Power Lunch - The Fed Decision 7/27/22

Episode Date: July 27, 2022

The Fed hikes rates by 75-basis points to fight inflation. Stocks didn’t move much when the statement was released but when Chairman Powell also said the central bank could slow the pace of hiking at some point, stocks took off. An all-star panel of experts offered their analysis of the decision and Former Fed Governor Frederic Mishkin weighed in. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

Good afternoon, everybody, and welcome to a very special edition of Power Lunch. I'm Tyler Matheson, along with Kelly Evans. The Fed decision on interest rates just minutes away. The central bank widely expected to hike interest rates by three quarters of a percentage point or 75 basis points in its effort to tame inflation. And ahead of that decision, let's check on where the market stand. Right now, the Dow is down or up, I'm sorry, 106 points. So consistent with the gains we've been seeing throughout the morning, the S&P, 500 is up 1.4%, and the NASDAQ has been leading the way all day long after those better than feared big tech results last night. The NASDAQ up 2.5%. We look at the S&P 500, just about 30 points away from 4,000. We do so as we welcome our guests. David Kelly, chief global strategist at JP Morgan Asset Management, Mona Mahajan, senior investment strategist

at Edward Johns and Jim Karen, a global fixed income portfolio manager at Morgan Stanley, management. Okay, folks, we're going into this. I think everybody is sort of low surprise factor here. Everybody sort of expects three quarters of a point. Let me turn first to David. David, I remember you saying at the last one of these events that the risk of the Fed is in these circumstances moving too late, doing too much, and doing it for too long. Is that still the prime risk the Fed faces? Yes, I mean, the U.S. economy right now is walking a tightrope on the edge of a recession. I don't think GDP tomorrow will be negative, but I think over the course of this year, there'll be virtually no growth at all. And the problem is this Fed is reacting to data as it's coming in. Monetary policies should be forward-looking at what we can see is a cold front is going through in terms of inflation.

Growth is slowing. The Federal Reserve should ease off a bit here. But I think they will go 75 basis points today because they just don't want to move until they actually. see signs of lower inflation. Mona, is the Fed willing to take a recession, mild, something more than that, in order to quash inflation? Yeah, clearly front and center for them right now is this inflation mandate. Until we start to see that data come down, probably two, three, maybe even four inflation readings to the downside. They can't really say that a trend has been established. But to David's point, keep in mind the data we're getting in tomorrow's GDP report and even the earnings are backward looking. The Fed hadn't really tightened into restrictive or even neutral

territory. We hadn't started quantitative tightening. So if we're softening already in anticipation of this Fed, when it does actually tighten, we can see more downside ahead in terms of economic softness and growth. Perhaps the silver lining is though markets have started to anticipate this ahead. Jim, we've got about less than one minute to go. You're the only one in this trio who sees even the remotest possibility of a full point hike from the Fed. What percentage do you put on that possibility? Well, I say it's about 25 percent. I mean, our base case is that they go 75 basis points. I wouldn't rule anything out. The Fed does have to be tough on inflation. So far, sequentially, they haven't seen core CPI or core inflation move down on a month-over-month basis. I think that they are trying to

fight this inflation. The problem is that they're fighting a lagging indicator inflation with a policy tool, raising interest rates that works with a lag. So it's very, very difficult for them to actually time this and get this right. The risk is a recession. The risk is a hard landing. They are willing to go into that territory in order to stop inflation. And I think that is what the markets have to take away. Take the Fed very seriously about fighting inflation. They're not going to give up on this very easily at this point. All right. Folks, we're going to pause right there and go to Steve Leasman now with the Fed decision. Steve. The Federal Reserve hiking interest rates by three-quarters of a percentage point, bringing the funds right now to a range of two and a quarter to two and a half percent.

The Federal Reserve making plain and saying that ongoing increases in the target range will be appropriate in the months ahead. The committee is on track as well to continue reducing its balance sheet. It's at a reduced rate right now, $47.5 billion and route to increasing that by $295 billion a month in the month of September. The Fed downgraded the assessment of the economy. saying it sees softening spending and production out there. It had been more upbeat in the prior report. It still though sees robust job gains and a low unemployment rate, but it also sees elevated inflation,

notes a series of sources from that inflation, supply demand imbalances, higher food and energy prices, and broader price pressures as well. Mentioning, of course, the Ukraine war is a source of inflation, but taking out the idea of the China lockdowns continuing to increase inflation, so that's maybe a source of people. a source of potential optimism there.

And finally, it was unanimous. As to George, who had dissented. Last time, winding, 50 did not dissent this time. A unanimous decision by the Federal Reserve of the hike interest rates by 75 basis points. Tyler. All right, Steve, thank you very much. So that looks like pretty much, Kelly, what we expected to see. Let's go around the panel.

And I'm going to go back to David Kelly and ask you the simple question. Here's another three-quarter point hike. We haven't had back-to-back hikes of that magnitude. As long as I've been in the business of covering financial markets, David, as I recall, I can't remember another time. If so, it must have been the early 80s. But is this the peak rate hike that we're likely to see in this rate hiking cycle, which is not to say we're not going to have more rate hikes,

but do you expect more 75 basis point rate hikes as we move into September, November, December? No, that's exactly the point, Tyler. I think we're seeing peak inflation and peak rate hikes. these two back-to-back 75 basis point rate hikes in June and in July, I think will be the highest rates we get in this cycle. I think in September they can back off to 50 basis points. And the reason for that is I believe both the July CPI number and the August CPI number will be in the range of sort of zero to two-tenths of a percent, much milder inflation coming off the back of these lower gasoline prices in particular.

And I think slower economic growth is a reality by the time you're really. you reach mid-September. So I think next time the Fed raises rates only 50 basis points, but obviously they're still being aggressive right now. Well, pretty muted reactions so far. Bob Bassani and Rick Santelli join us to look at the markets, guys, in this early few moments as we digest it. Rick, let's start with you and remind everybody that the 10-year prior to the Fed's last move six weeks ago was at 3.5 percent. And here we are still sitting around 275 or so. Yeah, and that is the key. If you look at where two, year note rates and 10 year notes were on the 15th, which is when the Fed made its move,

okay, of 75 base points the last time, everything peaked on the 14th. As a matter of fact, if you look, two year note yields right now are down nearly 40 basis points from their 347 high close, and the tens are down over 72 basis points from their high close. Both their high close were the day before the tightening. So the Fed's big 614 was to send a message to the market. The markets have been tightening financial conditions doing the heavy lifting, but something's changed. Since then, the market has eased, has loosened credit conditions pretty much on every level you look at. And that is the quandary right now. Many believe, large institutional traders, that many big hedge funds are going the other way.

they're going along with the Fed, who's supposed to be the big inflation fighter, and they're saying the market moves of late are wrong. They're saying they're wrong. If you look at the Dow, the Dow's up, what, over 5.5% to NASDAQ close to 10% since the 615 meetings. So the real issue here is, if the markets are wrong, then today is a great day to sell and watch everything go down in stocks, and a great day to sell to watch all rates go up. but that doesn't seem to be happening. And the big question is why.

I don't think the markets are wrong. What I think is that everybody's underestimating the recession issues in Europe and the manufacturing deterioration that most likely will happen in Europe. I really do think that the reason our markets are counterintuitively trading has much more to do with the issues outside the U.S. and energy. Does anybody out there really think that, Putin is going to let Germany and Europe stockpile enough to get through the winter. Isn't that the whole point of what he's doing is to make sure that doesn't happen?

I think there's going to be a bumpy ride ahead, especially for Europe. And I think that's why our markets are moving in the wrong direction. So say the big shorts who think the Fed has to be tougher and that this press conference is going to be much tougher because the markets are doing a no-no. They're ignoring what the Fed is. trying to do. All right. That said, we see stocks rallying somewhat from where we were going into the decision. Bob Bassani, let's turn to you a build on that point Rick was making and what else you think traders are talking about. There were no dissents in this decision, by the way.

So a very muted reaction, and I'm looking at technology stocks virtually unchanged since the announcement. S&P is up six or seven points, but really very muted. So the question is, what would the stock market really want? And what they want is they want, the stock market wants to validate the current belief that any recession might be mild. How might Powell validate that? Well, he's got to convince everyone that the Fed rate hikes are pretty much front-end loaded, going to happen in the next several months.

They'll be done by the end of the year. They have to come to believe that Powell believes that there are some signs the economy is slowing, and there may be some signs inflation is topping. Unfortunately, it's unlikely he's going to provide that kind of. of direct validation. So the Bulls already are saying, well, maybe Jackson Hole, that's August 25th. Maybe that will be the point at which we have clearer signs, and he can make a signal at that point. But right now, you've got a little bit of everything in this. Job gains have been robust. Unemployment rate remained low, but inflation remains elevated, and ongoing rate hikes

are appropriate. There's a little bit for everyone right now, and I suspect that's why we're getting such a muted reaction. Let me go back. Thank you, Bob. Let me go back to Jim Caron. I saw you not alternately nodding your head and shaking your head while Rick was talking. I'm not sure which you were doing to what things he was saying, but why don't you untangle your your facial expressions for me? Yeah, I think I largely agree with what Rick is saying. I mean, I think the markets are probably a little bit misguided in the sense that, yes, there is a healthy reprieve that interest rates maybe have stopped going up, as people like to say, it's the change that matters, it's the delta that matters. So maybe the fastest pace of rate hikes is now behind us. The Fed goes 50 and then

25s after that. And maybe bond yields aren't going up so much. But what the market's forgetting to ask is, why are yields so low at this point? Why is this actually happening? And I think why it is happening is because the market is sniffing out a harder landing and potentially even a recession. And also a slow recovery from that recession as well. So I don't believe that the markets will or that the Fed will quickly turn around and go from hiking rates to then cutting rates just to support the markets at all. I think that we can be in a very, very, very low growth scenario for an extended period of time. And I think that's what bond yields are essentially telling us. Credit spreads are staying relatively tight because if there is a recession, it's probably mild,

so you don't get a big default cycle. So I think there's a lot in here for almost everybody. But the point is that what's ahead of us isn't good. it's not terrible, but it's not great growth or it's not an appropriate response to what's actually taking place right now with Fed policy. I think that we're going to have turbulent times ahead. And I think we need a brace for that and see this as a little bit of a bare market rally. Interesting. Interesting point there. Mona, let me get you to react to what Jim just said and to what Rick just said. And while Jim didn't mention it, Rick certainly did. And that is concern about what's going on in Europe and how much

risk there is there for not just a little mild recession, but something much more sort of stringent than that. What are you seeing here? Have we seen peak rate hike, peak inflation, and maybe peak low unemployment? Yeah, you know, Rick brought up a great point, which is the relative attractiveness of the U.S. market and U.S. economy versus the rest of the globe at this point, and specifically Europe. You know, keep in mind, our economy did start from a position of relative strength. We see that in the labor market. The European economy started on somewhat of a softer footing. They didn't have the amount of stimulus in the system that we did. And so, and they're certainly more exposed to the Ukrainian crisis and the oil crisis than we are,

we are here in the U.S. And we're seeing this flight to safety, certainly in the dollar, ongoing in global markets, but we're also seeing this potential for softening global demand play out in commodity markets. Of course, not only oil, energy, food, grain, but industrial metal, copper in particular, which tend to be a proxy for global economic health has been now in bare market territory. And so it is interesting to see that perhaps the U.S. markets by default will be a little bit of a flight to safety play. But also interesting to see that perhaps in this scenario of a mild recession, and we certainly don't see the scope for a deeper, prolonged recession at this point, markets have reflected, you know, with the S&P down at its lowest negative 23%. Mild recessions, you usually get about negative 28 to negative 30%. So a lot of that work to the downside has been put in. But to Jim's point, will we get volatility ahead as some of the fundamentals catch up? Yes. But keep in mind, markets can bottom and even start to recover. even as some of the economic and earnings fundamentals continue to soften.

So that's something we should watch for in the months ahead. We're also watching the dollar soften a bit after this. And we should emphasize a lot of times the real moves don't happen until 2.30 when we hear from Chair Powell or even halfway through his press conference as his tone becomes more clear. 107 for the DXY. Let's get back to Steve Leesman for some more color here. Pretty unusual to have a unanimous decision, which this was Steve. Yeah, I mean, the Fed has been sort of unanimous throughout this whole process. and I think that's one of the problems, right, which is where was the dissent early on when the Fed was wide open for so long?

There should have been more dissent you would have thought at a Fed that was really dealing with the issues that were confronting it in terms of gathering inflation. But I want to talk about Rick's remarks, which I think are really interesting because you can do, you can go both ways with them in that he talks about this potential coming crunch in Europe for both a recession and an inflation standpoint from high, natural gas prices and energy prices in general. This is what we're going to be questioning Powell about, not necessarily about Europe, but what does he do with a recession? How much does he rely upon potential contraction of the economy to do some of the inflation work for him? And I don't know that he's game that out, but that's certainly something that I think the traders that Rick talks about want to know about, what investors want to know about. If you get some softening of the economy, And remember, that's where the Federal Reserve led the statement with, is the softening of the economy.

How does that factor into policy? I can say that I'm not sure I know. And the question is how much Powell is willing to say he knows about how much softening changes the policy outlook. All right, folks, thank you very much. And thanks to our panel, we appreciate your insights today. And as always, because this is the A-team right here on Fed Day. We really appreciate your time. And thank you so much.

to you soon again. All right. Coming up, Fed Chair Jerome Powell's press conference, 2.30. 17 minutes from now, tough questions are always expected as investors look for clues. On the outlook for rates, is forward guidance even appropriate here? We'll ask a former Fed Governor Frederick Michigan what he expects to hear from the chair, how the markets might further react all of that when power lunch return. Welcome back. We have another news alert out of Washington. This one not directly to do with the Fed. Kayla Towshi has it. Kayla. Kelly, the nonpartisan Congressional Budget Office released a long-term economic outlook that shows debt spiking to nearly double GDP and the deficit standing at double the historic average by 2052. The biggest driver of the deficit rising interest rates.

The CBO says the cost for the government to service publicly held debt quadruples by 2052 to 7.2% of GDP from about 1.6% today. The CBO also released a demographic outlook that estimates deaths in the U.S. outpaced births by 2043. After that point, the CBO says immigration will be the main driver of population growth in this country. On a call with reporters, the CBO said the aging population, higher spending, and growing debt painted a fiscal picture for this country that it called daunting. Kelly? Yeah, depressing, horrifying. So which part of this, Kayla, they always have to do this. obviously as it relates back to balancing the budget. Is that the idea?

Yes, and they release periodic updates, both within the one decade time frame to the three-decade time frame at different points during the year. And certainly the Congressional Budget Office has come under criticism from policymakers who suggest that it uses outdated models. But it is a snapshot, Kelly, of if history were the guide where the economy goes from here, and it gives you sort of a baseline for what to expect, even if exactly where it's, that data come out aren't, you know, exactly what the CBO has estimated. All right. Kayla, thank you very much.

Kail Taoshi with the latest there. All right, stocks are holding on to their gains following the Fed's decision to hike interest rates by three quarters of a percentage point, saying ongoing rate hikes will be appropriate. Fed Chair Powell's press conference just minutes away, 13 minutes to be precise. Joining us now is Frederick Michigan, former Federal Reserve Governor. Frederick, welcome, Professor. Good to have you with us. Good to be here.

I'll get your reactions to the decision here, which I think pretty much follow what you expected. But I was reading a column this morning in one of the New York papers by Brett Stevens, in which he was criticizing leadership globally in democracies, Biden, Boris Johnson, the German chancellor. But he held his maybe most critical words of all for Fed Chair Powell. He said the chairman of the Federal Reserve, who last year flubbed the most important decision of his career. Is that too harsh an assessment of the Fed chair's actions last year? Well, I actually do think the Fed really blew it. So that this is something I've been actually saying for over a year, that the Fed had a mindset, a policy framework that was seriously flawed.

And they stopped being preemptive. They assumed that the Phillips curve is dead when I think there's strong evidence that it would hibernate. And if you're not preemptive, it would come back again. And they did horrendous forecasting. So this is not a top moment for the Fed. I think, though, you know, we have to look at this in a more general perspective. Jay did a great job during the initial phase in COVID. So, you know, that was really excellent performance. I think the Fed really has blown it. And the good news, I think, is the Fed realizes that they've blown it. They won't say that, of course, and are now doing the right thing. The problem is that, when you make a mistake and you're not preemptive and appropriate way, which they should have been,

you actually have to do more. And that's why they've had to turn to 75 basis point increases. These are remarkable. The Fed typically likes to use do things very gradually, 25 basis point movements. Here they shifted gears. They turn the ship around, which is good news. But the reason they had to do it is because they did blow it. I don't know.

It's the inflammatory language that Brett used. But I do think that that is not the high point for Chairman Powell's performance. Well, I hear you being very diplomatic, but in spirit, seemingly agreeing that it was a blown or a missed opportunity. Absolutely. Absolutely. I do think they blew it. And now they're trying to fix the problem, which is the good news. You know, the disaster.

So there's a lot of parallels now to what happened in the – in the late 70s, you know, in the 70s, there Arthur Burns blew it, but he kept on blowing and he never fixed it until we had to get Big Paul Volcker to come in and fix the problem. Right. So I think that that has changed its tune, I think appropriately so. I think they're going to have to raise rates more than they're indicating at this point in terms of dot plots or the markets expect because they have to get credibility that they really are going to control inflation.

And I think that they have also indicated that their primary mission, right now is to get inflation to control, even if it risks a recession. That actually is exactly what they have to do. They may have been able to avoid that if they actually had performed better starting about a year ago. But, you know, that's life. It's not an easy job to figure this out as somebody who has actually been inside the room. It's not easy to get it, get it right. You do the best you can. But I actually have been very disappointed in the Fed's thinking and policy framework. I've had op-eds about that issue. It's really unfortunate, but at least they're now actually doing the right thing. So I'd love to come back and talk about the feds forecasting

acumen or lack thereof, and maybe we'll have time for that. But let me come to the more immediate question, which is, how long do you think it will take before inflation is, quote, unquote, under control, and at what level does under control imply? Is it 2%? Is it 2.5 to 3.5%? Where would the Fed kind of be comfortable with inflation? And how long is it going to take? Well, I do think inflation is going to come down. There are a lot of temporary components to to the rise in inflation. I think one of the mistakes was that the Fed only focused on the supply shocks and not on the demand shock. There were several, very important demand shocks that they ignored.

And I was very surprised at that. They ignored the fact that the physical policy was very expansionary, that there was all this pent-up demand. That's where they really made a serious mistake in their forecasting. I think now we're in a situation where they're taking away some of that demand impulse. And the supply shock issues will be temporary. There's also been very bad luck, by the way, for the Fed. Ukraine war is really bad luck. Even worse for the Ukrainians, but it's very bad.

in terms of the stance of monetary policy. And that was something that cannot be predicted. So the pet can't be blamed for that. I do think inflation is going to come down. The problem is that the inflation needs to come down to 2%. That's what the Fed, the whole point of an inflation target, which is something that I and Ben Bernanke very strongly advocated. We wrote a book on this. And is that you don't change it because of circumstances. The Fed agreed on 2%. I thought that was a very positive thing when they finally did that in 2012. Jay Powell's Fed has committed to that as well. It's not good enough to get inflation coming down from nine to four.

You have to bring it back down to two, and the markets have to be convinced that you'll bring it back down to two. All right. And that's the real problem right now. Not that inflation is going to be near 9%. We're not in the 70s, but we are in a situation where inflation is going to come down, but unless the Fed gets credibility and does the, job properly. It will take a long time to get it down to two. And in fact, if there's any

acceptance of a higher number, that's really very bad. Because then the whole inflation targeting exercise will not have been done properly. And indeed, the Fed actually, I think, also made a mistake when the way they executed the average inflation targeting. But even though that's actually a good idea of done right, they weakened the commitment to inflation target because they never would talk about horizon. And so there really are serious problems that they fell in. to, and that's why they have to be very tough and have to raise rates and probably a lot more than people expect. Well, we appreciate your time.

We love guests who come on and actually say something, and you have just said it, made the case, and in a very eloquent way, Frederick Michigan, we appreciate your time today. Thank you. My pleasure. And we are just moments away from the comments from Fed Chair Powell. Remember, this is often when we start to see the real market moves. What is his outlook if he offers one for the path of rate hikes? How does he characterize inflation?

Is it the hawkish or dovish version of Powell? We'll bring it all to you right after this. Welcome back to Power Lunch. Fed Chair Powell's press conference is scheduled to begin in less than three minutes after their decision, top of the hour, to hike rates by another 75 basis points. Let's get a quick check on the market. The Dow up 137 points, so it's built on its gains. We're up a quarter percent into the decision up four-tenths of a percent right now. Similar for the S&P, up one and a half percent.

the NASDAQ up 2.74%. That really goes back to the big tech relief rally, obviously. The 10-year treasury yields still around 275. Let's talk about what the market wants to hear from the chairman. David Kelly of J.P. Morgan is still with us. And David, everyone wants to know what's the main emphasis going to be, the slowdown that's referenced in the first line of the statement or the inflation pressures that could persist well into 2023. Well, I think the Fed chairman's still going to talk tough on inflation, but what I want him to say is, look, if we see signs that inflation is moderating and the economy is slowing down, we're going to back off here. I don't agree with Frederick Michigan that we have to get back to 2% in a hurry. Why do we have to do that? I mean, it took

eight years to get back to full employment after the great financial crisis. Nobody said that the Federal Reserve had to hurry up and hurry up to get it down faster. If it takes a few years to get inflation back down to 2%, if it comes down, you know, 5 and 4 and 3 and 2, and that's how you get there, that's okay. No need to put millions of people out of work to do that. So I hope the Fed backs off a bit and says, look, right now we're going to keep raising rates, but we're going to raise rates a little bit more slowly going forward if the economy shows signs of slowing down. What we'd like to do is get inflation to come down over the medium term, but also keep this economy rolling forward. Because in fact, keeping the economy growing is the best way to have a

sustainable level of reasonable interest rates. If they put the economy in recession, they're going to be reversing course within a year. And that's it. There's no point in doing that. So they need to say that they'll back off if the economy slows down. We've got a GDP report that's going to come out tomorrow. I assume that Fed Chair Powell has either seen it, knows about it, or we'll see it tonight. What do you think it's going to say? Well, there's all a divergence of opinions. Our models are still saying positive. The Eglanta Fed is still saying negative. But what I will say is the swing factors are trade in inventories, and they swing both quarters. So we've got some very good numbers in that this morning. That's why I think it's

will be positive, but it means if this third quarter could be negative now. So this economy is in really thin ice. I don't think it's really growing at all this year. And that's why the Federal Reserve needs to be a little easier here. We're priced in for just about a little bit more than a half-point hike at the next meeting. So those are the expectations that he has to kind of toy with. Do you think he tries to lean into forward guidance, David? Yes, I think he will. I think he's going to come under some pressure to say, look, if you do see lower inflation, are you going to ease off here? I think he'll have to give some hint that he recognizes the weakness in the economy here. So I think we might get a little bit of good news out of this.

How? I didn't get to ask Fred Mishkin this. Oh, here comes J-Pow. So we'll break away. We'll save it for another time, David Kelly. Thank you. And here he is Fed Chair. Good afternoon.

My colleagues and I are strongly committed to bringing inflation back down, and we're moving expeditiously to do so. We have both the tools we need and the resolve 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 and a half years and have proved resilient. It is essential that we bring inflation down to our 2% goal 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 the market is extremely tight, and inflation is much too high. Against this backdrop, today the FOMC raised its policy interest rate by three-quarters of a percentage point and anticipates that ongoing increases in the target range for the federal funds rate will be appropriate. In addition, we are continuing the process of significantly reducing the size of our balance sheet. And I'll have more to say about today's monetary policy actions after briefly reviewing economic developments. Recent indicators of spending and production have softened. Growth in consumer spending has slowed significantly,

in part reflecting lower, real disposable income and tighter financial conditions. Activity in the housing sector has weakened, in part reflecting higher mortgage rates. And after a strong increase in the first quarter, business fixed investment also looks to have declined in the second quarter. Despite these developments, the labor market

has remained extremely tight, with the unemployment rate near a 50-year low. low, job vacancies near historical highs, and wage growth elevated. Over the past three months, employment rose by an average of 375,000 jobs per month, down from the average pace seen earlier in the year, but still robust. 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, while labor supply remains suburb.

dude, with the labor-first participation rate little changed since January. Overall, the continued strength of the labor market suggests that underlying aggregate demand remains solid. Inflation remains well above our longer-run goal of 2 percent. Over the 12 months ending in May, total PCE prices rose 6.3 percent, excluding the volatile food and energy categories, core PCE prices rose 4.7 percent. In June, the 12-month change in the Consumer Price Index came in above expectations at 9.1 percent, and the change in the core CPI was 5.9 percent.

Notwithstanding the recent slowed down in overall economic activity, aggregate demand appears to remain strong. Supply constraints have been larger and longer lasting than anticipated, and price pressures are evident across a broad range of goods and services. Although prices for some commodities have turned down recently, the earlier surge in prices of crude oil and other commodities that resulted from Russia's war on Ukraine has boosted prices for gasoline and food, creating additional upward pressure on inflation. The FES 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, transportation. We are highly attentive to the risks high inflation poses to both sides of our mandate, and we're 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 three-quarters of a percentage point, bringing the target range to 2.5 to 2.5 percent. And we're continuing the process of significantly reducing the size of our balance sheet, which plays an important role in firming the stance of monetary policy. Overcoming months, we will be looking for compelling evidence

that inflation is moving down consistent with inflation returning to 2 percent. We anticipate that ongoing increases in the target range for the federal funds rate will be appropriate. The pace of those increases will continue to depend on the incoming data and evolving outlook for the economy. Today's increase in the target range is the second 75 basis point increase in as many meetings. While another unusually large increase could be appropriate at our next meeting, that is

a decision that will depend on the data we get between now and then. We will continue to make our decisions meeting by meeting and communicating and communicate our thinking as clearly as possible. As the stance of monetary policy tightens further, it likely will become

appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation. Our overarching focus is using our tools to bring demand into better balance with supply in order to bring inflation back down to our 2% goal and to keep longer-term inflation expectations well anchored. Making appropriate monetary policy in this uncertain environment requires a recognition that the economy often evolves, evolves in unexpected ways. Inflation has obviously surprised to 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 in what is already an extraordinarily challenging and uncertain time. We are highly attentive to inflation risks and determined to take the measures necessary to return inflation to our 2% longer run goal. This process is likely to involve a period of below-trend economic growth and some softening in labor market conditions. But such outcomes are likely necessary to restore price stability and to set the stage for achieving maximum employment and stable prices over the longer run. 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 look forward to your questions. Hi, Chair Powell, thanks for taking your questions. Rachel Siegel from the Washington Post. I'm wondering if you can walk us through your thinking around the decision not to go for a full percentage point increase. We saw a ramp up after the May CPI report came in hotter than usual, and then obviously the June figure did too. Was there any discussion of a stronger hike at this meeting?

Thank you. Sure. So we did judge that a 75 basis point increase was the right magnitude in light of the data. and in the context of the ongoing increases in the policy rate that we've been making. I'd say that we wouldn't hesitate to make an even larger move than we did today if the committee were to conclude that that were appropriate. That was not the case at this meeting. There was very broad support for the move that we made. You mentioned the June meeting. We had said many times that we were prepared to move aggressively, more aggressively, if inflation continued to disappoint.

And that's why we did move to a more aggressive pace at the June meeting, as we said we would do. At this meeting, we continued at that more aggressive pace as inflation has to continue to disappoint in the form of the June CPI reading. Thank you so much for taking our questions, Colby Smith, with the Financial Times. As the committee considers the policy path forward, how will it weigh the expected decline in headline inflation, which might come as a result of the drop in commodity prices, against the fact that we are likely to see some persistence in core readings in particular? And given that potential tension and signs of, you know, any kind of activity weakening here, how is the committee's thinking changed on how far into restrictive territory rates might need to go? So I guess I'd start by saying we've been saying we move expeditiously to get to the range of neutral.

And I think we've done that now. We're at 225 to 2.5 and that's right in the range of what we think is neutral. So the question is, how are we thinking about the path forward? So one thing that hasn't changed is that it won't change is that our focus is continuing to is going to continue to be on using our tools to bring demand back into better balance with supply in order to bring inflation back down. That'll continue to be our overarching focus. We also said that we expect ongoing rate hikes will be appropriate and that we'll make decisions meeting by meeting. So what are we going to be looking at? You know, we'll be looking at the incoming

data, as I mentioned, and that that'll start with economic activity. Are we seeing the slow down that we, the slow down an economic activity that we think we need, and there's some evidence that we are at this time. Of course, we'll be looking at labor market conditions, and we'll be asking whether we see of the alignment between supply and demand getting better, getting closer. Of course, we'll be looking closely at inflation. You mentioned headline and core. Our mandate is for headline, of course. It's not for core, but we look at core because core is actually a better indicator of headline and of all inflation going forward. So, we We'll be looking at both, and we'll be looking at them for, at those, both really for what they're saying about the outlook,

rather than just simply for what they say. But we'll be asking, do we see inflationary pressures declining? Do we see actual readings of inflation coming down? So in light of all that data, the question we'll be asking is whether the stance of policy we have is sufficiently restrictive to bring inflation back down to our 2% target. And it's also worth noting that these rate hikes have been large, and they've come, they've come, quickly and it's likely that their full effect has not been felt by the economy. So there's probably some additional tightening, significant additional tightening in the pipeline. So where are we going with this? I think the best, I think the committee broadly feels that

we need to get policy to, at least to a moderately restrictive level. And maybe the best data point for that would be what we wrote down in our SEP at the June meeting. So I think The median for the end of this year, the median would have been between three and a quarter and three and a half. And then people wrote down 50 basis points higher than that for 2023. So even though that's now six weeks old, I guess, that's the most recent reading. Of course, we'll update that reading at the September meeting in eight weeks. So that's how we're thinking about it. As I mentioned, as it relates to September, I said that another unusually large increase could be appropriate,

but that's not a decision we're making now. It's one that we'll make based on the data we see. And we're going to be making decisions meeting by meeting. We think it's we think it's time to to just go to a meeting by meeting basis and not provide you know the kind of clear guidance that we had provided on the way to neutral. Nick Timmeros of the Wall Street Journal. Chair Powell, you've said that your policy works through influencing expectations and that policy needs to be at least moderately restrictive, which means you need financial conditions

to stay tight. Futures market pricing currently implies you will raise rates this year along the lines of your June SEP, but then lower them a few months later next year. Are these expectations consistent with the need to keep financial conditions tight in order to moderate purchasing power and bring inflation back to 2 percent? So I'm going to start by pointing out that it's very hard to say with any confidence in normal times. In normal times. what the economy is going to be doing in six or 12 months. And to try to predict what the appropriate monetary policy would response would be. I mean, of course, we do that in the SEC, but nonetheless, you've got to take any estimates of what rates will be next year with a grain of salt because there's so much uncertainty.

These are non-normal times. There's significantly more uncertainty now about the path ahead than I think there ordinarily is, and ordinarily it's quite high. So, again, I would, the best data, the only data point I have for you really, is. is the June SEP, which I think is just the most recent thing that the committee's done. Since then, inflation has come in higher. Economic activity has come in weaker than expected. But at the same time, I would say that's probably the best estimate of where the committee's thinking is still, which is that we would get to a moderately restrictive level by the end of this year,

by which I mean somewhere between 3 and 3.5%. and that the committee sees further rate increases in in 2023. As I mentioned, we'll update that, of course, at the September meeting, but that's really the best I can do on that. You said inflation had been a little bit hotter than anticipated. Has your view of the terminal rate changed since June? So I wouldn't say it was – I think we didn't expect a good reading, but this one was even worse than expected, I would say.

I don't talk about my own personal estimate of what the terminal rate would be. I will write down that in it's going to evolve. Obviously, it has evolved over the course, I think for all participants, it has evolved over the course of the year as we learn how persistent inflation is going to be. And by the time of the September meeting, we will have seen two more CPI readings and two more labor market readings and significant amount of readings about economic activity and perhaps geopolitical developments, who knows?

It'll be a lot. It's an eight-week intermeeting period, so I think we'll see quite a lot of data, and we'll make our decision at that meeting based on that data. Gina. Hi, Jira. Thanks for taking our question. Gina Smiley, New York Times.

You kind of alluded to this earlier, but I wonder in the event that you see several months of very weak headline inflation numbers because oil prices are coming down so much, but core inflation continues to be strong. or even picks up. I wonder how you would think about that. So it's hard to deal with hypotheticals, but I just would say this. We, you know, we would look at both, and we'd be asking ourselves,

are we confident that inflation is on a path down to 2%? That's really the question. And we'll be making, you know, our policy stance will be set at a level, ultimately, at which we are confident that inflation is going to be moving down 2 percent. So you would, you know, it would depend on a lot of things. Of course, as I mentioned, core inflation is a better predictor of inflation going forward. Headline inflation tends to be volatile. So in ordinary times, you look through volatile moves and commodities. The problem with the current situation is that if you have a sustained period of supply shocks, those

can actually start to undermine or to work to work. work on de-anchoring inflation expectations. The public doesn't distinguish between core and headline inflation in their thinking. So it's something we have to take into consideration in our policymaking, even though our tools don't really work on some aspects of this, which are the supply side issues. Steve. Steve Leasman, CNBC. Thanks for taking my question, Mr. Chairman. Earlier this week, the President said we are not going to be in a recession. So I have two questions off with that. Do you

share the President's confidence in not being in a recession? And second, how would or would not a recession change policy? Is it a bright line, sir, where contraction of the economy would be a turning point in policy, or some amount of contraction of the economy, the committee would be willing to abide in its effort to reduce inflation? So as I mentioned, we think it's necessary to have growth slow down. And growth is going to be slowing down this year for a couple of reasons, one of which is that you're coming off of the very high growth of the reopening year of 2021. You're also seeing tighter monetary policy, and you should see some slowing.

We actually think we need a period of growth below potential in order to create some slack so that the supply site can catch up. We also think that there will be, in all likelihood, some softening in labor market conditions. And those are things that we expect that and we think that they're probably necessary if we were to have to get inflation, we were to be able to get inflation back down on a path to 2 percent, ultimately get there. The question was whether you see a recession coming in how that might or might not take policy. So we're going to be, again, we're going to be focused on getting inflation back down. And we, as I've said on other occasions, price stability is really, the bedrock of the economy. And nothing works in the economy without price stability. We can't have a

strong labor market without price stability for an extended period of time. We all want to get back to the kind of labor market we had before the pandemic where differences between, you know, racial and gender differences in that kind of thing. We're at historic minimums, where participation was high, where inflation was though. We want to get back to that. But that's not happening. That's not going to happen without restoring price stability. So that's something we see as something that we simply must do. And we think that in the, we don't see it as a trade-off with the employment mandate. We see it as a way to facilitate the sustained achievement of the employment mandate in the longer term.

Howard Schneider, with Groder's, particularly in regard to expectations, it's been said the last few months that the risks of doing too little outweigh the risks of doing much. Does that remain the bias? So we're trying to do just the right amount, right? We're not trying to have a recession, and we don't think we have to. We think that there's a path for us to be able to bring inflation down while sustaining a strong labor market. As I mentioned, along with, in all likelihood, some softening in labor market conditions. So that's what we're trying to achieve, and we continue to think that there's a path to that.

We know that the path has clearly narrowed, really based on events that are outside of our control. outside of our control, and it may narrow further. So, you know, I do think, as I said just now, that restoring price stability is just something that we have to do. There isn't an option to fail to do that, because that is the thing that enables you to have a strong labor market over time. Without restoring price stability, you won't be able

over the medium and longer term to actually have a strong, a sustained period, very strong labor market condition. So, of course, we serve both sides of the dual mandate, but we actually see them as well aligned on this. But as a follow into that, given the uncertainty and the sort of paradoxical flow of data you've been getting, if you're going to make a mistake, would you rather make the mistake on doing too much, raising too much than raising too little? We're trying not to make a mistake. Let me put it this way. We do see that there are two-sided risks.

There would be the risk of doing too much and, you know, important. opposing more of a downturn on the economy than was necessary. But the risk of doing too little and leaving the economy with this entrenched inflation, it only raises the cost. If you fail to deal with it in the near term, it only raises the cost of dealing with it later. To the extent people start to see it as just part of their economic lives, they start to factor high inflation into their decisions.

When that, on a sustained basis, when that starts to really happen, and we don't think that's happened yet, but when that starts to happen, it just gets that much harder and the pain will be that much greater. So I really do think that it's important that we address this now and get it done. Thanks, Chair Powell. Neil Irwin from Axios. To build a little bit on what Steve was asking, do you believe the United States is currently in a recession? Will the GDP reading tomorrow affect that judgment one way or the other? And has your assessment of the risk of recession changed any in recent weeks? So I don't, I do not think the U.S. is currently

in a recession. And the reason is there are just too many areas of the economy that are that are performing, you know, too well. And of course, I would point to the labor market in particular. As I mentioned, it's true that growth is slowing and for reasons that we understand, really, the growth was extraordinarily high last year, 5.5%. We would have expected growth to slow. There's also more slowing going on now. But if you look at the labor market, you've got growth, I think, payroll jobs averaging 450,000 per month, that's a remarkably strong level for this state of affairs. The unemployment rate at near a 50-year low at 3.6 percent, all of the wage measures that we track are running very strong. So this is a very strong labor market, and it's just not consistent with, you know, 2.7 million people hired in the first half of the year.

It doesn't make sense that the economy would be in recession with this kind of thing happening. So I don't think the U.S. economy is in recession right now. Ah, haven't seen it, and we'll just have to see what it says. I don't, I mean, I would say generally the GDP numbers do have a tendency to be revised pretty significantly. It's just, it's very hard to accumulate U.S. GDP. It's a large economy, and a lot of work and judgment goes into that. But you tend to take first GDP reports, I think, with a grain of salt. but of course it's something we'll be looking at.

Hi, Chair Powell, Victoria Guided with Politico. I wanted to ask about the new conflict of interest rules that you all rolled out. Some senators have written asking for those rules to have more teeth and to have sort of more transparency about the Fed officials' financial activity. I was wondering if you could speak to that and whether you intend on, you know, toughening those rules in any way. So those are the toughest rules in place, you know, at any comparable institution that I'm aware of. We think, you know, we thought about this carefully and we put them in place and we're building the infrastructure so that, so that, you know, the enforcement will be tight, that actually you won't be able to make trades unless they're pre-cleared. And the amount of trades you make will be. They'll have to be 45 days or more before any FMC meeting.

It's just, I think we've really, you know, created a very strong and robust set of rules that will, you know, support public. trust in the institution. And again, we're just, we're just now, the system is just now up and running, and I'm proud of what we did. Hi. Katerina Sarajevo, Bloomberg News. I wanted to ask a little bit more about the 75 basis points versus 50 versus 25. Can you talk a little bit about what kind of goes into your thinking for, you know, making the decision on how much to raise rates and, you know, just talk talking about a very large amount that you alluded to, could that possibly be 100 basis points? And then kind of along those lines, is there any sort of weakness in the economy outside of

inflation measures that would lead you to slow your hiking pace? So I'm going to take that as a question about the next meeting and thereafter. So as I mentioned, we're going to be looking at all of those things, activity, labor market, inflation, and we're going to be thinking about our policy stance and where does it really need to be. And I also mentioned that as this process, now that we're at neutral, as the process goes on, at some point, it will be appropriate to slow down. And we haven't made a decision when that point is, but intuitively that makes sense, right? We've been front-end loading these very large rate increases. Now we're getting closer to where we need to be.

So that's how we're thinking about it. And we're, you know, in terms of September, we're going to watch the data and the evolving outlook very carefully and factor in everything and make a decision in September about what to do. And I'm not really going to provide any specific guidance about what that might be. So, you know, but I mentioned that we might do another unusually large rate increase, but that's not a decision that we've made at all. So we are, you know, we're going to be guided by the data. And I think you can still think of the destination as broadly in line with the September, sorry, the June SEP, because it's only six weeks old. And sometimes, sometimes SEPs can get old really quick. I think in this one, this one I would say is probably the best guide we have as to where the committee thinks it needs to get at the end of the year and then into next year.

So I would point you to that. Hi. Thank you. Chris Ruegeybro, Associated Press. I wanted to ask about right now there is a sort of growing gap between the Fed's preferred measure of inflation, the PCE index, and the one that's followed by the public, the CPI, of course. How do you expect to handle this divergence if the PCE starts to come down enough for you to consider slowing rate hikes, even if the public is still seeing much higher CPI ratings? Thank you. So it's an interesting situation.

Of course, we've long used PCE because we think it's just better at capturing the inflation that people actually face in their lives. And I think that view is pretty widely understood. That said, the public really reads about CPI. And the difference really is because the CPI has higher weights on things like food, gasoline, motor vehicles and housing than the PCE index does. And so that accounts for a lot of the difference. However, over time, they tend to come together.

You know, we were given the importance in the public eye of CPI, we are calling it out and noticing it and everything like that. But remember, we do target PCE, that is, because we think it's a better measure. They will come together eventually. The typical gap was really about 25 basis points for a very long time. And if it got to, you know, 40 basis points,

that would be very noticeable. Now it's much larger than that because of the things I mentioned. So we'll be watching. both and but again, the one that we think is the best measure always has been PCE, at least since I think we some 20 plus years ago moved to PCE. Mr. Michael McKee. I'd like to weave a couple of things together, Mr. Chairman. Michael McKee from Bloomberg TV and radio.

You said that the destination pretty much remains the same in terms of your end of the year target, but where are you in the journey? We've now seen the federal stimulus programs and you. You mentioned consumer spending, business investment have slowed. Are they moving at pace you would expect, or is demand still greater than supply, too much greater than supply, that you need to do significantly more? And I ask because there are lags in the impact of monetary policy, as you mentioned. And a lot of this might hit in 2003.

The strong dollar effect may hit in 2023 when the economy might be weak. How do you know where you are and where you think you need to get to? Well, just talking about demand for a second. As I mentioned in my remarks, I think you pretty clearly do see a slowing now in demand in the second quarter. Consumer spending, business fixed investment, housing, places like that. I think, you know, people widely looked at the first quarter numbers and thought they didn't make sense and might have been misleading in terms of the overall direction of the economy. Not true of the second quarter.

But at the same time, you have this labor market. So there are plenty of experiences where GDP has been reported as weak, and the labor market is strong, and the economy has gone right through that and been fine. So that's happened many times. And it used to happen, if you remember, in the first quarter of every year, for several years in a row, GDP was negative, and the labor market was moving along just fine. and it turned out to just be measurement error. It was called residual seasonality.

We don't know the situation. The truth is, we think that demand is moderating. We do. How much is it moderating? We're not sure. We're going to have to watch the data carefully. There is a great deal of money on people's balance sheets so that they can spend.

The unemployment rate is very low. The labor market's very hot. There are many, many job openings. Wages are high. So it's the kind of thing where you think that the economy should actually be doing, pretty well in the second half of the year. But we'll have to see. We don't know that because you do see a marked slowing in the second quarter that is fairly broad. So we'll be watching that.

We'll be watching that. Of course, as I mentioned, we do want to see demand running below potential for a sustained period to create slack and give inflation a chance to come down. Hi. Thank you, Chairman. Nicole Goodkind, CNN Business. When does the committee expect to see a meaningful slowdown in the labor market and how much weakness will it? except with regard to slower job growth and higher unemployment before it pauses or begins to think about cutting rates. So I think you're already seeing, you've seen in the labor market, what you've seen is a decline from very high levels of job creation last year and earlier this year to modestly slower job creation. Still quite robust, as I mentioned. So you're seeing that.

You're seeing some increase in initial claims for an insurance. Although that may actually have to do with seasonal adjustments. We're not sure that that's actually real. There's some evidence that wages, if you look at average hourly earnings, they appear to be moderating. Not so yet from the other wage measures, and we'll be getting the employment compensation index measurement, I think, on Friday, I guess. And that's a very important one because it adjusts for composition. So I'd say you, and also anecdotally, you hear much

The sort of level of concern on the part of businesses that they simply can't find workers is probably down a little bit from what it was, say, for example, late in the latter parts of last year. So there's a feeling that the labor market is moving back into balance. If you look at job openings or quits, you see them moving sideways or perhaps a little bit down. But it's only the beginning of an adjustment. But I think most, also, if you look at, I mean, once you start citing these things, you can't stop. If you look at the household survey, you see much lower job creation, and the household survey can be quite volatile, but it has no jobs created in the last three months. So that might be a signal that job creation is actually a little bit slower than we're seeing in the establishment survey. So executive summary, I would say there is some evidence that labor demand may be slowing about.

bit, labor supply, not so much. We have been disappointed that labor force participation really hasn't moved up since January. That may be related to yet another big wave of COVID, and there's evidence that that's the case. So we're not seeing much in the way of labor supply. Nonetheless, I would say some progress on demand and supply getting back in alignment. So I think we're going to be looking at inflation as well. As I mentioned, we need, we We need to see inflation coming down. We need to be confident that inflation is going to get back down to mandate consistent levels. That's not something we can avoid doing. That really needs to happen. And we do think, though, that the labor market can adjust because of the huge overhang of job openings of excess demand, really,

there should be able to be an adjustment that would have lower than, perhaps lower than experience. expected increases in unemployment lower than would be expected in the ordinary course of events because the level, the ratio of vacancies to unemployed is just out of keeping with historical experience. And that suggests that this time could be different. Thanks, Mr. Chairman. Edward Lawrence from Fox Business. So you said the path may be narrowed to avoiding recession. So how close are we to a recession? And then how to forecast the possible recessions from banks and economists, how does that make a soft landing?

you've talked about more difficult? So as I mentioned, it doesn't seem that the U.S. economy is in recession right now. I think you do see weakening some slowdown, let's put it that way, in growth, and you see it

across some of the categories that I mentioned, but there's also just the very strong data coming out of the labor market still. So overall, you would say that in all probability, demand is still strong and the economy is still on track to continue to grow this year. But the slowdown in the second quarter is notable, and we're going to be watching that

carefully. Sorry. What was a lot of – What was a lot of – How did bank forecast the possible concessions and economies? Does that affect the soft landing? Well, you know, we've said since the beginning, I think, that having a soft landing is what we're aiming for. Of course, that has to be our goal. It is our goal. And we'll keep trying to achieve it.

I do think events, at the beginning, we said it was not going to be easy. It was going to be quite challenging to do that. It's unusual. It's an unusual event. It's not a typical event, given where we are. If there is a path to it, and we think it is the one I mentioned, that the labor market actually has such a large amount of surplus demand that you could see, you could see, you could see the, that demand coming down in a way that didn't translate into a big increase in unemployment as you would expect in the ordinary course because, frankly, the imbalance is so much greater. But we don't know that. I mean, this is a case of first impression. So anyone who is really sure that it's impossible or really sure that it will happen is probably underestimating

the level of uncertainty. And so I would certainly say it's an uncertain, uncertain thing. Nonetheless, it's our goal to achieve it, and we'll keep trying to do that. Thank you, Mr. Chairman. Jean Young with Market News. I wanted to ask about the balance sheet reduction program. It's been working for a couple months now and in a different environment than the last time the Fed did it. What are you learning about how it's working and how markets are reacting? And is reaching the minimum level of reserves needed in the system still several years away at the current pace?

So we think it's working fine. As you know, we tapered up into it, and in September we'll go to a full strength, and the markets seem to have accepted it. By all assessments, the markets should be able to absorb this, and we expect that will be the case. So I would say the plan is broadly on track. It's a little bit slow to get going because some of these trades don't settle for a bit of time, but it'll be picking up steam.

So, and I guess your second question was getting, yeah, no, the process of getting back down to the new equilibrium will take a while. And that time, it's hard to be precise, but, you know, the model would suggest that it could be between two, two and a half years, that kind of thing. And this is a much faster pace than the last time. Balance sheets much bigger than it was. But we look at this carefully and we thought that this was a sensible pace and we have no reason to think it's not I'm Chairman Powell Brian Chung Yahu Finance. Looking at financial conditions, it seems like the tightening has slowed as of late with the 10-year coming down

30-year fixed mortgage rates also going a bit sideways when we talk about a hot housing market still just wondering if you find financial conditions tight enough especially as you continue to raise rates. So a big piece of that is inflation expectations you know break-evens coming down, which is a good thing. It's a good thing that markets do seem to have confidence in the committee's commitment to getting inflation back down to 2 percent. So we like to see market-based, you know, readings of inflation expectations come down. You know, broader financial conditions have tightened a good bit. I mean, the way this works is we set our policy and financial conditions react and then financial conditions are what affects the economy. So we don't control that second step. We're just going to do what we think needs to be done. We're going to get our

policy rate to a level where we're confident that inflation will be moving back down to 2 percent, confident. So that's how we're going to take it. And of course, we'll be watching financial conditions to see that they are appropriately tight and that they're having the effect that we would hope they're having, which is to see demand moderate and inflationary pressures recede and ultimately inflation come down. Thank you, Chair Powell. Greg Robb from Market Watch. I wonder if you can go back a little bit in time to before there was this outbreak of inflation when the committee put in place forward guidance on tapering asset purchases.

I think it was December 2020. There's a recent speech by Fed Governor Waller talking about that and saying that maybe that was too tight, that kind of condition, and it put you a little bit behind. Not his words, but maybe, you know, were kind of late to react to some of the that inflation. So could you talk about that decision and have you looked at it in hindsight at all? Thank you. So yeah, we said that we wouldn't lift off until we had basically achieved our dual mandate goals. And the reason we did it in real time was that the first look at the new framework that

we'd rolled out, plenty of people were saying, oh, it's not credible, you'll never get inflation to 2%. Some of our critics now who say inflation is too high were the same ones who were saying you'll never get to 2% well. But anyway, that's what happened. So we we thought we needed to really make a strong statement with that. It wasn't part of the framework. The December 20 guidance was not part of our overall new framework. It was just guidance that we put in place. So I would say two things. One, I don't think that that is materially changed the situation. But I have to admit, I don't think I would do that again. I don't think I would do that again. We, you know,

Ultimately, the situation involved in a highly unexpected way for all of us. And, you know, maybe the learning is that leave a little more flexibility than that. But did it matter in the end? You know, if you look at, I really don't think it did. I'm not sure it would have mattered if we'd been raising rates three months earlier. Does anybody think that would have made a big difference? I mean, lots of central banks were raising rates three months earlier, and it didn't matter. I mean, this is a global phenomenon.

happening now, admittedly different in the United States. But anyway. Just a lot of people talk about that time, and they talk about a taper tantrum that, I know you haven't talked about it too much, but that you were worried at the time about repeating that taper tantrum that you had experienced as a governor. So was that part of that? Where did that fit into all those? Thank you.

So I think we learned there have been multiple taper tantrums, right? So there was the famous one in 2013. There's what happened at the December 18 meeting where markets can ignore developments around the balance sheet for years on end and then suddenly react very sharply. So we just had developed a practice of moving predictably and doing it in steps and things like that. It was just like that's how we did it. And so we did it that way this time.

We were careful to take steps and communicate and all that kind of thing. Yeah, we were trying to avoid. a tantrum because they can be quite destructive. They can tighten financial conditions and knock the economy off kilter. And, you know, when it happens, you have to really in both 13 and 18, really had consequences for the real economy, you know, two, three, four months later. So we were trying to avoid that. That was part of it. Again, I don't think that's, the real issue of 2020 and 21 was just trying to understand what was happening with the reopening economy. That that was where the big uncertainty was. And, you know, our view was that that the supply-side

issues would get better, that, you know, that people would go back to work, that labor-first participation would come back. Everyone would get vaccinated, schools would open, kids would be in school, and labor force participation would jump back up. You know, that's what we were, that was pretty, very broadly thought to be the case. You know, the supply-side issues would get solved reasonably quickly, and they just haven't. They still haven't. So that's really the learning, I think, is around how complicated these supply-side issues can be. We haven't seen this before in a long, long time. And so that's really what accounts for the pace at which we moved. And we did, when inflation changed direction, really,

in October, we've moved quickly since then. I think people would agree. But before then, inflation was coming down month by month. And we kind of thought we had the story, probably had the story right but then I think in October you hold so you started to see a range of data that said no this is a much stronger economy and and much higher inflation and we've been thinking and again we pivoted and here we are nancy marshall ginser with marketplace uh chair paulay just want to pin you down a little bit more on the issue of recession so if we get a negative GDP number tomorrow for the second quarter would the fed consider the u.s in a recession and just remind us what is your definition for the start of a recession?

So the Fed doesn't make a judgment on that. We're focused on the dual mandate and using our tools to achieve maximum employment and price stability. We don't say there is now a recession, that kind of thing. So that wouldn't be something we do. We would look at the data tomorrow and no doubt we'll look at it very carefully and draw whatever implications we can. As I mentioned though, if you think about what a what

And inflation, sorry, what a recession really is, it's a broad-based decline across many industries that, you know, that's sustained for more than a couple of months. And there are a bunch of specific tests in it. And it just doesn't, this doesn't seem like that now. What we have right now doesn't seem like that. And the real reason is that the labor market is just sending such a signal of economic strength that it makes you really question the GDP data. But, again, that's not a decision that we make. and we won't reach a conclusion one way or another on that. Thank you very much, Simon Rubinovich, with the economist.

You've said that some softening in the labor market is needed. Within the Fed, there are staff economists who've argued that Nairu, the non-inflationary rate of unemployment, might be as high as 5 to 6% right now, which obviously is a lot higher than the current rate of 3.6. What's your assessment of Nairu? Is that something that came up in discussion with the committee? So I think broadly a lot of economists think that the natural rate of unemployment will have moved up to some significant extent above where we think it was before.

And the reason is it's the usual matching issue where batching has become less effective in that kind of thing when you have the kind of turbulent downturn. and the big switch is in demand from services to goods and all that. So it could be higher, and my own instinct is that the natural rate of unemployment is higher. Of course, I would add that we don't know it. We can never know where these star variables are in real time with any confidence, but I would say it must have moved up materially. But the other side of that is, as all these jobs get created and people go back to work and unemployment is so low, I think,

you could, in principle, you could see it coming back down pretty significantly. And that would also, by the way, take pressure off of inflation, because that's that gap. It's the gap between actual unemployment and the natural rate that really is relevant for, you know, the negative slack we have in the economy with the overtight labor market. So if you were to, you wouldn't, you wouldn't observe this. It's an unobservable, but you could actually be seeing inflationary pressures coming down if that does happen. And we don't, we don't control that.

But that's something that logically, if the pandemic and the disorder in the labor market caused the natural rate to move up, then as the labor market settles down in principle, you should see it move back down. Thank you, Chair. Paul. Jeff Cox from CNBC.com. Just a question about, I hate to keep banging the drum about recession, but most of the polls that we're seeing now from the public, people believe that we're already in a recession or heading for one. pretty much the same thing. They're being told by folks like you and in the administration that we're not in a recession or we're not heading for a recession. Frankly, coming from the same people who told them that inflation was transitory, telling them now that we're not

heading for a recession. So what would you tell the public to reassure them now that you feel confident in your forecast going forward and the Fed is ready to respond to a potential downturn in the economy? No, all I've really said is I don't think it's likely that the U.S. economy. economy is in a recession now. And I've explained why that is the case. It's because you do see a very strong labor market. And I think the public will see that as well. You know, going forward, what we've seen is a slowing in spending, as I mentioned. We've seen the very beginnings of perhaps a slight lessening in the tightness of the labor market, but it would only be the beginnings. So, and I mentioned that I also said, that our goal is to bring inflation down and have a so-called soft landing, by which I mean, a landing that doesn't require a significant increase, a really significant increase in unemployment.

We're trying to achieve that. I have said on many occasions that we understand that's going to be quite challenging and that it's gotten more challenging over recent months. Thanks, Chair Powell. Kyle Campbell with American Banker. The FOMC has historically tried to avoid the kind of rapid monetary policy tightening that has happened so far this year. How concerned are you that the rate hikes that we've seen thus far might increase risks to financial stability, not just domestically but globally? I mean, there are precedents for the FMC moving very quickly, for example, 1994, 1980, even more so. So we've been known to do that when it's the appropriate thing to do, and this year it clearly is. I would say that given how quickly we've moved, I'm gratified that, well, that basically markets have been working.

They've been orderly. There's been some volatility, but that's only to be expected. For a financial stability perspective, you know, asset values are down, which in some sense lowers vulnerabilities. It's when they're really high that you would worry that they're vulnerable to a fall. Actually, many asset values have come down. I think you've got a well-capitalized banking system. I think you have households are generally in about as strong financial shape as they've been in a very long time, or perhaps ever, given what the money that's on people's balance sheets. And so you have a pretty, from a financial stability standpoint, you have a pretty decent, recent picture. Now, macroeconomic, there are plenty of macroeconomic issues that don't rise

to the level of financial stability concerns. By financial stability, you know, we think of that as things that might undermine the working of the financial system. So big, serious things. That's not to say that people at the lower end of the income spectrum aren't suffering because they are. They're suffering from high inflation. They're going to the, you know, to the grocery store and finding that, you know, in many cases their paycheck, they're it doesn't cover the food they're accustomed to buying. We're seeing actual, you know, real declines in food consumption. And, you know, it's very concerning. It's very unfortunate, and that's why we're really committed to bringing down inflation. One of the reasons.

Thank you, Mr. Chairman, Mark Kamrick, with Bankrate. I can remember when you held your first news conference and you vowed to be a very plain spoken chairman, and we're thinking today about the impacts of Fed policy on individuals as well. What would you say to individuals or households who may yet lose their jobs in this tightening cycle in the fight against inflation as they try to translate what Fed policy means to them and this complicated economic landscape? Thank you. So I guess the first thing I would say to every household is that we know that inflation is too high. We understand how painful it is, particularly for people who are living paycheck. to paycheck and spend most of that paycheck on necessities, such as food and gas and heating their homes and clothing and things like that.

We do understand that those people suffer the most. Middle class and better off people have some resources where they can absorb these things, but many people don't have those resources. So, it is our job. It is our institutional role. We are assigned uniquely and unconditionally the obligation of, of providing price stability to the American people. And we're going to use our tools to do that. As I mentioned, there will be some, in all likelihood, some softening in labor market conditions.

We need growth to slow to below potential growth. We don't want to, you know, we don't want this to be bigger than it needs to be. But ultimately, if you think about the medium and longer term, price stability is the thing that makes the whole economy work. It's what can give us a strong labor market and wages that aren't being eaten up by high inflation. If you talk to people, again, people who are making, you know, wages, relatively low wages, they're the ones who are suffering the most from inflation.

So it's all the more reason why we need to move on this. Thank you very much.