By Wong Kon How
One of the most important conferences or seminars we should attend is the press conference after each FOMC meeting. The reporters will have their translations, but I prefer to hear from Jerome Powell himself, as it provides information on what the Fed is thinking.
It is a 24-page transcript, and I have highlighted some of his key statements with added subtitle.
View on current inflation numbers
However, in recent months inflation has shown a lack of further progress toward our 2 percent objective, and we remain highly attentive to inflation risks.
We have stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent. So far this year, the data have not given us that greater confidence. In particular, and as I noted earlier, readings on inflation have come in above expectations. It is likely that gaining such greater confidence will take longer than previously expected. We are prepared to maintain the current target range for the federal funds rate for as long as appropriate. We are also prepared to respond to an unexpected weakening in the labor market.
Why Fed holds rates at current level?
We know that reducing policy restraint too soon or too much could result in a reversal of the progress we have seen on inflation. At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. Policy is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate. We will continue to make decisions meeting by meeting.
About the balance sheet
Turning to our balance sheet, the Committee decided at today’s meeting to slow the pace of decline in our securities holdings, consistent with the plans we released previously. Specifically, the cap on Treasury redemptions will be lowered from the current $60 billion per month to $25 billion per month as of June 1. Consistent with the Committee’s intention to hold primarily Treasury securities in the longer run, we are leaving the cap on agency securities unchanged per month and will reinvest any proceeds in excess of this cap in Treasury securities. With principal payments on agency securities currently running at about $15 billion per month, total portfolio runoff will amount to roughly $40 billion per month. The decision to slow the pace of runoff does not mean that our balance sheet will ultimately shrink by less than it would otherwise, but rather allows us to approach its ultimate level more gradually. In particular, slowing the pace of runoff will help ensure a smooth transition, reducing the possibility that money markets experience stress, and thereby facilitating the ongoing decline in our securities holdings that are consistent with reaching the appropriate level of ample reserves.
Will you hike rate the next meeting?
So I think it's unlikely that the next policy rate move will be a hike. I'd say it's unlikely. You know, our policy focus is really what I just mentioned, which is how long to keep policy restrictive. You ask what would it take, I think we'd need to see persuasive evidence that our policy stance is not sufficiently restrictive to bring inflation sustainably down to 2 percent over time. That's not what we think we're seeing, as I mentioned, but something like that is what it would take. We'd look at the totality of the data and answer that question that would include inflation, inflation expectations, and all the other data too.
Under what circumstances will you continue to hold rates at the current level?
So, for example, let me take a path; if we did have a path where inflation proves more persistent than expected, and where the labor market remains strong, but inflation is moving sideways and we're not gaining greater confidence, well that would be a case in which it could be appropriate to hold off on rate cuts.
Under what circumstances will you cut rates from the current level?
I think there's also other paths that the economy could take which would cause us to want to consider rate cuts and those would be, two of those paths would be that we do gain greater confidence, as we've said, if that inflation is moving sustainably down to 2 percent and another path could be an unexpected weakening in the labor market, for example. So, those are paths in which you could see us cutting rates.
How is your inflation reading to date?
What do we now see in the first quarter? We see strong economic activity, we see a strong labor market, and we see inflation. We see three inflation readings and so I think you're at a point there where you should take some signal. We don't like to react to one or two month's data, but this is a full quarter and I think it's appropriate to take signal now, and we are taking signal. And the signal that we're taking is that it's likely to take longer for us to gain confidence that we are on a sustainable path down to 2 percent inflation. That's the signal that we're taking now, yeah.
Are you see stagflation coming?
Yeah, I'm not dealing really in likelihoods. I think there are paths that the economy can take that would involve cuts and there are paths that wouldn't and I don't have great confidence in which of those paths, I think, I would say my personal forecast is that we will begin to see further progress on inflation this year. I don't know that it will be enough, sufficient, I don't know that it won't. I think we're going to have to let the data lead us on that. In terms of your question, your second question was stagflation. I guess I would say, I was around for stagflation and it was 10 percent unemployment, it was high single digits inflation, right now we have-- and very slow growth, so right now we have 3 percent growth, which is pretty solid growth I would say, by any measure, and we have inflation running under 3 percent. So, I don't really understand where that's coming from. And in addition, I would say most forecasters, including our forecasting, was that last year's level of growth was very high, 3.4 percent in I guess the fourth quarter, and probably not going to be sustained and would come down. But that would be our forecast. That wouldn't be stagflation. That would still be to a very healthy level of growth. And of course with inflation, we will return inflation to 2 percent and that won't be, so I don't see the stagflation actually.
Its an election year, is the bar for rate changes higher close to an election?
So we're always going to do what we think the right thing for the economy is when we come to that consensus view that it's the right thing to do for the economy. That's our record, that's what we do. We're not looking at anything else, it's hard enough to get the economics right here.
I mean you can go back and read the transcripts for every-- this ismy fourth election, fourth presidential election here, read all the transcripts and see if anybody mentions in any way, the pending election. It just isn't part of our thinking. It's not what we're hired to do. If we start down that road, again, I don't know how you stop.
Higher interest rates with higher mortgage rates and car loans is hurting consumers, what would you say to them?
Well, the thing that hurts everybody and particularly people in the lower income brackets is inflation. If you're a person who's living paycheck to paycheck, and suddenly all the things you buy, the fundamentals of life, go up in price, you are in trouble right away. And so, with those people in mind in particular, what we're doing is we're using our tools to bring down inflation. It will take some time, but we will succeed and we will bring inflation back down to 2 percent and then people won't have to worry about it again. That's what we're doing, and we know that it's painful and inconvenient but the dividends will be paid, will be very large and everyone will share in those dividends and we've made quite a lot of progress if you can think about it. I think headline, core PCE peaked at 5.8, now it's at-- anyway, headline peaked at 7.1, now it's at 2.7.
How is US inflation situation compare with EU and the Japanese economy?
So I think the difference between the United States and other countries that arenow considering rate cuts is that they're just not having the kind of growth we're having. They have, their inflation is performing about like ours or maybe a little better, but they're not experiencing the kind of growth we're experiencing. So, we actually have the luxury of having strong growth in a strong labor market, very low unemployment, high job creation, and all of that and we can be patient and we'll be careful and cautious as we approach the decision to cut rates.