Power Lunch - The Fed Decision 5/4/22

Episode Date: May 4, 2022

The Federal Reserve hikes rates by half a percentage point for the first time in two decades. Fed Chairman Jerome Powell says inflation is much too high, additional half point hikes are on the table and addressed the possibility of a future 75-basis point increase. The market reaction was volatile as investors hung on every word. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Power Lunch. I'm Tyler Matheson, along with Kelly Evans. The Fed decision is imminent minutes away. Policymakers widely expected to raise interest rates by a half percentage point. It would be the first half point hike since May of 2000. Historic. Before we get to our panel of experts, here's a check on markets going into this big reveal. The Dow is up 100 points right now. The S&P's up 10. The NASDAQ lower by one point. As for the yield on the tenure, we've seen some big moves here today. It is just a hair below 3% right now, 2.991. And, of course, that's a good benchmark. It looks like the markets are just waiting to see what happens.

Our panel today, David Kelly, Chief Global Strategist at JPMorgan Asset Management, Mona Mahajan, senior investment strategist at Edward Jones and Jim Karan, a global fixed income portfolio manager at Morgan Stanley. We kind of know, don't we, David, what the Fed is likely to do, a half-point rise in interest rates. But the question to me is, what is the level of the Fed funds rate, how high does it have to go ultimately to tame inflation? Much higher than where it is. It does need to rise.

I do think the Federal Reserve will continue to increase it at a relatively rapid pace throughout this year. But they don't have to do the whole job themselves. I think that's absolutely key. This economy has got a lot of breaking power in it anyway. And so if they push the federal funds rate up to, say, 2.5 percent by the end of it, this year, long rates rising, high dollar, less fiscal stimulus. This economy is going to slow anyway. Inflation's going to turn down anyway. So I think the key thing here is for the Federal Reserve. Don't be too aggressive here. Make sure you protect the economy. Don't send it into recession.

You don't need to do that because inflation will gradually ease anyway. Quickly, what are, David, those slowing pressures that you cite? Is it the high dollar that is going to make our exports more, even more expensive than they are today? Sure, high dollar, huge fiscal drag because we've got a much smaller deficit this year. And then also we get a rebound from COVID in the second quarter. But then that's kind of done. And so I think the services rebound will fade as the year goes on. And that's a lot of things dragging the economy down, slowing the economy down.

So the Federal Reserve doesn't need to do it all themselves. This economy is already losing momentum. Mona, now we have to ask where the next stop is on the 10-year. We're already about kissing 3% again today. Yeah, absolutely. Look, the 10 years moved, it's a double this year. It started around 150. Now we're close to 3%. Do we think that rate of change annualizes? Do we keep going at this pace? Probably not. But could we get beyond 3%. We think 3, 3.5% could be likely. Keep in mind, markets do tend to

overshoot both on the upside and the downside. But the key really will be, you know, to David's point, if and when we start to see inflation more meaningfully roll over, that's when we're going to see yields peak and more meaningfully roll over as well. So we think we're perhaps not quite there, but getting closer to a peak in yields as well. Jim, if we want to get to 2% inflation, how high do interest rates need to go? And what's the risk of a recession implied by that?

So that's the absolute key question. And I think if the Fed is absolutely dead serious about getting inflation to target by 2024, which is the term of their forecast expectations, then I think the Fed funds rate needs to go well above 3%. So it could be that they go to 3 and a quarter, 3 and a half percent. And the question I always ask, and it's the question that you're asking, Tyler, which is, what is the breaking point for the economy? Where do things really start to slow down?

And I think they do once we get above 3%. And that's what we're seeing in equity markets. That's what we're seeing in other markets. Importantly, though, we're not really seeing it too much in the credit markets. Credit spreads are staying well contained at this point. So I think if I'm looking at this from the fed's view, financial conditions might not be tight enough to control inflation. I agree with what David's saying. I think that plenty of things are going to slow down, but will it happen fast enough for the fed's liking? Financial conditions not tight enough, Jim? I don't think so. You know, based on where I see credit spreads right now, credit spreads have been hanging in pretty nicely. And it's really a question of having a financial market feedback to slow

inflation down within the time frame that the Fed wants those inflation pressures to come down. So that's in the next couple of years. So I would argue right now that, yes, equities have melted down and, you know, for sure, and rates have gone up. But we're not really seeing enough of a slowdown, at least by my calculations, to get to 2% inflation within the time frame that the Fed is specifying without hiking more. All right, Jim, it is like you knew what time it was because right now we're going to go to Steve Leasman for the news.

Steve. Federal Reserve raising the target range for the federal funds rate by 50 bases. points to a new target range of 75 basis points to one percentage point. The Federal Reserve increasing, since ongoing increases will be appropriate. The Fed will begin to reduce the balance sheet on June 1. It will ramp up the balance sheet reduction over time. It's going to begin with $47.5 billion in balance sheet reduction through August. And then after that three-month period, it's going to reduce the balance sheet to allow the runoff of $95 billion a month as expected. And that'll happen beginning in September.

That'll be a total of $60 billion in treasuries running off the balance sheet every month, $35 billion in mortgages. The Federal Reserve says household and business spending remains strong. Job gains have been robust. The Russian invasion of Ukraine likely puts upward pressure on inflation and weighs on economic activity. A very quick analysis, guys. There's one sentence in here that was a little. more dovish than I expected and a lot of other observers thought there'd be a line in here about the Fed moving expeditiously towards neutral. It doesn't say that. It just says

anticipates ongoing increases will be appropriate. Doesn't say how much. We're going to have to leave that for Fed Chair Jay Powell and whether or not he'll put some character on the pace and amount of tightening to come from the Federal Reserve. But as expected, 50 basis points and balance sheet runoff ramping up to $95 billion a month. Kelly? Steve, let's highlight two key things here as we're watching a knee-your- devious reaction to the statement. We see yields dropping about five basis points on the tenure to 295 and equities moving higher. Somewhat, the Dow is up 250. It seems like you said, they didn't use the word expeditious. Also, why are they doing half the expected pace of quantitative tightening

for the first three months? Oh, so no, we expected that. We actually began to survey that, Kelly, back several months ago in the Fed survey that the Federal Reserve would ramp up to the 95 billion. They've done that before. That was, I think, fairly well expected. I apologize for not mentioning it in the lead-up to this. But they're going to do that for three months. They want the market to adjust to this. Then they'll get to $95 billion.

So you think this is, what do you think then, Steve, are the dovish surprises from the statement? No dissenters. Just the one comment here. I saw a bunch of people. And because Powell went forward and said, we're going to move expeditiously back to neutral. People thought that was going to be the new sort of buzz phrase

that told us 50s were in and around or possibly coming for the statement, but that was not adopted in the actual language here. We'll see if Powell uses it again expeditiously to neutral to put numbers around that, Kelly. The way people understood that is 50 basis point hikes to two and a quarter, two and a half. They didn't say that. I'm not going to go overboard here and say this is a doveist statement. Remember, the Fed raised by 50. Remember, the Fed is going to $95 billion a month and runoff. So don't lose sight of the trees here or the forest here for the trees. I think the story here is whether or not the Fed is getting behind this idea of all of those 50s in route there, whether or not there's some play up and some play down here in terms of the amount.

Stick around, Stephen. We're going to bring back our panel plus Bob Pisani and Rick Santelli also joining us. Rick Santelli, let's turn to you. What are you seeing in the bond market? You know, it's unbelievably trim and quiet considering. Now, it's a lot of price volatility and yields moving, but just consider it. We're 279. That's where the market was right before Steve Leasman started to read what the Fed was going to embark on. So basically, it's unchanged. And definitely some stochastic process going on there.

2.97 was where tens were exactly before Steve started to read the statement. That's pretty much where they are now. The yield curve, tens to twos, was separated by about 19 and a half base points, exactly where it's at now. So what I think is the aggressive tendencies of the Fed have to be embedded in the marketplace because the Fed isn't going to back down. You know, they're basically putting a block on their shoulder and say, knock it off, inflation, we're going to deal with you. We're going to squash inflation. So they have to have that unified front. But in reality, the markets pricing in, in my estimation, worst case scenarios that most likely aren't going to happen.

Now, do I think the Fed isn't going to embark on a big tightening cycle? Of course I do. But I just think that going back to 2018 and 2019, perfect examples. In 2018, we had some tightening. Paul was tightening. And the markets, the same markets we're quoting now, we're showing three more tightenings in 2019 that turned into three eases. So I'm just saying that we need to slay infation. You need to have a unified front of being tough.

But you can't back down at all, even though deep inside, I do think the Fed understands that inflation, at least caused by supply chain issues, is going to moderate. The problem is there's lots of inflation that isn't like labor inflation. Right now we say, you know, you're not getting paid as much as inflation's going on. But my guess is in two or three years, that's going to reverse a bit. We're going to see higher wages stay. and we're going to see some of the inflation levels actually dip below that. I think the Fed's doing as good a job as possible,

considering they waited too long. All right, thanks very much, Rick Centelli. Let's go now for a look at the equity market to Bob Pazani. Stocks rather cheered it would seem, Bob. Cheered, but very muted. Same thing with the equity market as the bond market. We were moving actually before the Fed announcement, a couple of minutes before 4-1-86,

and then right after that we were moving up. moved to 42010. We're right around the 4200 level right now. So a fairly muted reaction. I think the issue for everybody down here is, has the market priced in enough Fed hawkishness? We're talking about 3% Fed funds at the end of the year. Powell has implied he wants a soft landing. The stock market doesn't believe that he's going to be able to deliver on that.

That's the big problem. So can you do a soft landing or not? And the problem is at the meeting, I think you're going to find out, or at the press, you're going to find out he can't imply that they're not going to. to be even more aggressive. He can't take 75 basis points off the table. And if he doesn't, that's going to imply an even harder landing. So it's hard to argue for a soft landing when the Fed isn't going to stop with the aggressiveness overall. I can tell you one thing. There is a very bullish opinion being pushed that inflation is peaking. That's going to cause the Fed to back off later

in the year. Powell himself addressed this recently at the IMF panel. He said it may be the peak will be in March, but we don't know that. And so we can't count on it. So Powell himself, has told the Bulls don't expect us to back off just because you see inflation peaking in March. And I think that's what's going to keep the markets on edge for a while. All right, Mona, let's turn to you for some reaction and analysis here. Takeaways? Yeah, absolutely. I think generally what Rick had mentioned is right.

I think the markets have priced in a very aggressive Fed. What we may hear from them today is no explicit dovishness. It does not make sense for them to be dovish when inflation has not yet moved. if they are asked about a 75 basis point rate hike or an intra-meeting rate hike, and they don't explicitly endorse it, the market may take that as on the margin a slightly dovish reaction as well. So I think they will put their foot on the pedal, but they may not explicitly endorse some of the most aggressive forms of tightening. And I think that's what we'll be watching for to see what their path is going forward

and how the markets may react to it. Jim, Karen, same question to you. What were the big surprises for you here? Well, I think that the Fed will likely continue to be very, very hawkish, but it seems that the initial statement that the initial statement wasn't overly hawkish. So I think the markets have taken a little bit of a reprieve from that. The one thing that I'll say, though, is that we have to respect the initial conditions. The market, you know, the economy has been strong. We're coming from a very, very strong footing. The equity markets, for example, have been very, very strong. Now, clearly they've

weakened, but we're coming from a very, very strong place. So what it seems to me like is that the markets are still a bit unafraid of the Fed. Now, the only issue that I have with that is that if the Fed wants to use their financial channel, financial conditions, to contain inflation risk, which is what they can do. That's what their policy is designed to do. Then I would argue that the markets probably have to go through a little bit more pain before the Fed actually achieves its goal of pushing inflation to the levels that it wants to and that they're competent that will actually get to that target inflation point. And I don't see that quite yet.

So I'm still a little bit nervous about the markets going forward. Today, right now might be okay, but going down the road, I'm a little bit concerned. David, why don't you react to what Jim just said? Are the markets insufficiently afraid of the Fed? I think that was one of the takeaways I took there. No, and I think the markets are probably getting this about right. I think the Fed is fundamentally dovish by its nature. They've been squawking like Hawks over the last year because inflation's been high.

But the reality is, as the economy was forward through the end of this year into next year, it's going to slow, inflation's going to roll over. And the Fed doesn't want to make the typical mistake of waiting too long and then doing too much and putting the economy into recession. And I think that, you know, Jay Powell, this press conference is going to be asked a lot of questions along the lines of, are you afraid of tipping the economy into recession? I think he's got to reassure people both that we're pretty confident inflation. will come down and no, we're not going to overdo this and put this economy into recession.

I think that will be comforting to markets. Steve, let me turn back to you, and we've talked a good bit about the interest rate question. Let's talk about the balance sheet and the pace at which it may decline. 9 trillion right now. It's going to start at about $47 billion a month, if I'm reading right, between treasuries and mortgage backs and rise to $95 billion. Why didn't the Fed go there sooner? is a way to get into this tightening a little quicker?

Why didn't it go to $95 billion? No, no. Why didn't it begin squeezing the balance sheet sooner? That's number one. And what do you make of the pace that it is embarking on now? So I think that the Fed not going sooner is one of the biggest mistakes the Fed has made maybe since I've been covering them. I mean, they all sort of felt like they ought to have, they should have stopped buying assets.

They were doing so, Tyler, incredibly through March, a time which was the same month that they reversed course. They had a plan to do something and they wanted to be, I guess the only excuse you could give is they wanted to follow through with their plan to do something through March. They did so and then they reversed course almost automatically. It's part of the reason they have to be a little more firm now in terms of raising rates, probably why they're doing 50s now. they probably should have stopped. Powell made a pivot a little bit late, not crazy late in November. You could argue maybe he should have done it in September, but you could say he still had a COVID crisis to deal with back.

If you remember, there was another outbreak. Okay. So he was a little late in the rhetorical pivot, but he was much too late in terms of the pivot when it came to buying or stopping the purchase of assets in QE. Let me just say real quickly, Tyler, when all is said and done, I hate to do something too quickly after a statement.

becomes out. We're now, you know, 11 minutes after a lift off here. And I see very little change here in the Fed Fund's futures market outlook. I'm still seeing them price in for 50 basis point rate hikes through September, which means you get to that sort of nebulous neutral rate of two and a quarter, two and a half by the September meeting. There's maybe something less of a chance of a 75 basis point rate hike built in, maybe a little bit that came off the boil, but not entirely. It's still 35% for June or July. So I happen to think that this is exactly what Powell wanted. He set the market up for this report or this, these actions. He gave it to them. And the market at the moment seems to be kind of even and flat on getting exactly what Powell told us we were going to get. On that note, Rick Santelli, a final thought from you here. The 10 year, which initially dropped about five basis points on the statement is a little bit higher again. We've 297, 298, that range. What are you watching? You know, I am watching the Tuesday 10 spread. It's just the easiest way to kind of handicap what's going on on the shorter maturities

that have been more aggressive in the rate increases because they're more closely tied to the Fed overnight rate. And the long end, of course, has a variety of issues. A, investors like to buy higher yielding instruments, even if they're not necessarily in positive, real rate territory. And, of course, we have this notion that the long end is going to be our canary in the coal mine, so to speak, whether the recession, which is caused by inflation and bad policies and mistakes, not by raising rates, which is actually the medicine. And I think that by watching that, if we get around zero, that's not going to be a very good thing. And if we see a bit of steepening, I think that would be a better thing.

All right. There's the 2's 10 spread just under 20 basis points. And big thanks to our panel, everybody. We really appreciate your thoughts, your reaction, your analysis of this hour. our Mona, Jim, Rick, Bob, and David Kelly, and of course, our Steve Leasman. You don't see him in the picture there because he's going over to ask some questions to Jay Powell at 2.30 when the press conference starts. Coming up here, we have more analysis and reaction to the decision from a former governor who's been critical of the central bank, plus Ed Yardini on the potential still for a soft landing for markets and the economy.

We're just moments away from this market-moving press conference with Fed Chair Jay Powell. Keep it right here. All right, welcome back, everybody. The Fed raising interest rates by 50 basis points, a half percentage points in Laban's terms. And detailing more on the balance sheet runoff. This is what the market's kind of expected, but we're still waiting to hear from Chair Powell, which we will in about 13 minutes time. Here now to react as former Fed Governor Robert Heller and Ed Yardini, president of Yardini Research. Welcome both of you. We're glad to have you here. Mr. Heller, I'm struck by something in my notes where you say that really to get inflation, tamed, the Fed fund rate needs to be positive, i.e. above the inflation rate, which would put it at something like 7 or 8 percent. That would spell recession or maybe even worse, wouldn't it?

Well, both boom times as well as the recession times can cause high interest rates. If we're in a big boom, if we have a lot of inflation, interest rates will be high. But at the present time, the Federal Reserve has to step on the brakes and actually slow down the economy. And therefore, we've got to have positive real rates. And that means a much, much higher Fed funds rate than we have at the present time. So you would like to have seen them raised by how much today? A point? Two points?

What? Yeah, the more, the better. You know, they should have raised a long time ago. Now they're behind the curve. and they're in a box, they have to raise it very high. They're talking about 50 basis point steps, but that will not stop inflation for a long time to come. So, Ed, I don't know whether you agree with Robert or you disagree,

but I do know in my notes that you say a lot of people are asking you, so why not just do it, get it, go more aggressively sooner and take the rate to where you think you're going to be able to effectively slow inflation. and do it fast? Right. Well, to your first question, I am in an opposite camp. I think that two and a half to three percent of the Fed funds rate is going to slow the economy down enough

to help bring inflation down. Inflation isn't totally a monetary phenomenon. That's something we've learned over the past 10-plus years. The Fed is, remember when the Fed tried to bring inflation up to 2% with very easy money and couldn't do it? There are other factors at work operating on inflation. And I think the supply chain disruptions is certainly an issue, which will get increasingly resolved. We've really had a tremendous inflation led by consumer durable goods, use car prices, new car prices, appliances, betting.

I mean, these things just don't keep going up at 15 to 20 percent, which is what we've been seeing over the past couple of years. I think they are going to start simmering down. I think we had a demand shock that was stimulated by way too much fiscal. and monetary easing. And now I think we're going to see that the demand for goods is satiated to a large extent. Pentup demand is satiated. We're going to see some strength in services. So I think the Fed is actually going to accomplish a soft landing.

I'm not in the recession cap. And I wonder, though, if this doesn't capture the potential for higher services inflation that's coming. You know, it almost feels like we're going to be in a twin peak situation where we had the good spike. And that was one thing. But how do you get rid once it's embedded? I mean, look at HCA's results the other day. Health services inflation. Look at what everyone from Tupperware to Lyft has said in the past 24 hours about wage inflation.

Sure. Yeah, I think you're making a very good point, a very important point. I think on the services side, the main trouble is going to be on rent. As we know, rent inflation right now is quite elevated. New leases, by some accounts, nationally are up 12 to 15 percent on. a year-over-year basis with a lag of about 12 to 18 months, all those new leases get into the pool of leases, and we'll see that in the CPI. My forecast is that the consumption deflator inflation rate will probably peak within the next few months at 6 to 7 percent. And then I think it's going to come

down to 3, to something like 4 to 5 percent by the second half of the year. So I think we will see a peak. It's still going to be high. And then next year, I think we get down at 3 to 4 percent. and the year after that, 2023, I think we could actually get down to 2%. I think what the markets want to see and what the Fed wants to see is some incredible evidence that we're peaking. We're not going to go back to 2% anytime soon. I think that's pretty obvious to everybody. I'm going to ask the esteemed Mr. Heller to respond to the esteemed Mr. Yardini,

who seems to feel like 2.5% on the Fed's fund rate is going to do the job in slowing the economy and slowing inflation. You disagree. You think those rates need to be three times as high. I totally disagree. As you keep pouring more liquidity into the bathtub, the water level rises. And that will lift all prices of all the commodities of all the ships afloat. Inflation will continue to increase.

You've got to get the money supply much, much lower. At the present time, it's growing at over 10 percent after having grown. 25% in 2020 and 21. So there's tons of liquidity, and we see that liquidity work and it's way through. I'm an old man. I've been there in the 70s and in the early 80s, and it will not end pretty. Ed, go ahead. And also inject some advice for investors here, because from what you're saying, it sounds like they can just kind of relax and all will be well. Well, all will not necessarily be well, but I think there's way too much pessimism out there. And I think there are lots of analogies between the inflation now in the 1970s, but one of the

huge differences is productivity collapsed during the 1970s. This time around, I think we're going to see productivity really pick up. Productivity growth actually bottomed on a cyclical basis back in 2015 at 0.5%. It's already up to 2%. I think it's heading up to 4.4.5%. I think it's heading up to four, four and a half percent, which is what we've seen in previous productivity cycle booms. The reason for that is a shortage of labor. And companies, I think increasingly are going to scramble to increase the productivity of labor. In terms of investing, I think it's too late to panic.

I certainly wouldn't be selling here. You know, probably made a lot more sense at the beginning of the year if you saw all these things coming. But look, it's very hard to call corrections. And I think this is still a correction. You have to call both the top and the bottom. And right now, a lot of people who might have take some credits for calling the top, I think, are going to miss the bottom. I want to get a quick final thought from Mr. Heller.

One of the things that worries me is that I'm not sure we've seen the top inflation in such things as fertilizer, wheat, corn, and natural gas because of the war in Ukraine. What say you? I fully agree with you. Those are contributing factor, but the essential factor is the excessive monetary expansion. And the Federal Reserve never talks about money. What's monetary policy without looking at money? That's my question. All right, Mr. Heller, thank you very much.

Ed Yardinney, great to see you, sir. Always a pleasure. We can't keep up with these markets, by the way. Just a moment ago, the S&P and NASDAQ had turned negative. Now the S&P's back positive. The Dow's up 100 points, where it looked for a second. like it might go lower. It tells you just how jumpy we are ahead of hearing from Fed Chair Jay Powell. His press conference begins in just about five minutes time. We'll bring it to you with

some last minute analysis and set up next. Welcome back, everybody, two and a half minutes away from hearing from Fed Chair Jay Powell himself, his first in-person press conference since January of 2020 after the biggest rate hike in two decades. Quick check back on the markets as we get set up for that shows they're all back in positive territory. We've had some pretty big moves here. Just two minutes ago, the Dow was up 40 points. Now it's up 270. So these are session highs. The S&P up 27, the NASDAQ up 24. There is a lot of trading going on. I bet a heck of a lot of it is algorithmic trading, probably machine-oriented trading. As you see there, the spread between the two-year and the tenure, about 20 basis points or thereabouts. Let's go

to Bob Pisani as we wrap up this abbreviated edition of Power Lunch before we hear from the chair. Talk to us, Bob. Tyler, we're just about where we started, maybe 10 points higher in the S&P. There's two problems for the markets right now. First, it wants to be convinced that Powell can engineer a soft landing, but it doesn't really believe it because it knows that Powell has to maintain the inflation fighting credibility, and so leave the possibility even more aggressive rate hikes are on the table. That's going to keep people on edge.

The second problem is the Fed is not going to be deterred by this argument that inflation might be peaking in March in April. Powell said earlier at various roundtables, we don't know if inflation is going to be peaking right now, and we cannot count on that. And because of that, you're going to see people who are going to be out there arguing, well, the market's, the inflation's peaking, therefore the Fed's going to back off. Powell has already said we can't do that. We can't rely on that. We have to make sure that we're fighting inflation. So the Fed's credibility is really at stake here, and that's why I think he's not going to take more aggressive rate hikes off the table at the 2.30 meeting. And that's going to be the first question anybody is going to be asking him.

Guys? Remarkable to see stocks jumping, breaking out really towards session highs. We should check on the financials, some of the other key sectors as well. Give us a little bit of that flavor. Dow up 240, S&P up 24, NASDAQ, which had been the big lagger today, up 15. And there are the financials. They're up about three quarters of 1%. All right. We're waiting for Fed Chair Powell to approach the podium down in Washington. This, I think, is going to be a live press conference. For the first time in a very long time, our Steve Leesman is in the audience, in the room down there, and as we get ready to see what he says, and there is the room. And there I can tell you that is Steve Leasman's head.

Right there, and there is the chair. Good afternoon. It's nice to see everyone in person for the first time in a couple of years. Before I go into the details of today's meeting, I'd like to take this opportunity to speak directly to the American people. Inflation is much too high, and we understand the hardship it is causing, and we're moving expeditiously to bring it back down. We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses. The economy and the country have been through a lot over the past two years and have proved resilient. It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all.

From the standpoint of our congressional mandate to promote maximum employment and price stability, the current picture is plain to see. The labor market is extremely tight and inflation is much too high. Against this backdrop, today the FOMC raised its policy interest rate, by a half percentage point, and anticipates that ongoing increases in the target rate for the federal funds rate will be appropriate. In addition, we are beginning the process of significantly reducing the size of our balance sheet. I'll have more to say about today's monetary policy actions after briefly reviewing economic developments.

After expanding at a robust 5.5 percent pace last year, overall economic activity edged down in the first quarter. The underlying momentum remains strong, however, as the decline largely reflected swings in inventories and net exports. Two volatile categories whose movements last quarter likely carry little signal for future growth. Indeed, household spending and business-fixed investment continued to expand briskly. The labor market has continued to strengthen and is extremely tight. Over the first three months of the year, employment rose by nearly 1.7 million jobs. In March, the unemployment rate hit a post-pandemic and near five-decade low of 3.6 percent.

Improvements in labor market conditions have been widespread, including for workers at the lower end of the wage distribution, as well as for African Americans and Hispanics. Labor demand is very strong, and while labor force participation has increased somewhat, labor supply remains subdued. Employers are having difficulties filling job openings, and wages are rising at the fastest pace in many years. Inflation remains well above our longer-run goal of 2%. Over the 12 months ending in March, total PCE prices rose 6.6%.

Excluding the volatile food and energy categories, core PCE prices rose 5.2%. Aggregate demand is strong, and bottlenecks and supply constraints are limiting how quickly production can respond. Disruptions to supply have been larger and longer lasting than anticipated, and price pressures have spread to a broader range of goods and services. The surge in prices of crude oil and other commodities that resulted from Russia's invasion of Ukraine is creating additional upward pressure on inflation. And COVID-related lockdowns in China are likely to further exacerbate supply chain disruptions as well. Russia's invasion of Ukraine is causing tremendous loss and hardship,

and our thoughts and sympathies are with the people of Ukraine. Our job is to consider the implications for the U.S. economy, which remain highly uncertain. In addition to the effects on inflation, the invasion and related events are likely to restrain economic activity abroad and further disrupt supply chains, creating spillovers to the U.S. economy through trade and other channels. 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, especially on 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're strongly committed to restoring price stability. Against the backdrop of the rapidly evolving economic environment, our policy has been adapting, and it will continue to do so. At today's committee meeting, the committee raised the target range for the federal funds rate by a half percentage point and stated that it anticipates that ongoing increases in the target range will be appropriate. We also decided to begin the process of reducing the size of our balance sheet, which will

play an important role in firming the stance of monetary policy. We are on a path to move our policy rate expeditiously to more normal levels, assuming that economic and financial conditions evolve in line with expectations. There is a broad sense on the committee that additional 50 basis point increases should be on the table at the next couple of meetings. We'll make our decisions meeting by meeting as we learn from incoming data and the evolving outlook for the economy. And we will continue to communicate our thinking as clearly as possible. Our overarching focus is using our tools to bring inflation back down to our 2% goal.

With regard to our balance sheet, we also issued our specific plans for reducing our securities holdings. Consistent with the principles we issued in general, January, we intend to significantly reduce the size of our balance sheet over time in a predictable manner by allowing the principal payments from our securities holdings to roll off the balance sheet, up to monthly cap amounts. For Treasury securities, the cap will be $30 billion per month for three months and will then increase to $60 billion per month. The decline in holdings of Treasury securities under this monthly cap will include Treasury coupon securities and to the extent that coupon securities are less than the monthly cap, Treasury bills. For agency mortgage-backed securities, the cap will be $17.5 billion per month for three months and will then increase the $35 billion per month. At the current level of mortgage rates, the actual pace of agency MBS runoff would likely be less than this monthly cap amount.

Our balance sheet decisions are guided by our maximum employment and price stability goals, and in that regard, will be prepared to adjust any of the details of our approach in light of economic and financial developments. Making appropriate monetary policy in this uncertain environment requires a recognition that the economy often evolves in unexpected ways. Inflation has obviously surprised the upside over the past year, and further surprises could be in store. We therefore will need to be nimble in responding to incoming data and the evolving outlook, and we will strive to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain time. We are highly attentive, attentive to inflation risks.

The committee is determined to take the measures necessary to restore price stability. The American economy is very strong and well positioned to handle tighter monetary policy. 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. Nick Tamarosa, the Wall Street Journal. Chair Powell, the unemployment rate at 3.6% in March is now essentially at the level that the committee had expected would prevail over the next three years,

and at the bottom end of FMC participants' projections for the longer run rate that you submitted in the projections at the last meeting. How has your outlook for further to declines in the unemployment rate changed since March. What does this imply for your inflation forecast and how has your level of confidence changed with regard to the feasibility of slowing hiring without pushing the economy into recession? Thanks. Thank you. So you're right, 3.6% unemployment is just about as low as it's been in 50 years. And I would say that I expect, and and committee members generally expect that we'll get some additional participation. So people will be coming back into the labor force.

We've seen that, particularly among prime age people. And that will, of course, tend to hold the unemployment rate up a little bit. I would also expect, though, that job creation will slow. Job creation has been at, you know, more than a half a million per month, in recent months, very, very strong, particularly for this stage of the economy. And so we think with fiscal policy less supported, with monetary policy, less supportive, we think that job creation will slow as well. So it is certainly possible that the unemployment would go down further.

But so I would expect those to be relatively limited because of the additional supply and also just the slowing in job creation. Implications for inflation, really the wages matter a fair amount for companies, particularly in the service sector. Wages are running high, the highest they've run. high, the highest they're running quite some time. And they are one good example of, or good illustration really, of how tight the labor market really is. The fact that wages are running at the highest level in many decades. And that's because of an imbalance between supply and demand in the labor market.

So we think through our policies, through further healing in the labor market, higher rates, for example, of vacancy filling and things like that, and more people coming back in. We like to think that supply and demand will come back into balance and that they're for wage inflation will moderate to still high levels of wage increases, but ones that are more consistent with 2% inflation. That's our expectation. Your third question was... Your level of confidence that you can slow hiring without pushing the economy into a downturn. So I guess I would say it this way. There's a path. There's a path by which we would be able to have demand

moderate in the labor market and and have therefore have vacancies come down without unemployment going up because vacancies are at such an extraordinarily high level there are 1.9 vacancies for every unemployed person 11 and a half million vacancies six million unemployed people so and we haven't been in that place on the vacancy you know sort of the vacancy unemployed curve the beverage curve we haven't been at that sort of level of of of a ratio in the modern area So in principle, it seems as though by moderating demand, we could see vacancies come down, and as a result, and they could come down fairly significantly, and I think put supply and demand at least closer together than they are, and that that would give us a chance to have lower, get to get inflation down, get wages down and then get inflation down without having to slow the economy and have a recession and have unemployment rise materially. So there's a path to that. Now, I would say I think we have a good chance to have a soft or soft-ish landing or outcome, if you will. And I'll give you a couple reasons for that. One is households and businesses are in very strong financial shape. You're looking at, you know, excess savings on balance sheets excess in the sense that they're substantially larger than the prior trend. Businesses are in good financial shape. The labor market is, as I mentioned, very, very strong. And so it doesn't seem to be anywhere close to a downturn.

Therefore, the economy is strong and is well positioned to handle tighter monetary policy. But I'll say, I do expect that this will be very challenging. It's not going to be easy. And it may well depend, of course, on events that are not under our control. But our job is to use our tools to try to achieve that outcome, and that's what we're going to do. Steve Leasman, CNBC. Thanks for taking my question, Mr. Chairman. You talked about using 50-bases-point rate hikes or the possibility of them in

coming meetings. Might there be something larger than 50? Is 75 or a percentage point possible? And perhaps you could walk us through your calibration. Why one month should we, or one meeting should we expect a 50? Why something bigger? Why something smaller? What is the reasoning for the level of the amount of tightening? Thank you. Sure. So 75 basis point and an increase is not something the committee is actively considering. What we are doing is, we raised 50 basis points today and and we've said that again assuming that economic and financial conditions evolve in in ways that are consistent with our expectations there's a broad sense on the committee that additional 50 basis increases should be on 50 basis points should be on the table for

the next couple of meetings so we're going to make those decisions at the meetings of course and we'll be paying close attention to the incoming data and the evolving outlook as well as to financial conditions and and finally of course we will be communicating to the public about what our expectations will be as they evolve. So the test is really just, as I laid it out, economic and financial conditions evolving broadly in line with expectations. And, you know, I think expectations are that we'll start to see inflation, you know, flattening out and not necessarily declining yet, but we'll see more evidence. We've seen some evidence that the core PCE inflation is perhaps either reaching a peak or flattening out. We'll want to know more than just some evidence.

to want to really feel like we're making some progress there. But, I mean, we're going to make these decisions, and there will be a lot more information. I just think we want to see that information as we get there. It's a very difficult environment to try to give forward guidance 60, 90 days in advance. There are just so many things that can happen in the economy and around the world. So, you know, we're leaving ourselves room to look at the data and make a decision as we get there. I'm sorry, but if inflation is lower, one month and the unemployment rate higher, would that be something that we would

calibrate towards a lower increase in the funds rate? I don't think a one month. One month is not at now. No, one month's reading would not, it doesn't tell us much. You know, we'd want to see evidence that inflation is, is moving in a direction that gives us more comfort. As I said, we've got two months now where core inflation is a little lower, but we're not looking at that as a reason to take some comfort. You know, I think we need to really see that our expectation is being fulfilled, that inflation, in fact, is under control and starting to come down. But again, it's not like we would stop. We would just go back to 25 basis point increases. It'll be a judgment call

when these meetings arrived. But my, again, our expectation is if we see what we expect to see, then we would have 50 basis point increases on the table at the next two meetings. Thank you. Colby Smith from the Financial Times. Given the expectation that inflation will remain well above the Fed's target at year end, what constitutes a neutral policy setting in terms of the Fed funds rate? And to what extent is it appropriate for policy to move beyond that level at some point this year? So neutral. When we talk about the neutral rate, we're really talking about the rate

that neither pushes economic activity higher nor slows it down. So it's a concept, really. it's not something we can identify with any precision. So we estimate it within broad bands of uncertainty. And the current estimates on the committee are sort of 2 to 3%. And also, that's a longer run estimate. That's an estimate for an economy that's at full employment and 2% inflation. So really what we're doing is we're raising rates expeditiously to what we see as the broad range of plausible levels of neutral.

But we know that there's not a bright line drawn on the road that tells us when we get there. So we're going to be looking at financial conditions, right? Our policy affects financial conditions and financial conditions affect the economy. So we're going to be looking at the effect of our policy moves on financial conditions. Are they tightening appropriately? And then we're going to be looking at the effects on the economy. And we're going to be making a judgment about whether we've done enough to get us on a path to restore price stability. It's that.

So if that path happens to evolve levels that are higher than estimates of neutral, then we will not hesitate to go to those levels. We won't. But again, there's a sort of false precision in the discussion that we as policymakers don't really feel. You're going to raise rates and you're going to be kind of inquiring how that is affecting the economy through financial conditions. And of course, if higher rates are required, then we won't hesitate to deliver them. Thanks, Trapal, Neil Irwin, with Axios. Do you see evidence that inflationary psychology is changing that in areas like workers wage demands, businesses willingness to raise prices, do you see evidence that there is a psychological shift going on on inflation?

Thanks. We don't really see strong evidence of that yet, but that does not in any way make us comfortable. I think if you see, look at short-term inflation expectations, they're quite elevated, and you can look at that and say, well, that's because people expect inflation to come down. In fact, inflation expectations come down fairly sharply. Longer-term inflation expectations have been reasonably stable, but have moved up to, but only to levels where they were in 2014 by some measures. So you can look at that, and I think that's a fair description of the picture, but it's really about the risks.

We don't see a wage price spiral. We see that companies have the ability to raise prices, and they're doing that, but there have been price shocks. So I just think it takes you back to the basic point was that we know we need to expeditiously move our policy rate up to ranges of more normal, neutral levels, and we need to look around and keep going if we don't see that financial conditions have tightened adequately or that the economy is behaving in ways that suggest that we're not where we need to be. So, again, you don't see those things yet, but I would say there's no basis for fueling. comfortable about that. It's a risk that we simply can't, we can't, we can't run that risk. We can't allow a wage price spiral to happen, and we can't allow inflation expectations to become unanchored. It's just something that we can't allow to happen, and so we'll look at it that way.

Thanks, Gina. Great. Thanks, Chair Powell. Gina Smilke with The New York Times. You mentioned in the statement both the upside risks to inflation from Russia and China. Obviously, those are very much supply chalks rather than demand side. And I wonder what you meant to convey by adding them. I wonder what you meant to convey by adding those. Well, so we, our tools don't really work on supply shocks. Our tools work on demand.

And to the extent we can't affect really oil prices or other commodity prices or food prices and things like that. So we can't affect those. But there's a job to do on demand. And you can see that in the labor market where demand is substantially in excess of supply. of workers, and you can see it in the product markets as well. But I guess I'm just pointing out that a couple of things. For both the situation in Ukraine and the situation in China, they're likely to both add to headline inflation, and people are going to be suffering from that.

People don't, people almost suffer more from food and energy shocks then, but even though they don't actually tell us much about the future path. So the second thing is that they're both capable of. preventing further progress in supply chain, in supply chains healing. And so, or even making supply chains temporarily worse. So they're not, they're going to, they're going to weigh on the process of supply, of global supply chain healing, which is going to affect broader inflation, too. So they're, in a way, there are two further negative shocks that have hit really in the last, you know, 60 days, 90 days.

Victoria. Hi, Victoria Guida from Politico. I want to follow up on that because you all have obviously highlighted that there are both supply and demand issues at play and inflation. And I'm just wondering, you know, if these supply chain issues continue

because of Russia, because of China, or just because these things take a while to work out, does getting back down to your 2% mandate require that these supply chain issues get resolved since you can only handle the demand side, as you said, or will you have to crimp demand maybe even further if the

supply chain issues don't resolve themselves in order to try and get inflation back down to where you want it to be? So, you know, I'll just say for now, we're focused on doing the job we need to do on demand, and there's plenty to be done there. Again, if you look at it's essentially almost two-to-one job vacancies to unemployed people. There's a lot of excess demand. There are more than five million more employed plus job openings than there are the of the labor force. So there's an imbalance there that we have to do our work on.

Very difficult situation. If you can't, you know, you would look at core inflation, which wouldn't include the commodity price shocks. And, you know, we would, that's one of the reasons we would tend to focus on that because we can, we can have more of an effect on that. But it would be a very difficult situation. I mean, we have to be sure that inflation expectations remain anchored. And I mean, that's part of our job. too. So we'd be watching that carefully. And that does, it puts any central bank in a very difficult situation. Howard Schneider with Reuters and thanks and nice to be back. So two questions, one quick

one. You cited the 1.9 to one figure so often now I got to ask you, what would be a good figure there? What would you like to see that come down to to think that you're sort of a non-inflationary vacancy to unemployed rate? And secondly, on help from inflation, how much are you counting on wealth effects through stock market channels? markets broadly down quite a bit since late fall first of the year. How are you mapping that into household consumption? Have they come down enough? Do you need another leg down in equity values to think that households are going to stop spending at the rate you need them to stop spending? Okay, so in terms of the vacancies to unemployment ratio, we don't have a goal in mind. There's no

specific number that we're saying we've got to get to that. It's really you've got to get to a place where the labor market appears to be more in balance. And that depends not only on the level of those things. It also depends on how well the matching function in the labor markets are working. Because the longer these expansions go on, you can get very efficient with all of that. And the beverage curve shifts out, and that also tends to help. So there isn't a specific number. I will say we were at, you know, I think when we got to one-to-one in the late teens,

we thought that was a pretty good number. But again, we're not shooting for any particular number. What we'd like to see is progress, but we're not really looking at that. That's not, that's an intermediate variable. We're looking at wages, and we're looking at ultimately inflation. So, you know, there are a bunch of channels through which policy works. You can think of it as, you know, introsensitive spending. And then you can think of another big one as asset values broadly.

And, you know, there are big models with a lot of, you know, a lot of different channels that are related to that. We don't focus on any one market, the equity market, or the housing market, or we focus on financial conditions broadly. So we wouldn't be targeting any one market, as you suggest, for going up or down, or taking a view on whether it's at a good level or a bad level. We just would be looking at very broad measures of financial conditions, all the different financial conditions indexes, for example, which include equity, but they also include debt and many other things, credit spreads, things like that too. Hi, Chair Powell, Rachel Siegel here from the Washington Post. To follow up from your message from the very beginning, what is your message to the American people about when they will start to feel the effects of, say, a 50 basis point rate hikes or multiple hikes?

How do you explain to them what that does to their grocery bill or their rent or their gas bill? Thank you. So the first thing to say is that we understand, and some of us are old enough to have lived through high inflation, and many aren't, but it's very very. It's very unpleasant. It's just something people don't, when they experience it for the first time, you're paying more for the same thing. If you're a normal economic person, then you're probably don't have that much extra, you know, to spend, and it's immediately hitting your spending on groceries, on, you know, on gasoline, on energy and things like that. So we understand the pain involved. So how do you, how do you get out of that? And the only, we, we, we, we, we, It's our job to make sure that inflation of that unpleasant, high nature doesn't get entrenched in the economy.

That's what we're here for. One of the main things we're here for, perhaps the most fundamental thing we're here for. And the way we do that is we try to get supply and demand back in sync with each other out of in balance, back in balance, so that the economy is under less stress and inflation will go down. Now, the process of getting there involves higher rates. So higher mortgage rates, higher borrowing rates, and things like. that. So it's not going to be pleasant either. But in the end, everyone is better off, everyone, particularly people on fixed incomes and at the lower part of the income distribution

are better off with stable prices. And so we need to do everything we can to restore stable prices. We'll do it as quickly and effectively as we can. We think we have a good chance to do it without a significant increase in unemployment or, you know, really sharp slowdown. But ultimately, we think about the medium and longer term, and everyone will be better off if we can get this job done. The sooner the better. Thank you, Chair Powell. Edward Lawrence with the Fox Business Network.

So you've talked in the past about consumer spending and how that's driving, drives the economy. Are you concerned with this high-level inflation that the consumer will stop spending, pushing us into, and what's the level of your concern, pushing us into a recession? So the economy is doing fairly well. We expect growth to be solid this year. And we see household spending and business investment as fairly strong,

even in the first quarter, which was relatively slow on some other fronts. And the labor market. If you look at the labor market, for people who are out of work and looking, There are lots of job opportunities for wages are moving up at rates that haven't been seen in quite a long time. So it's a very, it's a good time to be a worker looking to, you know, either change jobs or get a wage increase in your current job. So it's a strong economy. And nothing about it suggests that it's that it's close to or vulnerable to a recession. Now, of course, given events around the world and fading fiscal policy effects and higher

rates, you could see some slower economic activity. Certainly it will not be. Last year was an extraordinarily strong growth year as we recovered from the pandemic, as I mentioned, growth over 5%. But most forecasters have growth this year at a, you know, at a solid pace above 2%. But we've talked with economists who have advised Democrats and Republican presidents, who both said that the Fed is so far behind the curve on inflation, that a recession is inevitable. And as I said, I think we have a good chance to restore price stability without a recession, without a severe downturn and without materially high unemployment. And I mentioned the reasons for that.

So I see a strong economy now. I see a very strong labor market, for example. Businesses can't find the people to hire. They can't find them. So typically in a recession, you would have unemployment. Now you have surplus demand. So there should be room, in principle, to reduce that surplus demand without putting people out of work. The issue will come that we don't have precision surgical tools.

We have essentially interest rates, the balance sheet, and forward guidance. And they're famously blunt tools. They're not capable of surgical precision. So I would agree. No one thinks this will be easy. No one thinks it's straightforward. But there's certainly a plausible path to this. And I do think we've got a good chance to do that.

And, you know, our job is not to rate the chances. It is to try to achieve it. So that's what we're doing. There are a range of opinions, though, and that's only appropriate. Steve, Dorsey. Thanks, Steve Dorsey, CBS. You mentioned earlier just now, fading fiscal policy. Do you feel that the Fed has been supported enough from policies at the White House

and in Congress in combating inflation? You know, we, it's really the Fed that has responsibility for price stability. And we, you know, we take whatever arrives at the Fed in terms of fiscal activity, we take it as a given, we don't evaluate it. We don't, it's not our job, really. We don't have an oversight function there. And we look at it as our job to what, given all the factors that are happening, to try to sustain maximum employment and price stability. So if Congress or the administration has ways to help with inflation, I would encourage that, but I'm not going to get into making recommendations or anything like that.

It's really not our role. We need to stay in our lane and do our job. When we get inflation back under control, then maybe I can give other people advice. Right now we need to just focus on doing our job, and I'll stick to that. Stick in our lane. Steve Matthews with Bloomberg News. A number of your colleagues have said that rates will need to go above neutral into a restrictive territory to bring down inflation.

One, do you agree with that? And two, you've recently spoken great praise of Paul Volker, who had the courage to bring inflation down with recessions in the 1980s. And while it's certainly not your desire and the soft landing is the, is the, is the, the, big hope of everyone, would this FOMC have the courage to endure recessions to bring inflation down if that were the only way necessary? So I think it's certainly possible that we'll need to move policy to levels that we see as restrictive as opposed to just neutral.

We can't know that today. That decision is not in front of us today. If we do conclude that we need to do that, then we won't hesitate to do it. But I'll say again, there's no bright line that you're stepping over. You're really looking at what our policy stance is and what the market is forecasting for it. You're looking at financial conditions and how that's affecting the economy and making a judgment. We won't be arguing about whose model of the neutral rate is better than the other one. It's much more about a practical application of our policy tools.

We're absolutely prepared to do that. Wouldn't hesitate if that's what is taken. So I am, of course, who isn't an admirer of Paul Volcker. I shouldn't be singled out in this respect, but I knew him just a little bit and have tremendous admiration for him. But I would phrase it this way. He had the courage to do what he thought was the right thing. That's what it was. It wasn't that he wasn't a particular thing.

It was that he always did. He always did what he thought was the right thing. If you read his last autobiography, that really comes through. So that's the test, is it isn't, will we do one, particular thing. I would say we do see, though, we see restoring price stability as absolutely essential for the country in coming years. Without price stability, the economy doesn't work for anybody, really. And so it's really essential, particularly for the labor market. If you think about it, if you look at the last cycle, we had a very, very longest expansion cycle in our recorded history.

And in the last two, three years, you had the benefits of this tight labor market going to people in the lower quartiles. And it was, you know, racial wealth and income, not wealth, but income gaps were coming down, wage gaps. So it's a really great thing. We'd all love to get back to that place. But to get back to anything like that place, you need price stability. So we've been, basically, we've been hit by historically large inflationary shocks since the pandemic. It's not, this isn't anything like, regular business. This is, we have a pandemic, we have the highest unemployment, you know, since the depression. Then we have this outsized response from fiscal policy and monetary policy. Then we have inflation. Then we have a war in Ukraine, which is cutting the commodity, you know, patch in half. And now we have these shutdowns in China. So it's been a series of inflationary shocks that are really different from anything people have seen in 40 years. So we have to look through that and and look at the economy that's coming out the other side, and we need to somehow find price stability out of this. And it's obviously going to be very challenging, I think, because you do have, you know, numerous supply shocks,

which are famously difficult to deal with. So I guess that's how I think about it. Chris Ruegaver. Thank you. Chris Ruegaver and Associated Press. Earlier, you just said that if necessary, I think, were the words, that you would, or if it, if it turned out to be necessary, or you said it's possible that we'll need to move policy to restrictive levels. Given where inflation is and the hot economy is, or certainly the hot labor market, as you described it, why still the hesitation? I mean, shouldn't it be, what else do you need to see in order to determine that?

Wouldn't the Fed naturally be looking to go to a restrictive level at this point? Thank you. So I didn't, if I said necessary, I meant to say appropriate. We're not going to be erecting a high barrier for this. It's more if we think it's appropriate. You know, the point is we're a very long way from neutral now. We're moving there expeditiously and we'll continue to do so. And we don't have to make, we can't make that decision really today. The decision for about how high to go will get, we'll be on the table to be made when we reach neutral. And, you know, I expect we'll get there expeditiously, as I've mentioned.

So it's not that we're not, we don't want to make, making that decision today wouldn't really mean anything. But I'll say again, if we do believe that it's appropriate to go to those levels, we won't hesitate. Mike McKee from Bloomberg Television and Radio. The balance sheet, why did you decide to wait until June 1st to begin letting securities roll off and not immediately start in the middle of this month, say, And do you have another, a newer or a better estimate for the monetary policy impact of letting the balance sheet decline? And then finally, I'm just curious why you felt the need to address the American people at the top of your remarks. Are you concerned about Fed credibility with the American people? So why June 1 it was just pick a date, you know, and that happens to be, that happened to be the date that we picked.

It was nothing magic about it. We, you know, it's not going to have any macroeconomic significance over time. We just picked that. That's, we sometimes we publish these calendars on the first day of the month, and that's what we're doing. I wouldn't read anything into it. In terms of the effect, I mean, I would just stress how uncertain the effect is of shrinking the balance sheet. You know, we, you, we run these models and everyone does in this field and make estimates of what will be the, how do you, how do you, how do you, you, um, we run these models and everyone does in this field in this field and make estimates of what will be the, how, how do you, how do you, how do you, measure, you know, a certain quantum of balance sheet shrinkish compared to quantitative easing.

And, you know, these are very uncertain. I really can't be any clearer. There won't be any clearer. You know, people estimate that broadly on the path we're on, and this is, this will be taken probably too seriously, but sort of one quarter percent, one rate increase over the course of a year at this pace. But I would just say with very, with very, wide uncertainty bans, very wide. We don't really know. There are other estimates that are much smaller than that, by the way, and some of you may have read about that. That's kind of a mainstream estimate. We know that it does, that it is part of returning to more normal and more neutral financial conditions. And, you know, our strategy is to set up a plan and have it operate

and really have the interest rate be the active tool of monetary policy. In terms of speaking to the American people, so I feel like sometimes I just want to remind us, really, that that's who we work for and that it's inflation that people are feeling all over the country. And it's very important that they know, that we know how painful it is and that we are working hard on fixing it. I thought it was quite important to do that. And so that was really the thinking behind that. Do you think the Fed has a credibility problem? No, I don't.

And a good example of why would be that so in the fourth quarter of last year, as we started talking about tapering sooner and then raising rates this year, you saw financial markets reacting very appropriately, not to bless any people. particular day's measure, but the way financial markets, you know, the forward rate curve has tightened in response to our guidance and our actions really amplifies our policy. I mean, it's monetary policy is working through expectations now to a very large extent. We've only done two rate increases, but if you look at, if you look at financial conditions, the two years, the two years at 280 now in September, I think it was at 20 basis points.

And that's all through the economy. People are feeling those higher rates already. And so that shows that the markets think that our forward guidance is credible. And I think that's, we want to keep it that way. Hi there. Brian Chung with Yahoo Finance. To expand on Steve's question about Paul Volker, there was also a great pain that came with that as well, higher interest rates, obviously affecting households and businesses,

and wondering how you kind of square what might be demand. destruction? Are you already seeing that? Is the idea here to incentivize a lack of spending to decrease consumption to perhaps table business investments? Is that essentially what's happening through this hiking cycle? Thanks. Well, so as I mentioned, you can see places where whether demand is substantially in excess of supply and what you're seeing as a result of that is prices going up at unsustainable levels, levels that are not consistent with 2% inflation. And so what our tools do is, as we read it, raise interest rates, demand moderates, and it moves down. Interest rates, you know, businesses will invest a little bit less,

consumers will spend a little bit less. That's how it works. But ultimately, getting supply and demand back, you know, back in balance is what gives us 2% inflation, which is what gives the economy a footing where people can lead successful economic lives and not worry about inflation. I mean, so, yes, there may be some pain associated. with getting back to that. But, you know, the big pain is in not dealing over time, is in not dealing with inflation, and allowing it

to become entrenched. Thank you. Thank you, Chair Powell. Greg Rob from MarketWatch. I was wondering if you could take a step back and talk about, in March, the dot plot had, you know, steady, look like steady, quarter point rate hikes, get the funds rate up to 2%

the end of the year. Now it seems like you're much more aggressive. So could you talk talk about the thinking that's behind that? Thank you. So look, I think you've, what you've seen is, really, I would say, last fall, in the middle of last fall, there was a time when our policy stance was still pretty much in sync with what the data were saying. If you remember, there were a couple of week jobs reports, and inflation had actually come, month by month inflation had come down until September,

a few months in a row, stayed low. And then around the end of October, we got three or four really strong readings that just said, no. This is a much stronger economy. And by the way, then with the restatement of the jobs numbers, it looked like the job market was much more even and stronger in the second half of the year. But that hadn't happened yet. Anyway, we got an ECI reading, employment compensation index reading the Friday before the November meeting. Then we got a really. really strong jobs report. Then we got a really high CPI report. And so I think it became clear to the committee that we needed to adjust and adapt. And we have ever since then. Really, ever since then,

we've been adapting. We, you know, there were, there were, the committee moved by the time of the December meeting to a median of three rate increases, then to a meeting of seven increases at the March meeting. And that process is going on. And it's clearly continuing. And that's why I say, And I actually mentioned this at the March meeting that no one should look at any single SEP as sort of a real resting place for 90 days because we're in a fast evolving situation. And that's what's happened. You can see unanimous vote today, of course, and I told you the guidance that broad support on the committee to have 50 basis point hikes on the table at the next couple of meetings.

So you're right. And by the way, other forecasters have been doing. doing the same thing. And it's just us adapting to the data and to the situation and using our tools to deal with it. Hi, Nancy Marshall Genser with Marketplace. Chair Powell, I want to ask how you're able to balance your dual mandate, stable prices, and maximum employment, especially when the unemployment rate for black workers is still roughly double, roughly twice the rate for white workers. So unemployment rates for all racial groups have come down a lot and are now much closer to where they were before the pandemic hit.

So that's one thing I would say, and that's important. But the bigger point is this. I do not at this time see the two sides of the mandate as in tension. I don't, because you can see that the labor market is out of balance. You can see that there's a labor shortage. There aren't enough people to fill these job openings, and companies can't hire, and wages are moving up at levels that would not, over time,

be consistent with 2% inflation over time. And, of course, everyone loves to see wages go up, and it's a great thing, but you want them to go up at a sustainable level, because these wages are, to some extent, being eaten up by inflation. So what that really means is to get the kind of, labor market we really want to get. We really want to have a labor market that serves all Americans, especially the people in the lower income part of the distribution, especially them. To do that,

you've got to have price stability. And we've got to get back to price stability so that we can have a labor market where people's wages aren't being eaten up by inflation and where we can have a long expansion, too. That's the good thing as you can have, as we have. We've had several of the longest expansions in U.S. history have been in the last 40 years, and that's because it's been a time of low inflation. And long expansions are good for people and good for the labor market. So that's the way I think about it. I don't, I think we, you know, our tools work, we have to think in the medium and longer term. And I do think that the best thing for everyone is for us to get back to price stability to support really a sustained period of strong labor

market conditions. Thanks very much.