the Fed will continue its rate high campaign, albeit perhaps at a slower pace or for a little bit longer than it did, but with smaller increments? Well, I think the market, while is anticipating something more doveish in the the dots than we've got we've got here because if you look at the fed funds futures market as of this

morning it was looking at a terminal rate between 475 and 5 not between 5 and 5 and a quarter but what i think is really interesting is in some ways the fed is more hawkish than that because what they're saying is that by the end of the year they'll still be between 5 and 5 and a quarter at the end of 2023 and as of this morning futures markets were pricing in the idea that the fed is already going too far and will have to cut rates twice at the end of this year so i think there's going to be a major argument here sort of between the Fed and the markets, where the markets are saying, you're overdoing it, you're going to put this economy into recession here, and that's why you're going to end up having to reverse course. So I do think it is, I think this is a mistake. I think the Fed is trying

to be hawkish to, you know, show how resolute they are against inflation, but inflation's fading anyway. And it's not worth putting the economy into recession just to hit your inflation target, you know, a year earlier than you thought you were going to. Inflation's coming down anyway. So I'm disappointed by this, but I think this is more hawkish than markets expected. Although, John Bellows, let's remember how dovish the dots turned out to be coming into this year and how wildly they underestimated the actual rejection of inflation and rate hikes. So could we live through an episode like that again to David's point where the Fed does come around to the markets? If anything, the dots are one of the most lagging indicators that we

have. Yeah, I think you're on a good point. There certainly is a little bit of a dissonance between the dots and the market. But the thing I would emphasize is. is that the degree of that is much smaller than it has been and certainly much smaller than the volatility that we've realized in the market over the last nine months. So we've been in a market where the surprises have been very large and the Fed surprises have been even larger. And that's been really challenging.

It's been challenging for equities, it's been challenging for bonds. And as we progress, we're getting closer to the point where there is a convergence, there is a little bit more clarity on the outlook. I think Powell and his press conference is going to talk a lot about kind of his four looking expectations. And we're going to see less volatility as a consequence. I think that's

generally a good thing. So the thing I would emphasize here is there's a little bit of dissonance left, but it's a degree smaller, multiple degrees smaller than the volatility we've experienced. And that's a big transition. And it's a transition that I think will generally be supportive of financial markets, you know, some resolution of the uncertainty, some convergence, you know, and that forward-looking policy that I said earlier. I think that's generally a good thing. And I think that's where we're headed. All right. So, viewers, an update for you guys right now and those listening on Sirius XM Channel 112. Markets are at session lows. The NASDAQ composite is off almost 100 points.

The S&P is down about 2720 and handles call it that just kind of so to speak. Yeah, I'm checking it right now, not about 20. So half of 1% declines. The Dow is now down 165, 170 some points. Mona, this is a good time to bring you back into the conversation here as well. We started you off with kind of the macro picture and what the expectations were. The way that the markets are shaping up right now seems to indicate at least that the initial part of next year could be a little bit more, say, bias to the downside, but maybe not as volatility so as it's been. If you stack things up with the data that we've seen today from the Fed and the CPIs and the PPI and everything else, does this then still mean that the path of least resistance for stocks is lower? Do we test the lows? Do we set new ones here in early 2023?

Yeah, it's a great point. And look, I think to John's point earlier, we are headed towards a 5% plus terminal rate according to today's dot plot. But really, the market wasn't too far off of that. And so 5% or so means probably two more 25 basis point rate hikes. Maybe the Fed is giving itself some room in case inflation does become more volatile. But I also agree with David that inflation is starting to show signs of rolling over. And there are several leading indicators that we follow that do indicate that inflation will probably continue to move in this downward direction. Interestingly, I do think the Fed is being a bit conservative, so they have three and a half percent core inflation by the end of 2023. I think there have been so many calls that the Fed has been wrong on inflation to the upside, that now they want to be a little bit more cautious to the downside, and perhaps the same way they're giving themselves a little bit of room in the Fed funds rate. Now, to your point on do we retest the lows, certainly we think there's a period of volatility

ahead of us as we get through not only in economics downgrade, but the earnings downgrade that was mentioned earlier. But that being said, this is what we are calling the worst kept secret on Wall Street. You know, this recession or this period of economic downturn is well known and established by not only Wall Street, but a lot of people are talking about it already. We do think that if markets do enter a period of volatility, it could potentially be short-lived in that they will start very quickly then looking towards this period of recovery. ahead. And keep in mind, when you do look at history, the analysis shows us that markets actually start recovering anywhere from three to six months before a recession ends. And so these four looking

markets, we think, continue in 23 for sure. And really, we start transitioning from defensive portfolios to more recovery portfolios. All right, let's turn back, get a kind of quick comment as we start to turn our attention to the Fed conference at 2.30. We hear from the chair himself, Rick. What will you be listening for? You know, I would be listening for the notion that higher for longer, and I believe even if we start to show more dramatically heading towards a recession, I think the key to this move by the Fed, this whole tightening cycle, is that they're going to be much tougher to actually reverse and turn corners and lower rates. I think that's what you want to concentrate on. And if you look at May Fed Fund futures, and I've been looking at May, that's been roughly the fulcrum between

April, May, June. But it had a dramatic break. A very dramatic break in. My phone was going off because many of my sources that trade were telling me that changed the way they traded twos, tens, thirties in the stock market after watching the dramatic 10 basis point dropping May Fed Fund futures. All right, Steve Leasman, we're going to give the last word to you here as we wrap up this panel. The takeaway and what you will be listening for and asking Fed Chair J. Powell during this press conference. Here's the thing.

There is now the need for a daily Leasman-Santelli show. market said what, Fed said what. I don't agree that we're heading for a period of lower volatility. I think there's more volatility because I think, you know, Rick is very focused on what the market is saying. My job is to report to you in detail what the Fed is saying. That gap grew today. Rick is right. We did have a strong move in that May 2020-3 contract up to 492 from 482, but it's still below where the Fed is.

And more so, when you look out the curve to the January 24, As I think Dave Kelly said earlier, the Federal Reserve sees itself ending the year at that five and an eighth number. And the market thinks they're going to end in the 440 range. So there's 60, 70 basis points of difference between the markets. I think we have some discussions that have to be had, some explaining that has to be done about where the market is priced and where the Fed thinks we're going. And somebody's going to have to give something here. I don't necessarily think Kelly Evans was wrong earlier when she pointed out.

how wrong the Fed has been, but somebody's got a turn tail here, either the markets or the Fed, and this is going to be a very interesting story from here. I look forward to continue discussions with my colleagues in Chicago, Rick Santelli. All right. One of the best panels around to break down Fed decisions and economic data. Thanks to our panel, John Bellows, Monomahajun, David Kelly, as well as, of course, Steve Leesman, Bob Bassani, and Rick Santelli as well, Kelly. So it gets even more interesting from here on now. Coming up, former Fed Governor Frederick Michigan, will tell us how high he thinks rates should go and for how long. Our analysis of the central bank decision continues with the press conference starting in less

than 15 minutes time. This often ends up being the real mover of financial markets. Don't go anywhere. We're back in just a moment. All right. Stocks drop, yields pop following the Fed's decision to raise interest rates by a half a percentage point to its highest level in 15 years. Let's now bring in former Federal Reserve Board Governor Frederick Michigan.

He is also a CNBC contributor. Thank you very much, sir, for joining us this afternoon. I wonder, you've had a few moments now to digest kind of what's happened. We're obviously all looking forward to this press conference. What exactly stood out to you, sir? Well, I think the issue here is that the Fed is indicating that it has to raise rates. The issue I think that's very important is that they've slowed down the speed of raising rates. I'm not sure how critical that is in one sense, but it's important another in that as J. Powell has emphasized, the real issue is how high they have to go. I actually would have preferred to actually keep on a 75 basis point cycle for one, you know,

for one more time, because I think that actually they have to go to higher rates than the market's anticipating and also that the dot plots are indicating as well. So I actually also like to be more preemptive. Again, this has to do with the fact that they drop preemption, which is a huge mistake. So I think that they have to get back. to indicate they really are going to be ahead of the curve, and they're going to be serious about not pivoting, that there are now calls for people to say, gee, you know, the Fed should not pause not too far in the distant future. I think they've got to do their job and indicate that's what they're going to do to keep inflation under control. And there is risks that, in fact,

they could go too far, but it's worse to have risk that, in fact, inflation doesn't get back under control. So you would have gone 75 here. That's interesting. I wonder what you make of the more forward-looking market indicators, the deeply inverted yield curves, especially the tens-ones, which has more or less a perfect track record, the fact that they've hiked now the Fed funds rate to well over where the rest of the curve really even is, except for it the very short-term. Even something like prices paid of the ISM, right, the way that that's collapsed to levels consistent with 2% PCE inflation, do those forward-looking indicators of inflation not tell you they're perhaps already too restrictive with policy here?

Well, I certainly don't think they're too restrictive, that's for sure, because what What you have to think about is it's not the actual federal funds rate that's important. It's what we call the real federal funds rate, the federal funds rate that's adjusted for inflation. And even now, that's still not very high, because at least for the next couple of years, it's very likely that inflation is going to be not getting down below the 3 percent level, and that it's going to take a while longer than that. And so right now, they've only gone to sort of moderate tightening.

It's not really – in fact, they've just really gotten to neutral just fairly recently. So from that perspective, I think that that that's using current inflation. In inflation, as you know, is a lagging indicator. I mean, the inflation we're experiencing now is from monetary policy that was set into place 18 months ago. Absolutely. But in terms of actually the kind of numbers that we see in terms of looking forward to what we think inflation is going to be, we don't really see numbers below 3% for a while. Now, actually, we might forget lucky, and in fact, inflation would go below that.

but I think expectations are really that inflation is still well above the Fed's target. And from that viewpoint, for quite a period of time, I'd like to see the Fed be a little bit tighter because they were a little bit too easy earlier on. So this is actually a judgment call. I think really what's more important is that the Fed actually a signal that they're not going to just cave in and start to pause too early. That's what I really, really worry about. So in that case, it's not so much that I worry about the actual role.

rise this time, but just where they're heading to. And that do they actually are willing to actually say that the risks that are more dangerous right now are not getting inflation under control rather than having the economy going to recession? And that's always a balance. But I think that there are a lot of people saying, gee, we're going to have a recession. Isn't that terrible? But in fact, in order to get inflation under control, that's what the Fed is going to have to do.

You could look at past episodes that you always get a slowing in the economy when you're actually trying to get inflation under control. And that's even more true when you've actually gotten a little bit behind the curve, as the Fed has. All right. So we've got just about maybe a minute or so left here, Frederick. Before we let you go, is there a case to be made? A lot of folks, economists are talking about this idea that interest rate policy has a long and variable lag. I've heard that term a lot now these days.

Is there a case to be made that these days, this decade, that long and variable lag has become shorter, that we see policy impacts in as little as three to six to nine months as opposed to to 18, like Kelly pointed out before. I really don't think so. I think that the lags are pretty long. And that's one of the reasons why it's not easy to be a central banker, that you've got to call the shots and sort of call the shots now for what you think is going to happen a year to two years from now.

So I think that that's the age-old problem that central banks have, which is that they have to try to anticipate the future. It's not easy to do so. You can make some big mistakes that the Fed actually did make in this recent cycle. But that's just the job. It's part of what you have to do. And in fact, this is also an indication that you're operating under uncertainty, that sometimes you have to actually ask which are the balance of risks that you think are much more dangerous.

And in this particular episode, not getting inflation under control right now is actually quite dangerous. So that's what I really worry about. And also the political pressures that are going to get much worse on the Fed. There are also people talking about raising the inflation target, which I think is not the right time to do so. Okay. All right, perfect. Great thoughts. Friedrich Michigan, former Fed Governor. Thank you very much. We appreciate it, sir. And the press conference is next. Don't go anywhere. Welcome back. Let's get the lay of the land as we wait the Fed Chair's news conference. It starts in just a couple of minutes time. We saw stocks. We'll talk to Mike Santoli down at the New York Stock Exchange. Mike. We saw stocks immediately sell off and yields pop a little bit on the decision. Everyone seems to think if Powell were to lean one way, hawkish would be that way. But there's still a risk he could open the door to use some language about needing to soften the pace depending on how the data comes in or something to that effect. without a doubt, Kelly. I mean, he can certainly acknowledge progress in various areas on inflation,

those that he laid out not too long ago in that speech that the market took heart in. So yes, I do think there is that opening. I think what the market is initially reacting to is not just the higher projected Fed funds rate where it's going to get to next year, but also in combination with the economic and inflation forecast that the committee put together, right? So they're saying growth is going to be worse than we thought three months ago, half percent GDP growth. That's as close as the Fed's going to get to predicting recession. And meanwhile, core inflation higher than we thought just three months ago. So that combination is unsettling. If they think inflation is going to be even higher while growth slows down, employment has

to go up into the mid-fourths is what they're saying. And even with that, they're going to keep Fed funds above 5 percent. No, all that is subject to the markets disagreeing with it and deciding to take the other side. And you've been pointing out, and I think it's in all investors' heads, that one year ago, the market, the Fed was very wide of the mark with what the outlook was going to be and what they were going to have to do. So at some point, you know, you can fight the Fed if you feel as if their premises are not necessarily realistic. But, you know, Mike, you can fight the Fed, but you're not going to do it from a career long or short perspective if you don't have more data, right? I mean, is there anything that we're going to see between now and, say,

the early part of January, February, as we head into the next part of the interest rate cycle in the early part of next year that breaks the market out of any part of the range that we've already seen for the past two or three months. Well, I think what you can see, Dom, is, first of all, the PCE inflation numbers, as people are trying to put them together in advance, they're going to show decelerating core inflation. So people are maybe going to be able to gain some comfort that inflation does have some downside momentum, and therefore, you know, the Fed may not have to go as far as they thought, or maybe growth can be more resilient. So I think every data point is going to be filtered through, you know, this set of expectations that the Fed

Committee has put out there. And look, we've absorbed a lot. The stock market's in the same place it was when the Fed Funds rate was at 0.75 percent back in the spring. So it's not as if every tick in what the Fed Funds rate does immediately takes value out of the market. It's all about how we're getting there and how much longer we have to wait until the end. And we've just got a couple seconds left. What's the one thing you'd be watching for in the press conference, Mike? I would say he's going to say we're not done. He's going to talk about higher for longer. And he did say and see if he actually gives a nod to the CPI data we got yesterday

and is willing to exclude the rent calculations from inflation expectations. In other words, to try and say maybe now finally it's time for a more nuanced view of inflation. Whereas early this year he said, we can't do that. Let's get a quick look at the market as we wait to hear from the Fed share. The NASDAQ's down about 8 tenths of a percent, as you can see right now. The Dow less than that, interestingly, down about 4, 10%. of 1%. And crude oil still hanging on to its gains with WTI up about 2.5%. We saw pop in bond yields DOM as well. Immediately after the decision came out, up about three and a half basis points on

the 10-year. And there we still are sitting right around those levels around 354. All right. And what we have right now, you can see right there on your screen. Fed Chair J. Powell approaching the podium right now. So we'll take you to his comments live right now. Good afternoon. Before I go into the details of today's meeting, I'd like to underscore for the American people, that we understand the hardship that high inflation is causing, and that we are strongly committed to bringing inflation back down to our 2 percent goal. Over the course of the 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 best rock of our economy. Without price stability, the economy doesn't work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all. Today, the FOMC raised our policy interest rate by a half percentage point. 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're continuing the process of significantly reducing the size of our balance sheet. Restoring price stability will likely require maintaining a restrictive policy stance for some time. I'll have more to say about today's monetary policy actions after briefly reviewing economic developments. The U.S. economy has slowed significantly from last year's rapid pace. Although real GDP rose at a pace of 2.9 percent last quarter, it is roughly unchanged through the first three quarters of this year. Recent indicators point to modest growth of spending and production this quarter. Growth in consumer spending has slowed from last year's rapid pace, in part reflecting lower real disposable income and tighter financial conditions. Activity in the housing sector has

weakened significantly, largely reflecting higher mortgage rates. Higher interest rates and slower output growth also appear to be weighing on business fixed investment. As shown in our summary of economic projections, the median projection for real GDP growth stands at just 0.5 percent this year and next well below the median estimate of the longer-run normal growth rate. Despite the slowdown in growth, the labor market remains extremely tight, with the unemployment rate near a 50-year low. Job vacancy is still very high and wage growth elevated.

Job gains have been robust, with employment rising by an average of $200,000. 72,000 jobs per month over the last three months. Although job vacancies have moved below their highs and the pace of job gains have slowed from earlier in the year, the labor market continues to be out of balance, with demand substantially exceeding the supply of available workers. The labor force participation rate is little changed since the beginning of the year. FOMC participants expect supply and demand conditions in the labor market to come into better balance over time, easing upward pressures on wages and prices. The median projection in the SEP for the unemployment rate

rises to 4.6% at the end of next year. Inflation remains well above our longer run goal of 2%. Over the 12 months ending in October, total PCE prices rose 6%, excluding the volatile food and energy categories, core PCE prices rose 5%. In November, the 12-month change in the CPEC. was 7.1% and the change in the core CPI was 6%.

The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases. But it will take substantially more evidence to give confidence that inflation is on a sustained downward path. Price pressures remain evident across a broad range of goods and services. Russia's war against Ukraine has boosted prices for energy. and food and has contributed to upward pressure on inflation. The median projection in the SEP for total PCE inflation is 5.6% this year and falls 3.1% next year, 2.5% in 2024 and 2.1% in 2025. Participants continue to see risks to inflation as weighted to the upside.

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 measures from financial markets. But that is not grounds for complacency. 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 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 high inflation poses to both sides of our mandate, and we are strongly committed to returning inflation to our 2 percent objective. At today's meeting, the committee raised the target range for the federal funds rate by a a half percentage point, bringing the target range to 4.5% and a quarter to 4.5%. And we are continuing the process of significantly reducing the sides of our balance sheet. With today's action,

we have raised interest rates by 4 and a quarter percentage points this 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. Over the course of the year, financial conditions have tightened significantly in response to our policy actions. Financial conditions fluctuate in the short term in response to many factors, but it is important that over time they reflect the policy restraint that we're putting in place to return inflation to 2%.

We are seeing the effects on demand in the most interest-sensitive sectors of the economy, such as 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 50 basis points today, a step down from the 75 basis point pace seen over the previous four meetings. Of course, 50 basis points is still a historically large increase, and we still have some ways to go.

As shown in the SEC, the median projection for the appropriate level of the federal funds rate is 5.1% at the end of next year, a half percentage point higher than projected in September. The median projection is 4.1% at the end of 2024, and 3.1% at the end of 2025, still above the median estimate of its longer run value. Of course, these projections do not represent a committee decision or plan, and no one knows with any certainty where the economy will be a year or more from now. Our decisions will depend on the totality of incoming data and their implications for the outlook for economic activity and inflation,

and we will continue to make our decisions meeting by meeting and communicate our thinking as clearly as possible. We are 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 sustained 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 long run.

The historical record cautioned 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. I will look forward to your questions. Steve Leesman, CNBC, thanks for taking my question, Mr. Chairman. You just talked about the importance of market conditions reflecting the policy restraint you put in place. Since the November meeting, the 10-year has declined.

by 60 basis points. Mortgage rates have come down. High yield credit spreads have come in. The economy is accelerated and the stock market's up 6%. Is this loosening of financial conditions a problem for the Fed in its effort and its fight against inflation? And if so, do you need to do something about that? And how would you do something about that? Thank you. So as I mentioned, it is important that overall financial conditions continue to reflect the policy restraint that we're putting in place to bring inflation down to 2%. We think that financial conditions have tightened significantly in the past year, but our policy actions work through financial conditions,

and those in turn affect economic activity, the labor market and inflation. So what we control is our policy moves and the communications that we make, financial conditions both anticipate and react to our actions. I would add that our focus is not on short-term moves, but on persistent moves. and many, many things, of course, move financial conditions over time. I would say it's our judgment today that we're not at a sufficiently restrictive policy stance yet, which is why we say that we would expect that ongoing hikes would be appropriate. And I would point you to the SEC, again, for our current assessment of what that peak level will be.

As you will have seen, 19 people filled out the SEC this time, and 17 of those 19 wrote down a peak rate of 5% or more in the 5s. So that's our best assessment today for what we think the peak rate will be. You will also know that at each subsequent SEP during the course of this year, we've actually increased our estimate of what that peak rate will be. And today, the SEP that we're published shows, again, that overwhelmingly FOMC participants believe that inflation risks are to the upside. So I can't tell you confidently that we won't move up our estimate of the peak rate again at the next SEP.

I don't know what we'll do. It will depend on future data. What we're writing down today is our best estimate of what we think that that peak rate will be based on what we know. Obviously, if the inflation data come in worse, that could move up and it could move down if inflation data are softer. Gina. Gina Smilich, New York Times. Thanks for taking our questions. the SEP, like you mentioned, suggest that the Fed will be making another three-quarter

percentage points worth of rate increases in 2023. I wonder if you would foresee that being in 25 basis point increments, 50 basis point increments, sort of how you see the speed playing out going forward. And then I wonder what you're looking at as you determine when to stop. So, as I've been saying, as we've gone through the course of this year, as we lifted off and got into the course of the year and we saw how strong inflation wasn't how persistent, it was very important to move quickly. In fact, the speed, the pace with which we're moving was the most important thing.

I think now that we're coming to the end of this year, we've raised 425 basis points this year and we're into restrictive territory, it's now not so important how fast we go. it's far more important to think what is the ultimate level. And then at a certain point, the question will become, how long do we remain restrictive? That will become the most important question. But I would say the most important question now is no longer the speed. So, and that applies to February as well. So I think we'll make the February decision based on the incoming data and where we see financial conditions, where we see the economy. And that'll be the key thing. But I mean, for that decision. But ultimately, that question about how high to raise rates is going to

one that we make looking at our progress on inflation, looking at where financial conditions are, and making an assessment of whether policy is restrictive enough. I've told you today we have an assessment that we're not at a restrictive enough stance, even with today's move, and we've laid out our own, our individual assessments of what we would need to do to get there. At a certain point, though, we'll get to that point, and then the question will be, how long do we stay there? And there, the strong view on the committee is that, that we'll need to stay there, you know, until we're really confident that inflation's coming down in a sustained way. And we think that that will be some time.

Now, why do I say that? If you look at, look at that, you can break inflation down into three sort of buckets. The first is goods inflation. And we see now, as we've been expecting, really, for a year and a half, that supply conditions would get better, and ultimately supply chains get fixed, and demand settles down a little bit and maybe goes back to services a little bit, and we start to see goods inflation coming down. We're now starting to see that in this report and the last one. Then you go to housing services.

We know the story there is that housing services inflation has been very, very high, and will continue to go up, actually, as rents expire and have to be renewed. They're going to be renewed into a market where rates are higher than they were when the original leases were signed. But we see that the new leases that the rate for new leases is coming down. So once we work our way through that backlog, that inflation will come down sometime next year. The third piece, which is something like 55% of the index, PCE core inflation index, is non-housing-related core services. And that's really a function of the labor market largely at the biggest cost by far in that sector is labor.

And we do see a very, very strong labor market, one where we haven't seen much softening, where job growth is very high, where wages are very high. vacancies are quite elevated, and really there's an imbalance in the labor market between supply and demand. So that part of it, which is the biggest part, is likely to take a substantial period to get down. The goods inflation has turned pretty quickly now, after not turning at all for a year and a half, now it seems to be turning. But there's an expectation, really, that the services inflation will not move down so quickly, so that we'll have to stay at it so that we may have to raise rates higher to get to where we want to go. And that's really why we're writing down those high rates and why we're expecting that they'll have to remain high for a time.

Howard Schneider, with Reuters, thanks for taking the question. You described GDP growth in the SEPs as moderate or modest, I believe, yet it's really approaching stall speed. Half a percentage point is not much. You described labor market unemployment rate as representing some softening, but it's nearly a full percentage point rise, and that's well in excess of what has historically been associated with recession. Why wouldn't this be considered a recessionary projection by the Fed? Well, I'll tell you what the projection is. I don't think it would qualify as a recession, no, because you've got positive growth. The expectations in the SEC are basically,

as you said, which is we've got growth at a modest level, which is to say about a half a percentage point. That's positive growth. It's slow growth. It's well below trend. it's not going to feel like a boom. It's going to feel like very slow growth, right? In that in that condition, labor market conditions are softening a bit. Unemployment does go up a bit. I would say that many analysts believe that the natural rate of unemployment is actually elevated at this moment. So it's not clear that those forecasts or inflation are really much above the natural rate of unemployment. We can never identify its location with great precision. But that 4.7% is still a strong labor market.

If you look, you know, you've got, the reports we get from the field are that companies are very reluctant to lay people off. Other than the tech companies, which is, you know, a story unto itself. Generally, companies want to hold on to the workers they have because it's been very, very hard to hire. So, and you've got all these vacancies out there far in excess of the number of employed people, that doesn't sound like a, you know, a labor market where a lot of people will need to be put out of work. So that we, you know, there are channels through which the labor market can come back into balance with, with relatively modest increases in unemployment, we believe. None of that is guaranteed, but that is what their forecast reflects. Thanks, Nick Timmeros of the Wall Street Journal.

Chair Powell, I want to follow up on Gina's question. The decision to step down the pace of rate increases, rate rises, appears to have been socialized at your last meeting, largely before the past two CPI reports showed inflation decelerating in line with the committee's forecast this year. You just now talked about making decisions meeting by meeting and being mindful of the lags of policy. Does that mean all things equal? You would feel more comfortable probing where the terminal rate is by moving in 25 basis point increments, including beginning at your next meeting. So I haven't made a judgment on what size.

rate hike to make it the last meeting. But, you know, what you said is broadly right, which is having moved so quickly and having now so much restraint that's still in the pipeline, we think that the appropriate thing to do now is to move to a slower pace. And, you know, that will, that will allow us to feel our way and, you know, and get to that level, we think, and better balance the risks that we face. So that's the idea. It makes a lot of sense, it seems to me, particularly if you consider how far we've come. But again, I can't tell you today what the actual size of that will be. It will depend on a variety of factors, including the incoming data in particular,

the state of the economy, the state of financial conditions. No, absolutely not. No, as just a matter of practice, the SEC reflects any data that comes out during the meeting. And participants know that they have the, they know this, that they can, make changes to their SEP during the meeting, you know, well in advance of the press conference so that we're not running around. But that's not the case. It's never the case that the CPs don't reflect an important piece of data that came in on the first day of the meeting. Hi, Chair Powell, Rachel Siegel from the Washington Post. Thank you for taking our questions.

I'm wondering if we could talk about the projection for the unemployment rate. Why has the Fed raised its unemployment projection? Is it because the model suggests that a higher terminal rate would automatically cause a higher unemployment rate, or are you seeing signs that the labor market isn't quite as strong as we think it is now? Thanks. No, it's not about the strength of the labor market. The labor market is clearly very strong. It is more just that, you know, by now we had expected, we've continually expected to make faster progress on inflation than we have, ultimately. And that's why the, that's why the peak rate for this year goes up between this meeting and the September meeting. You see that, you see the fact that we've made less progress and

expected on inflation. So that's why that goes up. And that's why unemployment goes up because we're having to tighten policy more. And so it didn't go up by much in the median, I don't think, but that's the idea, is slower progress on inflation, tighter policy, probably higher rates, probably held for longer, just to get to where you, the kind of restriction that you need to get inflation down to 2%. In order to get to that number, how much of that could be caused by layoffs versus vacancies trimming or changes to the labor force population rate? It's very hard to say, you know, you can look at history, right? And history would, you know, would say that in a situation like this, the declines

on unemployment would be more meaningful, I think, than what you see written down there. But why do we think that is the case? So I'll give you a few reasons. First, just is that there's this huge overhang of vacancies, meaning that vacancies can come down a fair amount and we're hearing from many companies that they don't want to lay people off so that they'll keep people because it's been so hard. I mean, I think we've, it feels like we have a structural labor shortage out there where there, you know, four million fewer people, a little more than four million who were in the workforce available to work than there's demand

for workforce. So the fact that there's a strong labor market, you know, means that that companies will hold on to workers and it means that it may take longer, but it also means that the costs in unemployment may be less. Again, that we're going to find out empirically, but I think that's a reasonably possible outcome, and you do hear, you know, many, many labor economists believe that it is. So we'll see you, though. Thank you, Colby Smith with the Financial Times. How should we interpret the higher core inflation forecast for 2023 in the SEC? Does that not then suggest that the policy rate currently forecasted for next year should actually be higher than the 5.1 medium estimate penciled in?

Well, I think that's why one of the reasons it went up was that Corps came in stronger this year, came in stronger this year. Yeah, what you see is our best estimate as of today, really, as of today, for how high we need to raise rates, to how much we need to tighten policy to create enough, you know, restrictive policy to slow economic activity and slow. soften the labor market and bring inflation down through those channels. That's, that's all you, that's, that is the estimate, best estimate we make today. And, uh, as I mentioned, we'll make another estimate for the next SEP and we'll, you know, of course, between meetings, we do the same thing,

but we don't publish it. Um, hi, Victoria Guida with Politico. Um, I wanted to make sure I understand specifically, um, what's going on in the SEP because you all expect rates to go higher, but you're also more pessimistic about what inflation is going to look like next year. And I was just wondering, you know, given that we have seen some cooling in inflation, you know, is that primarily because of wage growth, that you expect wage growth to be sort of a headwind? And we're going into next year with higher inflation than we had thought, right? So we're actually moving down to, the level that we're moving down to next year is still a very large drop in inflation from where inflation is running now, well more than 1% change in

inflation. But remember that the jump-off point at the beginning of the year is higher. So, you know, we're moving down still by a very large chunk. I don't think it's having, I don't think the policy is having any less effect. It's just starting from a higher level at the end of 2022. So we're getting down, I believe the median is 3.5%. That would be, that's a pretty significant drop in inflation. And, you know, where is it coming from? It's coming from the good sector, clearly.

By the middle of next year, we should begin to see lower inflation from the housing services sector. And then, you know, the big question is when we, how much will you see from the largest, the 55% of the index, which is the non-housing services sector? And, you know, that's, that's where you need to see, we believe, you need to see a better balancing of supply and demand in the labor market so that you have, it's, it's not that we don't want wage increases. We want strong wage increases. We just want them to be at a level that's consistent with 2% inflation. Right now, if you put into, if you factor in price, productivity estimates, standard productivity estimates, wages are running, you know, well above what would be consistent with 2% inflation.

Thanks. Hi, Chair Powell, Neil Irwin with Axios. Some of your colleagues have been pretty explicit that they can't imagine rate cuts happening in 2023. That's certainly not implied by the SEC. But futures markets have priced in some easing in the back half of next year. What's your view of the likelihood of any kind of rate cuts next year? What circumstances might make that plausible? You know, our focus right now is really on moving our policy stance to one that is restrictive enough to assure a return of inflation to our 2% goal over time.

It's not on rate cuts. And we think that we'll have to maintain a restrictive stance of policy for some time, historical experience caution strongly against prematurely loosening policy. I guess I would say it this way. I wouldn't see us considering rate cuts until the committee is cut. confident that inflation is moving down to 2% in a sustained way. So that's that's the, that's the test I would articulate. And you're correct, there are not rate cuts in, in the SEC for 2023. Steve Matthews with Bloomberg. Let me ask you about China. In the last few weeks, China has abandoned its COVID policy and been reopening pretty strongly. I'm wondering if you see that as

disinflationary because you're seeing supply chains improve or inflationary because it obviously brings a lot more demand globally and improves the global outlet for growth and for commodities prices. So you're right. Those two things will offset each other. We're weaker output in China will push down on commodity prices, but it could interfere with supply chains ultimately, and that could push inflation up in the West. It's very hard to say, you know, how much, how those two will offset each other. And it doesn't seem likely, actually, that the overall net effect would be material on us. But to your point, China faces a very challenging situation in reopening. And we've seen waves of COVID all around the world can interfere with economic activity. China,

a very critical manufacturing place for manufacturing and exporting. Their supply chain is very important. And China faces a reopening. They've, you know, they've backed away from their COVID restriction policies. There could be very significant increases in COVID, and we'll just have to see it's a risky situation. But again, it doesn't seem like it's likely to have material overall effects on us. Hi, Chris Ruegabert, Associated Press. Thank you for taking my question. I wondered if you could comment a bit more about yesterday's inflation report. I mean, it showed inflation cooling in all three of the categories that you laid out at Brookings. Are you starting to Are you confident that you're seeing real progress on getting inflation under control?

Are you still worried it could slip into some kind of unentrenched, you know, upward spiral? Thank you. Right. So the data that we've received so far for October and November, we don't have the some of the we have some remaining data to get in November, but they clearly do show a welcome reduction in the monthly pace of price increases as I mentioned in my opening statement. It will take substantially more evidence to give confidence that confidence that inflation is on a sustained downward path. So the way we think about this is this. This report is very much in line with what we've been expecting and hoping for. And what it does is it provides greater confidence in our forecast of declining inflation. As I mentioned, we've been expecting forecasting significant declines in overall inflation and core inflation in the coming

year. And this is the kind of reading that it will take to support that. So really this gives us greater confidence in our forecast rather than at this point changing our forecast. In terms of the pieces, we have been expecting goods inflation to come down as supply chain pressures eased. That's happening now. Housing services, as I mentioned, there is good news in the pipeline as long as new housing leases show declining inflation. That will show up in the measure around the middle of next year, so that should help. And the big piece, again, is core services X housing, which is very important. And we have a ways to go there. You do see some beginning signs there, but ultimately that's that's the big that more than half, as I mentioned,

of PCE core index. And it's very fundamentally about the labor market and wages. If you look at wages, look at the average hourly earnings number we got with the last payrolls report. You don't really see much progress in terms of our average hourly earnings coming down. Now, there may be composition effects and other effects in that. So we don't put, we don't put too much weight on any one report. These things can be volatile month to month. But we'll be looking for wages moving, you know, down to more normal levels where workers are doing well and ultimately their gains are not being eaten up by inflation. There's a, excuse me, Michael McKee from Bloomberg Radio and television. There's a little

of a disconnect between the optimistic view you just expressed about the economy and the changes that you've made in the SEP. And I'm wondering if you're reacting to the fact that the markets have loosened financial conditions, or if you feel the Fed may be a little bit behind on inflation, whether the recent disinflation we're seeing is transitory or not, and how this affects the idea of a soft landing if you're projecting just half a percent growth for this year. So if I if I think I got your question. So you know one thing is to say is I think our policies in getting into a pretty good place now we're restrictive and I think we're you know we're getting close to that level of sufficient we think sufficiently restrictive. We laid out today

what our best estimates are to get there. And, I mean, it boils down to how long do we think this process is going to take. And, of course, we welcome these better inflation reports for the last two months. They're very welcome, but I think we're realistic about the broader project. So that's all, that's the point I would make. It's, you know, we see goods prices coming down. We understand what will happen with housing services, but the big story will really be the rest of it, and there's not much progress there.

And that's going to take some time. I think my view and my colleagues view is that this will take some time. We'll have to hold policy at a restrictive level for a sustained period so that, you know, two good, you know, two good monthly reports are, you know, very welcome. Of course, they're very welcome. But I think we need to be honest with ourselves that there's, you know, inflation, 12-month core inflation is 6% CPI. That's three times our 2% target. Now, it's good to see progress, but let's just understand. And we have a long ways to go to get back to price stability.

No, I wouldn't say that. No, I don't say that. I mean, I would say this. You know, to the extent we need to keep rates higher and keep them there for longer, and inflation, you know, moves up higher and higher, I think that narrows the runway. But lower inflation readings, if they persist in time, could certainly make it more possible. So I just, I don't think anyone knows whether we're going to have a recession or not. And if we do, whether it's going to be a deep one or not.

It's just it's not knowable. And certainly, you know, lower inflation reports, were they to continue for a period of time, would increase the likelihood of a, so I would put it this way, of a return to price stability that involves significantly less, less of an increase in unemployment than would be expected, given the historical record.

Hi, Chairman Powell. Hi, Chairman Powell, Brian Chung, NBC News. You warned Americans of pain earlier this year as the Fed hikes rates, but with the Fed now expected to raise rates higher than you thought when you first said that, just wondering where we are in that pain. How would you describe that to Americans if the projections on unemployment find themselves? That would be 1.6 million Americans out of jobs. So the largest amount of pain, the worst pain would come from a failure to raise rates high enough and from us allowing inflation to become entrenched in the economy. economy so that the ultimate cost of getting it out of the economy would be very high in terms of unemployment, meaning very high unemployment for extended periods of time. The kind of thing that

had to happen when inflation really got out of control and the Fed didn't respond aggressively enough or soon enough in a prior episode, you know, 50 years ago. So that's really the worst pain would be if we fail to act. What we're doing now is, you know, it's raising interest rates for people. And so people are paying higher rates on mortgages and that kind of thing. There will be some softening in labor market conditions. And I wish there were a completely painless way to restore price stability. There isn't. And this is the best we can do. I do think, though, that markets are pretty confident, it seems to me, that we will get inflation under control. And I believe we will. We're certainly highly committed to do that.

Thank you, Mr. Chair. Grady Trimble with Fox Business. You've reiterated today, and the committee has reiterated its commitment to that 2% inflation target. I wonder, is there ever a point where you actually reevaluate that target and maybe increase your inflation target if it is stickier than even you think it is? That's just changing our inflation goal is just something we're not thinking about. It's not something we're not going to think about. It's we have a 2% inflation goal. and we'll use our tools to get inflation back to 2%. I think this isn't the time to be thinking about that. I mean, there may be a longer run project at some point, but that is not where we are at all. The committee, we're not considering that. We're not going to consider that under any circumstances.

We're going to keep our inflation target at 2%, and we're going to use our tools to get inflation back to 2%. Thank you, Chairman Powell. Nicole, Goodkind, and Business. As you monitor wage growth and unemployment data, I wonder if you're paying close attention to a sector or even income level, like, how do you factor potential exacerbations of inequality into your risk calculations, especially given the case-shaped recovery of 2020?

So I would go back to the labor market that we had in 2018, 19, 20. So what that looked like was wage increases for the people at the lowest end of the income spectrum were the largest. the gaps between racial groups and gender groups were at their smallest in recorded history. And all of that because of a tight labor market, a tight labor market, which had inflation running, you know, just a tick below 2% in the economy growing right at its potential. So that seems like something that would be really good for the economy and for the country if we could get back to that. And so that's what all of us want to do. We want to get back to a long expansion where the labor market can remain strong over an extended period of time.

That's a really good thing for workers in the economy. And we'd love to get back to that. That's what our goal is. You know, there's in the near term, we have to use our tools to restore price stability. But, you know, we can't, what we have to think about is the medium and longer term. If you think about it, the country went through a difficult time, I think much more difficult than we can think it would happen here. But it really set up our economy for several decades of prosperity. So price stability is something that really pays dividends for the benefit of the economy and the people in it over a very, very long period of time.

And so when it is lost for whatever reason, it has to be restored and as quickly as possible, which is what we're doing. We do. Yes, we absolutely do. We look at, it's our regular practice to talk about unemployment rates by different groups, including racial groups and that sort of thing. We do. We keep our eye on that. Hi, Nancy Marshall Genser with Marketplace. What would you do if the economy slows so much that we enter recession before we see strong, consistent signs that inflation is slowing, in other words, stagflation? So I don't want to get into too many hypotheticals, but, you know, we'll, we, it's hard, it's hard to deal with hypotheticals. So let me just say that we have to use our tools to support maximum employment and price stability. I've made it clear that right now the labor market's very, very strong. You're at a 50-year low where you're at or above maximum employment, in 50-year low in unemployment. Vacancies are very high wages, nominal,

wages are very high. So the labor market is very, very strong. Where we're missing is on the inflation side, and we're missing by a lot on the inflation side. So that means we need to really focus on getting inflation under control, and that's what we'll do. I think as the economy heals, the two goals come more into into play. But right now, clearly the focus has to be on getting inflation down. Thank you, Chairman Powell. Greg Robb from MarketWatch. You spoke a little bit ago. You said that the U.S. looks like we have a structural labor shortage in the economy.

Could you expand on that, talk a little bit more about that? And really, are you talking about getting Congress action on increasing, like, legal immigration, things like that? Thank you. So what I meant by that, the structural labor shortage, is if you look at where we are now, as I mentioned, if you just look at demand for labor, you can look at vacant. plus people who are actually working, and then you can take supply of labor by, are you in the labor market, are you looking for a job

or have a job, and you're more than 4 million people short. We don't see, despite very high wages and an incredibly tight labor market, we don't see participation moving up, which is contrary to what we thought. So the upshot of all that is the labor market is actually, it should, it's three and a half million people at least, smaller than it should have been based on pre-pandemic, just assume population and reasonable growth

and aging of the population. Our labor force should be $3.5 million more than it is. And there are lots of easy ways to get to bigger numbers than that if you go back a few more years. So why is that? Part of it is just accelerated retirements. People dropped out and aren't coming back at a higher rate than expected. Part of it is that we lost a half a million people who would have been work close to a half a million who would have been working. who died from COVID. And part of it is that migration has been lower. We don't prescribe, you know, it's not our job to prescribe things, but, you know, I think

if you ask businesses, you know, pretty much everybody you talk to says there aren't enough people. We need more people. So I tried to identify that in my speech I gave a month ago, but I stopped short of telling Congress what to do because, you know, they gave us a job and we need to, you know, do that job. Thank you, Chair Powell. Jennifer Sean Berger with Yahoo Finance. You say you expect growth of just half a percent next year.

Given that you've said the process of raising rates and getting inflation back under control will be painful, have you had discussions within the committee and addressed how long and or how deep of a recession you would be willing to accept? No. I mean, what we do is we make our forecasts and we, publish them quarterly. And, you know, if you look at those forecasts, those are, those are forecasts for slow growth, for a softening labor market, by which I mean unemployment goes up, but, but not a great deal. And you see inflation coming down. You see rates going up a lot. You see inflation coming down. Those are those forecasts. And that's that's really what they show.

We're not, we all, of course, we don't talk about, uh, You know, this kind of a recession and that kind of a recession. We just, you know, we make those forecasts. The staff runs, and you will see this if you look at the old teal books, runs alternative simulations of all different kinds at every meeting, and we look at those two, and those will explore different things. But that's just, you know, upside and downside scenarios. Of course, that's responsible practice that we've carried on for many decades.

But no, we don't, we haven't asked ourselves that question. We'll go to Gene. Hi, Gene Young with Market News. I wanted to ask about the SEP again. If you are reaching peak rates around 5% in the first half of next year and inflation starts to decline materially, that would seem to make the real rate gradually more restrictive. Is that something that's built into the projections and into models?

Is that something you would want to see? So we do know that. Of course, that's something that we know and we'd see. But as I mentioned, you know, we wouldn't, I wouldn't see the committee cutting rates until we're confident that inflation is moving down in a sustained way. That would be my test. I don't see us as having a really clear and precise understanding of what the neutral rate is and what real rates are so that it would mechanically happen like that. It would really, it'll be a test of, for cutting rates, I think in the event it'll be a question of, do we actually feel confident? confident that inflation is coming down in a sustained way.

Thank you very much.