Federal-Reserve
Federal Reserve Chairman Jerome Powell emphasized the central bank's commitment to combatting high inflation and bringing it back to its 2 percent goal during the FOMC press conference. This will be achieved through sustained periods of below-trend growth, which will result in some softening of labor market conditions, along with interest rate increases. Powell acknowledged that high inflation is hurting those at the lower end of the income and wealth spectrum and that tight monetary policy is necessary to deliver price stability, which has large benefits to society. Additionally, Powell discussed the need for a correction in the housing market to bring it back to better balance and acknowledged the impact of global tightening by central banks.
In this section, Chair Powell discusses the Federal Reserve's commitment to bringing inflation back to its 2 percent goal and the tools and resolve they have to achieve it. He mentions that without price stability, the economy does not work for anyone, and that strong labor market conditions cannot be achieved without it. The FOMC has raised its policy interest rate and anticipates ongoing increases to be appropriate. Despite recent indicators of modest growth of spending and production, the labor market has remained extremely tight, with the unemployment rate near a 50-year low, job vacancies near historical highs, and wage growth elevated. While longer-term inflation expectations appear to be well-anchored, the longer high inflation continues, the greater the chance that expectations will become unanchored.
In this section, Federal Reserve Chair Powell discusses the Fed's actions and plans to combat inflation. The Fed is focused on bringing inflation back down to 2 percent, which will require sustained periods of below-trend growth, and there will likely be some softening of labor market conditions. The Fed has raised interest rates by 3 percentage points this year, and they anticipate ongoing increases will be appropriate but will depend on incoming data and the evolving outlook for the economy. The historical record cautions against prematurely loosening policy, and restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run.
In this section, Chair Powell discusses the factors the Fed will consider before reducing rates, such as growth running below trend and inflation returning to 2 percent. He also addresses how monetary policy affects the economy with long and variable lags and notes that the Fed will slow the pace of rate hikes as the stance of policy tightens further. Powell anticipates that the policy rate needs to reach a restrictive level before inflation can be confidently brought down to 2 percent. Furthermore, Powell suggests that the increase in the unemployment rate next year reflected in the Fed's SEP projections is modest compared to previous historical episodes because the current job opening situation is outside of historical experience, and longer-run inflation expectations are fairly well anchored.
In this section of the FOMC press conference, Chair Powell explains that part of the current inflation is due to supply shocks caused by events that weren't seen in prior business cycles, such as the pandemic and the Russian invasion of Ukraine. However, recent developments may help ease inflationary pressures, such as the peak of commodity prices for now and resolving supply chain disruptions. Powell acknowledges that the outcome of restoring price stability while achieving a soft landing would be challenging and that there is no way to know if this process will lead to a recession. He also notes that vacancies and quits are good indicators of how tight the labor market is, and the overall goal is to get inflation back down to 2 percent to prevent greater pain later on. Questions from reporters focus on how the committee thinks about the policy destination and how to think about SEP in this meeting.
In this section of the FOMC press conference, Chair Powell discussed the committee's plans for rate increases, stating that they are committed to reaching a restrictive level for the federal funds rate and the decision on the exact rate increase will be made at the next meeting. Powell also discussed the risk-management considerations and the motivations behind continuing to front-load rate increases when progress on inflation has not been seen despite expectations that supply-side healing would bring down inflation. Additionally, Powell touched upon the balance sheet and the possibility of selling mortgage-backed securities, stating that while it is something the Fed will turn to in the future, it is not something they're considering at the moment, and the decision will be based on various factors.
In this section, Chair Powell discusses the potential risks of global tightening by central banks and the coordination among them. He notes that they are in frequent contact and exchange information on their respective economies and international spillovers. While there may not be coordination due to different levels of interest rates, they are informed by other important economies' actions. Powell acknowledges that the economy has been resilient, with a strong labor market, durable consumption, and corporate profits, but sectors like housing are sensitive to higher interest rates. The economy is expected to grow below trend this year, and the focus is on getting inflation back to 2 percent.
In this section, Federal Reserve Chairman Jerome Powell acknowledges the high likelihood of a period of slower growth, which could result in increases in unemployment. However, he points out that to set the economy up for another period of strong labor markets, the current focus should be on getting inflation under control. While there is no painless way to achieve this, Powell emphasizes that rates need to rise significantly to decrease inflation and subsequently create meaningful downward pressure. He explains that high inflation is hurting people at the lower end of the income and wealth spectrum and by slowing the economy, hopefully leading to supply-side improvements, and softening labor market conditions, they can deliver price stability, which delivers large benefits to society.
In this section, Chairman Powell addresses the need to keep inflation low and stable for a long period of time, as history has shown that higher inflation leads to more pain for the public. He explains that to get there, the economy needs tight monetary policy, which will bring economic pain such as job losses, higher interest rates, and slower growth. However, this is necessary to avoid higher costs of restoring price stability down the road. Powell also discusses the need to reset the housing market, which requires a correction to align supply and demand so that housing prices go up at a reasonable pace, and people can afford houses again.
In this section, Chairman Powell discusses the housing market and the impact of the correction on it, saying that the current situation will put it back in better balance but shelter inflation will remain high for some time. When asked about the expected rates and how restrictive they could be, he explains that when they get to that level, the rate will be adjusted for a forward-looking measure of inflation, and there will be a positive federal funds rate that could be around 1%. He notes that they have written down a plausible path for the federal funds rate and that they will continue to watch the incoming data and evolving outlook to ensure policy is in the right place.
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