FOMC Press Conference with Jerome Powell - 19th June 2019 @ 19:30 PM UK

Since the beginning of the year, we have judged that our current policy stance was broadly appropriate and that we should be patient in assessing the need for any changes, in light of increased uncertainties and muted inflation pressures. We now emphasize that the committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its two percent objective. I'd like to step back and review how the changing economic and financial picture brings us to today's decision. So far this year, the economy has performed reasonably well, with solid fundamentals supporting continued growth and strong employment. Inflation has been running somewhat below our objective, but we've expected it to pick up, supported by solid growth and a strong job market. Along with this favorable picture, we've been mindful of some ongoing crosscurrents, including trade developments and concerns about global growth. At the time of our last FOMC meeting, which ended on May 1, there was tentative evidence that these crosscurrents were moderating. The latest data from China and Europe were encouraging, and there were reports of progress in trade negotiations with China. Our continued patience stance seemed appropriate, and the committee saw no strong case for adjusting our policy rate. In the weeks since our last meeting, the crosscurrents have reemerged. Growth indicators from around the world have disappointed on net, raising concerns about the strength of the global economy. Apparent progress on trade turned to greater uncertainty, and our contacts in business and agriculture report heightened concerns over trade developments. These concerns may have contributed to the drop in business confidence in some recent surveys and may be starting to show through to incoming data. Risk sentiment in financial markets has deteriorated as well. Against this backdrop, inflation remains muted. While the baseline outlook remains favorable, the question is whether these uncertainties will continue to weigh on the outlook and call for additional monetary policy accommodation. Many FOMC participants now see that the case for somewhat more accommodative policy has strengthened. Let me explain the basis for this judgment, starting with the outlook for jobs and growth. Participants see unemployment remaining low this year and next. Monthly job gains in May were lower than expected, however, and in light of recent developments, this bears watching. Still, many labor market indicators remain strong. Community, business, and labor leaders all tell us that the prospects for job seekers have seldom been better, and that this is true even for those who have traditionally struggled to find work. Wages are rising, and this is particularly so for lower-paying jobs. Committee participants' growth projections for 2019 are little revised from March, with a central tendency of 2.0 to 2.2 percent, just above their estimates of longer-run normal growth. The growth projections for the year as a whole mask some important details about the composition of growth. Annual growth will be boosted by the surprisingly strong first quarter, which had just been reported at the time of the May FOMC meeting. As I noted then, the unexpected strength was largely in net exports and inventories, components that are not generally reliable indicators of ongoing momentum. The more reliable drivers of growth in the economy are spending on consumption and business investment. While consumption was weak in the first quarter, incoming data show that it has bounced back and is now running at a solid pace. In contrast, the limited evidence available at this time suggests that growth in business fixed investment has slowed in the second quarter. Moreover, manufacturing production has posted declines so far this year. Thus, while the baseline outlook remains favorable, many FOMC participants cited the investment picture, weaker business sentiment, and the crosscurrents I mentioned earlier as supporting their judgment that the risk of less favorable outcomes has risen. After running close to our symmetric two percent objective for most of last year, inflation declined in the first quarter. Data since then shows some pickup, but participants broadly see inflation moving back up toward our two percent objective at a slower pace than had been expected. The central tendency for 2019 core inflation, which excludes volatile food and energy components, is between 1.7 and 1.8 percent. Setting aside short-term fluctuations, committee participants expressed concerns about the pace of inflation returning to two percent. Wages are rising, as noted above, but not at a pace that would provide much upward impetus to inflation. Moreover, weaker global growth may continue to hold inflation down around the world. We are firmly committed to our symmetric two percent inflation objective, and we are well aware that inflation weakness that persists even in a healthy economy could precipitate a difficult-to-arrest downward drift in longer-run inflation expectations. Because there are no definitive measures of inflation expectations, we must rely on imperfect proxies. Market-based measures of inflation compensation have moved down since our May meeting, and some survey-based expectations measures are near the bottom of their historic ranges. Combining these factors with the risks to growth already noted, participants expressed concerns about a more sustained shortfall of inflation. Overall, our policy discussions focused on the appropriate response to the uncertain environment. The projections of appropriate policy show that many participants believe that some cut in the federal funds rate will be appropriate in the scenario that they see as most likely, though some participants wrote down policy cuts and others did not. Our deliberations made clear that a number of those who wrote down a flat rate path agree that the case for additional accommodation has strengthened since our May meeting. This accommodation would support economic activity as inflation returns to our objective. Uncertainties surrounding the baseline outlook have clearly risen since our last meeting. It's important, however, that monetary policy not overreact to any individual data point or short-term swing in sentiment. Doing so would risk adding even more uncertainty to the outlook. Thus, my colleagues and I will be looking to see whether these uncertainties continue to weigh on the outlook, and we will use our tools as appropriate to sustain the expansion. Thank you. I will be pleased to take your questions.

The committee had our usual long discussion of global and domestic economic and financial conditions, and then spent this morning talking about monetary policy and came to the view that I expressed to you: we're going to be monitoring the crosscurrents and the other items that we've mentioned, but we'd like to see more going forward, particularly whether these risks continue to weigh on the outlook. Generally, as I mentioned, many on the committee do see a strengthened case for cutting rates. Eight of those actually wrote down rate cuts. A number of others see that the case is strengthened, but the committee wanted to see more, as I mentioned. Some of these developments have been of quite recent vintage, so we do expect that we'll be learning a lot more on all of these issues in the near term, and that's our focus.

I'm sure that things will change before the next meeting. I expect a full range of data and information on all of these issues that we are looking at. I think we'll learn a great deal more about them, and we think that's the right way to move here. Many of these developments happened part of the way through the last inter-meeting period. Only seven weeks ago, we had a great jobs report and came out of the last FOMC meeting feeling that the economy and our policy was in a good place. So we want to react to developments and trends that are sustained and genuine, not react to data points or changes in sentiment, which can be volatile. At the same time, we're quite mindful of the risks to the outlook and are prepared to move and use our tools as needed to sustain the expansion.

I would say that we're not looking at any one thing. I guess I would start by agreeing with your premise that news about trade has been an important driver of sentiment in the intermediate period, but we're also looking at global growth. It's really trade developments and concerns about global growth that are on our minds. We're not exclusively focused on one event or piece of data. Risks seem to have grown in the meantime. Incoming data in the United States has been pretty good, particularly for the consumer. Consumer spending is solid, supported by a healthy job market, high levels of employment, and wages going up. We do see some areas that we're looking at, such as business fixed investment, the prolonged shortfall in inflation, and perhaps job growth. We don't like to look at one job report; we like to average over three or six months, but still that bears watching. So we'll be monitoring the implications of all of those developments for the US economic outlook. We expect to learn a good deal more, and we'll be asking the question whether those risks are going to continue to weigh on the outlook. In the end, we'll use our tools as appropriate to sustain this long expansion.

I think the law is clear that I have a four-year term, and I fully intend to serve it.

We're always trying to balance that risk, but I would say that given the quite recent nature of some of the events, the committee felt that the right thing to do was to wait and see more. We will see a lot more on all these issues in the very near term, so I don't think the risk of waiting too long is prominent right now. As a general matter, it's always something we have to weigh, but I think we believe the right thing here is to watch carefully in the near term and see how these risks unfold and whether they continue to weigh on the outlook. Obviously, we try to avoid going prematurely as well. In this case, the risks we see having emerged have gotten our attention and have called a number of us to write down rate cuts, and a number of those who haven't to see that the case is strengthened.

I'll say the same thing I said last time before there had been a dissent: I think the process of careful, thoughtful dissent is a very healthy one, and I've always believed that. You make better decisions when you hear a disparity of views, so I really do look at it that way. I would add, though, that the support for the path we took, for the policy statement that we adopted, was quite broad.

I think all central banks are focused on their domestic mandates; they're focused on economic conditions from a domestic standpoint. That goes for the European Central Bank, the Fed, all central banks. So that's our principal focus. It could cut either way. To the extent you see stronger financial conditions and stronger activity in the eurozone after a rate cut, that would support activity. We're really focused on the risks to our baseline outlook, which is still a pretty favorable one, and the risks to that outlook. That's our principal focus.

I'll take the inflation question first. We noted in the statement and in my remarks that market-based measures of inflation expectations, breakevens, dropped. We noted that as one of several reasons why it feels to us that the case for more accommodation has strengthened. Not only did the actual forecast for inflation for this year among FOMC participants drop a couple of tenths, but that means a more prolonged shortfall of inflation. This is something I've been concerned about for quite a long time, one of the principal reasons I called for the review. In a world where policy rates are going to be closer to the effective lower bound, we need to be really strong on 2% inflation. We certainly don't want to be seen as weak on inflation, and I don't believe we are. On the dots, this is the first time we've talked about cutting rates in the dot era. My view on the dots is that they provide useful information for people, but we need to explain what they are and what they are not. They are not a forecast of the group; they're not discussed or debated at the meeting; they're an input to policy more than an output. They're also only the most likely case. In a situation with high uncertainty, the second most likely case might only be a little less likely, but that doesn't show up in the dots. If you pay too close attention to the dots, you may lose sight of the larger picture.

That's something we haven't really engaged with yet, and it will depend very heavily on incoming data and the evolving risk picture. More generally, the research you refer to notes that in a world closer to the effective lower bound, it's wise to react to prevent a weakening from turning into a prolonged weakening. An ounce of prevention is worth a pound of cure. That is a valid way to think about policy in this era, and it's always in the minds of policymakers. I don't know what that means in terms of the size of a particular rate cut going forward. That will depend heavily on the actual data and the evolving risk picture.

The US Treasury has responsibility for exchange rate policy, not the Fed. We don't comment on the level of the dollar. We have responsibility for maximum employment and stable prices, and we use our tools to achieve that. We do that through changing financial conditions, and one of those is the dollar, but we don't target the dollar. Central banks from other nations, when they get together, routinely adopt a communique that says we will target our domestic economic and financial conditions and not our exchange rate using monetary policy. That includes the United States and the G20 communique we adopted ten days ago. So I'm not the right person to ask about dollar policy innovation.

There was not much support for cutting rates now at this meeting. A number of people wrote down rate cuts, but all but one felt that it would be better to see more before moving. Some of these developments are so recent that we want to see whether they'll sustain. We felt it would be better to get a clearer picture of things and that we would learn a lot about these developments in the near term. Ultimately, we're going to be asking ourselves whether these risks will continue to weigh on the outlook, and we will act as needed, including promptly if that's appropriate, to sustain the expansion.

It's a complicated picture, but the big pieces are this: The baseline outlook has been good, primarily because consumer spending came back up in the second quarter and is at a healthy level. That makes sense given a tight labor market, companies saying labor is scarce, workers saying jobs are plentiful, wages going up, and high levels of household confidence. Consumer spending, which is 70% of the economy, is quite solid. Job creation on a three-month average is still well above the level of entry into the workforce. However, manufacturing, investment, and trade have been weaker globally, not just domestically. Factors include China's efforts to bring down leverage, uncertainty over supply chains due to trade developments, and Boeing 737 issues. Lower oil prices are contributing to lower investment but also to lower gas prices, supporting spending. There isn't one thing that explains it all. You see growth in services, which is the larger part of the economy, leading to low unemployment, good job creation, and rising wages. On top of that, you have crosscurrents: concerns about global growth and trade developments. From that picture, we concluded we'd like to see more, but we do see these risks and want to watch whether they continue to weigh on the outlook.

We have the tools we have, and we're committed to using them to support economic activity through a number of channels that are reasonably well understood. Some are more directly tied to interest rates than others, but we generally believe our interest rate policy can support demand and business investment. We'll use those tools as we see appropriate to achieve our objectives, which are to sustain this expansion. I would note that the reason we say 'sustain the expansion' is that we are now seeing communities being brought into the benefits of this expansion that hadn't been earlier. This is ten years into the expansion, and we heard a lot at the conference in Chicago about how important it is to keep it going because we are benefiting groups that haven't seen this kind of prosperity in a long time. We take the crosscurrents as a given and have our tools. Anything that could undermine our achievement of our dual mandate goals is worthy of our attention and can call forth a policy response.

I don't discuss elected officials publicly or privately. We at the Fed are deeply committed to carrying out our mission, and our independence from direct political control is an important institutional feature that has served the economy and the country well.

On your specific question about digital currencies replacing central bank currencies, I think we're a long way from that. Digital currencies are in their infancy, so we're not too concerned about central banks no longer being able to carry out monetary policy because of cryptocurrencies. Facebook has made quite broad rounds with regulators and supervisors around the world to discuss their plans, and that certainly includes us. It's something we're looking at. We meet with a broad range of private sector firms all the time on financial technology. There is tremendous innovation going on, with potential benefits but also potential risks, particularly for a currency that could have large application. I would echo what Governor Carney said: we will have quite high expectations from a safety and soundness and regulatory standpoint if they decide to go forward. We don't have plenary authority over cryptocurrencies as such, but they play into our world through consumer protection and money laundering. Through international forums, we have significant input into the payment system and play an important role here in the United States.

We have said we wouldn't look at raising the target rate for inflation. The reason is it's become a global norm, 2%. Our statutory mandate is price stability. We are looking at less radical ideas, such as how to make the 2% inflation objective more credible. This gives me a chance to say a couple of things about the review and Chicago. It's a new thing for us, and I thought it was appropriate and important. It will be a year-long or longer process looking at our strategy, tools, and communications, meant to open ourselves up to dialogue and criticism with the constituencies we serve. We've had a series of Fed Listens around the country and an academic conference earlier this month with seven papers. The heart of the conference was two panels with practitioners from low- and moderate-income communities. People were struck by their intervention, which was uniformly about how important maximum employment is and what it means in their communities. They haven't had a booming economy; they have low unemployment and many social problems. Now companies want to hire, providing opportunities not seen in a long time. For someone who does this work, that was very focusing and motivating. When those panelists were asked about 2% or 4% inflation, they shrugged. 4% inflation is not a practical alternative. You see disinflationary pressures around the world, and central banks have a hard time getting inflation up to their objectives. Even with high resource utilization, inflation has been lingering. Saying you're going to go for 4% -- I wonder how credible that would be.

The 2013 guidance is not binding, and that's what came out of the GAO review. But we have the authority to examine banks for safety and soundness. As a bank supervisor, we start with the risks banks are taking through their portfolios and the obligations they've undertaken. We monitor that very carefully. Exposures are much smaller than before the crisis, and we test that regularly in stress tests. We have a sense of what losses would be. In supervision, we focus on the risks banks are running. I feel that is in a good place, but we never say mission accomplished. What's happened is that the paper is now owned by market-based vehicles: CLOs, mutual funds, etc. We have a good sense domestically of where that paper is; internationally, not as much. The Financial Stability Board is looking at that. These vehicles are pretty stably funded with no run risk, but there is macroeconomic risk. The Financial Stability Oversight Council is looking at it, and we call it out as a macroeconomic risk, but it's not a financial stability risk in the sense of undermining the financial system's ability to intermediate credit.

I think the issue isn't that banks don't understand the rules; the risk is not in the banks but in those market-based vehicles. I'm no longer day-to-day involved in this as I was before I took this job, but my sense is that we do understand what risks the banks are running. The question is how concerned we should be about large holdings by market-based vehicles and what risks they present. We are very carefully assessing that and continue to take all these risks seriously. I gave a whole speech about this a few weeks ago.

We have to be closer to full employment because more jobs are being created than people entering the labor force; the unemployment rate is lower. The labor market is in a good place. The level of wages is consistent with what it should be: approximately equal to inflation plus productivity increases. What's surprising is that we could reach these levels of unemployment late into a cycle and not see even higher wages pushing up on inflation. Wages are growing at a healthy and appropriate rate, but not at a rate that would provide much upward thrust for inflation. We watch this very carefully and are careful not to assume there is no more slack. When I got to the Fed, unemployment was in the 8% range, and it has come down. We haven't seen wages pick up or real signals that we're at maximum employment. Surveys show the labor market has tightened but not over-tightened.

We haven't made any decisions yet. Balance sheet runoff is very close to the end of its planned life. If we do provide more accommodation—and we haven't really addressed this—if we do, we'll keep in mind what we said earlier this year: we'll always be willing to adjust balance sheet policy so that it serves our dual mandate objectives. Thank you very much.