Powell's speech and Q&A transcript

Source: Mikko, Zhibao

Opening Remarks

Thank you for your introduction. I look forward to my conversation with Professor Rajan. I will begin by briefly discussing the outlook for the economy and monetary policy.

At the Federal Reserve, we remain focused on the dual mandate goals given to us by Congress: maximum employment and stable prices. Although uncertainty and downside risks have increased, the U.S. economy remains in a solid position. The labor market is at or close to full employment. Inflation has declined sharply but is slightly above our 2% objective.

Turning to the latest data, we will have preliminary data on first-quarter GDP in a few weeks. The data currently available suggest that the pace of growth in the first quarter slowed from last year's solid pace. Despite strong auto sales, overall consumer spending appears to have grown modestly.

In addition, strong imports in the first quarter reflect businesses trying to get ahead of potential tariffs and are expected to weigh on GDP growth.

Surveys of households and businesses reported a sharp decline in sentiment and increased concerns about the outlook, largely reflecting concerns about trade policy. Full-year external forecasts are declining and largely point to a continued slowdown in the economy, but still positive growth. We are tracking the latest data closely as households and businesses continue to digest these developments.

On the labor market, nonfarm payrolls increased by an average of 150,000 per month in the first three months of the year. While job growth has slowed relative to last year, low layoffs and low labor force growth have kept the unemployment rate in a low and stable range. Meanwhile, the ratio of job openings to unemployed job seekers has remained just above 1, close to pre-pandemic levels. Wage growth has continued to slow, but is still outpacing inflation. Overall, labor market conditions are favorable, broadly balanced, and not a significant source of inflation pressure.

As for our price stability mandate, inflation has eased significantly from its pandemic peak in mid-2022 without the painful increases in unemployment that typically accompany efforts to reduce high inflation. Progress on inflation continues to be gradual, with recent readings remaining above our 2 percent objective. Estimates based on data released last week suggest that overall PCE prices increased 2.3 percent in the 12 months through March, and core PCE prices, excluding the more volatile food and energy categories, increased 2.6 percent.

Looking ahead, the new administration is implementing significant policy changes in four different areas: trade, immigration, fiscal policy, and regulation. These policies are still evolving, and their effects on the economy remain highly uncertain. We will continue to update our assessments as we learn more. The tariff increases announced so far have been much larger than expected. The economic impacts are also likely to be, which will include higher inflation and slower growth. Both survey-based and market-based measures of short-term inflation expectations have risen sharply, with survey participants pointing to tariffs. For the most part, survey measures of longer-term inflation expectations appear to remain rock solid; market-based breakeven inflation continues to run close to 2 percent.

As we gain a better understanding of the Administration's policy changes, we will better understand their impact on the economy and, in turn, their implications for monetary policy. It is highly likely that tariffs will cause at least temporary increases in inflation. It is also possible that the inflationary effects will be more persistent. Avoiding such an outcome will depend on the size of the effects, the time it takes for them to be fully passed through to prices, and, ultimately, on keeping longer-term inflation expectations anchored.

Our obligation is to keep longer-term inflation expectations anchored and to ensure that one-time increases in the price level do not evolve into persistent inflation problems. In acting to meet this obligation, we will balance our dual mandate of maximum employment and price stability, bearing in mind that without price stability we cannot achieve the long-term strong labor market conditions that benefit all Americans. We may find ourselves in challenging situations where our dual mandate objectives are in tension. If that happens, we will consider how far the economy is from each of our goals and the potential different time frames over which we expect to close those respective gaps.

As the great Chicagoan Ferris Bueller once noted, "Life moves fast." At this point, we are well-positioned to await greater clarity before considering any adjustments to our policy stance. We will continue to analyze emerging data, the changing outlook, and the balance of risks. We understand that high unemployment or inflation can be damaging and painful to communities, families, and businesses. We will continue to do everything we can to achieve our maximum employment and price stability goals.

Question and Answer Session

Thank you very much, Chairman, for your remarks, and I look forward to you expanding on those points over the next 40 minutes or so. I remember that you were interviewed by Melody Hopson last time here, and while I can't match that, I'll try to make up for that by asking high-quality questions. As you've repeatedly stressed, communication and transparency are so important to the Fed, and I was hoping you could expand on some of the points you just made. As a former central banker, the only thing the Economic Club has ever reminded me of is not to get caught up in central bank bureaucracy, so I'll try to avoid that.

Let me start by saying that you've led the Fed through many difficult times, including COVID, the liquidity crisis in March 2020, severe inflation, the SVB banking crisis. And the likelihood of a Fed-led "soft landing" that has emerged over the past year has been increasing. Now, it seems that in just a few months, everything has changed: JPMorgan now expects the probability of a recession this year to be about 60%. What do you think about this?

POWELL:

First of all, thank you for being here today, it's really an honor to be in the room with you. In fact, my appearance in that previous speech was my first appearance as Chairman seven and a half years ago, so it's great to be back today. I agree with you that it has been an eventful seven years - to put it mildly, I was always waiting for the three months of calm that never came. (Laughter) As for your question, I want to review the situation in 2024: In 2024, the economy grows at 2.4%, unemployment remains low at around 4%, close to the mainstream estimate of full employment, and inflation declines, around 2.5% by the end of the year. That's what the economy looks like at that time, and I can't make any comments about it, but it's what it is. As for your mention that the government is implementing major policy changes, especially on trade, the impact of which may cause us to deviate from our goals, as I mentioned in my speech. So there is a high probability that unemployment will rise as the economy slows; at the same time, there is also a high probability that inflation will rise as tariffs are implemented and some of the burden of tariffs is eventually passed on to the public. That's a very likely scenario, and I hope we can get through it and get back on track, but we're committed to full employment and price stability, and that's our job. I think we're probably going to be off those goals for the rest of the year, or at least not make any progress, and then we'll get back to making progress when we can. Q: Let's talk a little bit about tariffs. You've acknowledged that some of the impact of tariffs will be one-time and temporary, but you've also said that tariffs may provide a lot of companies with room to raise prices. As you mentioned, the prices of dryers and washers are going up because of the tariffs, and even without the tariffs, the prices of dryers are going up. How do you think the tariffs are going to affect inflation? What's going to make them more permanent? And what do you think is going to affect economic growth? A: A simple starting point is that tariffs will cause prices to rise, and therefore inflation, but they're a one-time thing. So, the price level goes up, and that's it. But that can happen in certain circumstances, depending on a lot of factors that we don't know. I want to point to a couple of them, or three. The first is the magnitude of the impact. As I mentioned, the tariffs are higher than the forecasters expected, certainly higher than our own expectations, and even in the best-case scenario that we envision, we've considered a range of scenarios. That's one. The second is how long it takes for the tariffs to have an impact on inflation. The longer it takes for the impact to have an impact, the higher the risk that the public will start to experience and expect higher inflation, and that companies will start to expect that, and that increases the risk of inflation. The third point is what I mentioned in my speech, you have to keep inflation expectations anchored. If we can get those three things under control, then we can make sure that this is just a one-time increase in prices and that it doesn't turn into a sustained inflationary process, which is an important part of our job.

Q?

What about the impact of tariffs on quantities? For example, with the current level of tariffs on China, people are worried that supply chains may be disrupted and companies may not be able to import related products from China because the prices are too high. If it turns into a supply shock, will the Fed's response be different than if it were primarily a price shock?

Powell:

In fact, I had dinner last night at the Chicago Federal Reserve Bank with many directors from various departments of the Chicago Federal Reserve Bank, many of whom are CEOs of important companies, and they are generally feeling uncertain, and the impact of imported components on their products is a huge issue. But if you look back to the pandemic, you will remember that there was a shortage of semiconductors, which led to a shortage of cars, and the demand for cars was extremely high at the time. Shortages persist for a long time because production can't keep up, and that's one of the reasons why inflation is so long-lasting. So when you think about supply disruptions, you think about the kind of situation that could take a while to resolve and could cause a one-time inflationary shock to be prolonged or even more persistent, and we would be concerned about that. In that case, you look at the auto companies, their supply chains are likely to be severely disrupted, and you would be concerned that this process could last for years and the inflationary process could be prolonged.

All of this is highly uncertain. We are actually thinking about how the tariffs might affect the economy before they go into effect, which is why we are actually waiting to see what the ultimate policy is and then we can better assess the economic impact.

Q:

Let's talk about immigration. You mentioned that the labor market is in reasonable balance right now. Of course, what we've seen over the last few months, the last few months of the previous administration and what has continued into this administration, is a significant drop in immigration. How do you think that will affect the labor market? POWELL: Part of the reason that the economy has been growing so strongly over the last few years is that immigration has been so strong, and those people have joined the workforce, and the economy has kept them employed, and there was a lot of demand at the time, and we're still digesting the labor shortage. As you mentioned, immigration has fallen dramatically since the last administration changed its policy, and so the growth of the labor force has actually stopped, it's actually stagnated. But at the same time, demand has been falling, and so has the demand for workers, and so the creation of wage jobs has also fallen, and they've fallen in sync in some ways, which is why the unemployment rate has been pretty stable for a year or so. So to some extent, the demand for workers and the supply of workers may have fallen somewhat coincidentally. In terms of the impact on the labor market, we're still at full employment, the labor force participation rate is still very high, and wages have come back down to levels that are pretty sustainable at the moment given the assumptions made about productivity. So the labor market is in good shape. In the long run, the impact of immigration is generally considered to be modest for inflation, with demand and supply effects more or less canceling each other out, so we don't expect a significant impact on inflation.

Q:

There has been a lot of talk in recent weeks about government layoffs and job freezes at research institutes and universities. How quickly and to what extent will this affect the labor market?

A:

It's too early to say, but what I can say is that, of course, government layoffs will be significant for those who are laid off.We don't know how large the layoffs will be. At the moment, they are not large enough to have a material impact on a workforce of 170 million people. In terms of funding cuts in areas such as science, we do see large layoffs and significant impacts on employment in universities, research hospitals, and cities with a lot of research institutes. I don't know what the total will be. And of course, in addition, there are likely to be effects on economic growth, productivity, health, and all sorts of other things from cutting scientific research, but those are hard to estimate in real time.

Q:

Given that we're talking about the future, you're looking at higher unemployment in the near future as well as potentially higher inflation, and of course the policy required for each scenario is likely to be different. You talked briefly at the podium about how the Fed would view both scenarios and how it would respond, and I'll give you another opportunity to elaborate.

POWELL:

Most of the time, when the economy is weak, inflation is low and unemployment is high, both of which require lower interest rates to support economic activity, and vice versa. So most of the time, those two objectives are not in conflict, and they really aren't. Now the labor market is still strong, but the shock that we're experiencing, the pulse that we're feeling is higher unemployment and higher inflation, and our tools can only do one of those two things at a time, so it's a difficult situation for a central bank. In terms of what to do, the best thing we can do is actually have a little clause in our consensus statement that we voted on to capture how we deal with these issues. What we say is that we're going to look at how far the economy is from these two goals, and then we're going to ask ourselves whether the speed at which they achieve these goals might be different. We're going to look at these things and think about them, and we're going to make very difficult judgments, no doubt. We're not in that situation now, but as I mentioned in my remarks, we may well be in that situation.

Q:

I want to bring up another word that's been used a lot today: uncertainty. As one respondent to the Dallas Fed survey said, "In my 40-plus year career, I've never felt so uncertain about my business." The warning today is not just about immediate policy uncertainty, but about a radical change in the philosophy of the U.S. economy, not just policy uncertainty, but structural uncertainty. As you pointed out, one of the effects of higher levels of uncertainty is that companies will delay investments.For example, even after tariffs stabilize, companies that are considering repatriating production facilities will hesitate because they don't know whether the tariffs will be lifted in the future, perhaps by the next administration.How do you account for this long-term uncertainty in your policy?

Powell:

Let me first agree that we feel strongly, and you will all understand this, that these are very fundamental changes in the policies that the United States has long pursued. And there is no real experience to draw on, I mean,the Smoot-Hawley tariffs were not actually that large, and that was 95 years ago.

So there's no modern experience of how to think about this, and businesses and households are saying in surveys that they're experiencing extremely high levels of uncertainty. And some of the research from the Federal Reserve suggests that that does cause businesses and households to back off on decision-making, which is certainly reasonable. And you hope that this is a phase that you'll go through, and then you'll know that things are more certain, and so people can resume normal economic activity with an understanding of what the new normal is. I mean, your question is really, what if this uncertainty persists? I think that's a difficult environment. I think people's expected returns have to be higher, and I think people will weigh the impact on investments, and overall, if the United States is going to be a jurisdiction that's structurally riskier, that makes us less attractive to investors. We don't know that yet, but I think that will be the ultimate impact. Q: Okay, let's turn to financial markets. We've seen some volatility, particularly in the stock market. I mean, the VIX had risen to levels that we saw earlier in the pandemic and it's now backed off a bit. Some people have argued that if the stock market crashes, the Fed will intervene, and that's what's called the "Fed put," are they right?

POWELL:

I'd say "no," and explain.

I think the market is digesting what's going on, and really the policy, and particularly the trade policy, and the real question is how this is going to play out, how it's going to play out, we don't know yet. Until we know that, you can't make an intelligent assessment, and there's still going to be a lot of uncertainty, and once you know what the policy is, the economic impact is still going to be very uncertain.So the market is struggling with a lot of uncertainty, and that means volatility. But even so, the market is still functioning. The market is functioning as it should in this challenging situation, and it's functioning very well, just as you would expect. Q: We've also seen volatility in the bond market, and typically when there's risk aversion, we see yields on German bonds and Japanese government bonds go down, but we see yields on U.S. Treasuries go up. What do you think is causing that? POWELL: I would say the same thing, I think it's hard to really know. I've had a lot of experiences, for example, where there's been major volatility in the bond market and people will form a narrative and then two months later you look back and see that narrative is completely wrong. So I think it's premature to say exactly what's going on. Clearly, there's some deleveraging going on among hedge funds in leveraged trades. And, again, markets are pricing in historically unique developments, and there's a lot of uncertainty. I think you're likely to see continued volatility, but I'm reluctant to say exactly what's causing it, I'd just say that markets are orderly and they're operating pretty much the way you'd expect in a period of high uncertainty like this.

Q:

So the Fed slowed down the reduction of its balance sheet at its last meeting. Was that because of uncertainty about how much reserves and liquidity the market would need, and you wanted to take more time to understand that? On the other hand, you said that markets are orderly, and would the Fed intervene if markets became disrupted?

POWELL:

We think reserves remain ample, so we don't think we're anywhere near the point where QT would stop. But we were faced with a situation where there were going to be large inflows and outflows of reserves for other reasons, having to do with the debt ceiling and the Treasury's general account, which would be interesting to those who work in the Treasury market. But when these large flows were occurring over a six-month period, we couldn't really see evidence of whether we were approaching or not approaching a level where reserves were low. So we decided to slow down. We considered pausing, but we debated that, and it was one of the great debates we had on the FOMC, and we decided to slow down. People were really starting to see the merits of doing that because the slower we went, the smaller the balance sheet could get without causing disruption, and we wanted that process to continue, and it was going very slowly now. So we thought that was a very good thing, and it meant that it could continue for a longer period of time, and we would be able to very carefully arrive at the level of reserves that we thought was appropriate, and still have ample reserves. Q: So what about the international system based on the dollar? Amid all this chaos, are you prepared to provide dollars to central banks, as you have done in the past, when there is a global dollar shortage?

POWELL:

Absolutely, absolutely. To give you an idea of ​​what's going on, we have standing dollar swap lines with the five major central banks, and they flow to economies that have large dollar funding markets overseas, and in fact, these are overseas markets, for example, where European or Asian institutions are buying asset-backed securities that are backed by U.S. consumer loans. So in fact, these are loans to U.S. consumers, and we support that, and we want to make sure that dollars are available, and they need dollar funding to hold these dollar assets. So the way it works is, when needed, we lend to the central bank in dollars, they repay us in dollars, and then they pay us in their own currency, and they lend in dollars, so we don't take any credit risk or anything like that, and that supports the dollar funding market. The dollar funding market is very sensitive in times of crisis, and this is very helpful. The reason we do this is that it's really good for us as consumers, so we're going to continue to do it, and it's part of the dollar's role as a reserve currency, and most importantly, we're going to do it.

Q:

You mentioned that one of your concerns is the U.S. fiscal situation. Obviously, U.S. sovereign debt continues to rise, what are your thoughts on the long-term implications for interest rates and economic stability? How much more can our national debt increase before it reaches a level that is unsustainable in the long term?

Powell:

The U.S. federal debt is on an unsustainable path, but it's not yet at an unsustainable level, and no one really knows how much further we can go.

other countries have gone further over time, but we are now running very large deficits at full employment, and that's a situation that we very much need to address as soon as possible, the sooner the better.

If I can speak from my time working on these issues in the past, this is not a Fed problem, but if you look at a pie chart of federal spending, the largest pieces and the growing pieces are Medicare, Medicaid, Social Security, and now interest payments, so that's really where the work needs to be done, and these issues can only be solved on a bipartisan basis, no one party can find a solution without both parties involved, so it's critically important. All domestic fiscal discretionary spending, which is usually the focus of discussion, is a very small percentage of federal spending, and it's a declining percentage of federal spending over time. So when people focus on cutting domestic (discretionary) spending, they're not actually solving the problem, domestic discretionary spending is already declining, and I just want to make that point because a lot of the conversation that politicians provide is about domestic. POWELL: First of all, I think you're right, and I think the public is right. When we say inflation is coming back down to 2% to 2.5%, we think that's a good thing, but it doesn't help you much if you're paying 20% ​​more now than you're going to pay in 2021, you're still paying a lot more for the necessities of life than you did in the past. That's just another way of saying that people hate inflation and it's easy to see why. What we can really control is a world where prices don't fall overall (deflation) except in extreme circumstances, and we don't want to risk that. So I don't think it's possible for us to have a framework where we're going to reduce prices by 10% or so, and that's not something we're going to be thinking about. We're basically looking for the best way to promote 2% inflation over time. You know, the changes we made in 2020 were really innovations around what to do when you're stuck in near-zero interest rates. Now we are well above zero, and we may still need to find a way to deal with that in our framework, but maybe the main scenario is no longer that we are dealing with the effective lower bound, and it will be a framework that looks more like what we had before 2020.

POWELL:

One ​​of the tools that you introduced to deal with the zero lower bound was quantitative easing, but you also used quantitative easing to address disruptions in financial markets, will you be more specific about what your goals were for using quantitative easing as you do your review?

In the beginning, we almost always used it for financial market functioning, and that was the case during the global financial crisis and the pandemic, and we did try to explain ourselves during the pandemic, and our explanation did change, but I think it's fair to say that we could have done a better job of explaining why we did that, and that's something we're aware of and are thinking about.

Q:

No discussion of AI is complete without one. As AI is advancing so rapidly, it could impact productivity, it could impact employment, and some people are saying that we're going to see technological unemployment emerge in a serious way for the first time with AI. What's your take on that? And how will it impact the future of the Fed?

POWELL:

Like everybody who's been exposed to what it can do, it's beyond my imagination. I mean, I thought it was like a better version of Google at first, but it's not, it's like a better person (laughter), I mean, it can do amazing things. So the thing is, over 250 years of technological innovation, technology has been evolving, and people were worried that it would replace human labor and people would lose their jobs, but that's not the case. Or it might be in the short term, but in the long term, what it does is increase human productivity, and therefore improve living standards. So, is this going to eliminate more jobs than it creates? We just don't know. I mean, you come back in 20 years and it's going to be a situation where people are more efficient in their jobs because of AI? Or is it going to be a situation where AI has replaced a lot of people? I think it's hard to say, but it's really quite remarkable what it can do. And, you know, we recently had a professor from Wharton come in and do a demo, and you talk to it like you're talking to a person, and it responds like a person, and it's really amazing what it can do. And, by the way, it's still early days, and they say there's going to be more amazing breakthroughs even in the next few years. So I think it's one of the two or three things that's most likely to make a huge difference to the economy around the world in the next 20 years, and I think it's hard to say how it's going to play out.

Q:

Let's talk about your job. An important person once said about your job, "It's the best job in government, and you go into the office once a month and you say let's see, flip a coin." And then everybody talks about you like you're a god. What do you do in your office on a typical day? Is it fulfilling? Dare I say it, is it enjoyable? Do you really feel like a god? POWELL: I agree, I think it's the best job in government, I agree with that, I really enjoy it. Yes, I enjoy the job, it's an honor to serve the country, it's very humbling because you know everybody makes mistakes, it's just that the economy is very unpredictable, all of that is true. And, you know, I do what everybody expects me to do, we do read more than the typical executive, my colleagues and I do a lot of our daily work every day. As for being a god, I would say we are fortunate to have a lot of well-paid critics who tend to diss us. So we don't feel like a god. Q: OK, let's talk about something more mundane. What are the key metrics that you focus on in that office? What sources of data do you look at to help you make decisions? POWELL: You know, I'll start with the labor market. You know, there's more, better, more reliable labor market data than anywhere else. And there's a lot of data, you know, there's new jobs, there's nonfarm payrolls, there's wages, there's participation rates, you can break all of that down into different categories, there's a million different things. So there's a lot of labor market data. If you're going to go into economics, it's a great field to go into because there's a lot of things to do. And then we also look at inflation data. You know, I follow global developments very closely, and I talk to my global counterparts regularly to understand what's going on. Financial markets are very important, you know, you can, and lately we've been very focused on what's happening in currency markets, fixed income markets, and equity markets, as you would expect. For me, my background was more in the private sector, and as an investor for a large part of my career, I had to talk to outsiders and understand what they were seeing and dealing with so that I could really connect the dots. You know, I can only look at so much data, but to really get the story and the narrative, it's more about talking to outsiders, and you know, anecdotal data really helps to contextualize things.

Q:

Yes, you said you talked to business people last night to get a sense of what's going on in the Midwest.

Let me turn to the independence of the Federal Reserve. You reiterated that you intend to stay in office until the end of your term, which of course reassured many in the financial markets. What means does the administration or the legislature have to put pressure on the Fed? Should people be concerned that the independence of the Fed will be threatened after you leave?

POWELL:

Our independence is enshrined in the law. We are legally protected. You know, Congress could change that law, but I don't think there's any danger of that. The independence of the Federal Reserve has broad bipartisan support and broad support in both houses. So I don't think that's an issue. There's a Supreme Court case that people may have read about in the newspapers today, where the Supreme Court may decide whether the general authorization law for independent agencies can contain a provision that prohibits the president from firing a member of the board except for good cause. People are talking a lot about that case. I don't think that ruling will apply to the Federal Reserve, but I don't know, and it's a situation that we're watching very closely. Overall, the independence of the Federal Reserve is widely understood and supported in Washington and in Congress, and that's what's really important. The key is that we can make our decisions, and we will make our decisions based solely on our best analysis of the data and what is the best way to achieve our dual authorization goals in order to best serve the American people. That's the only thing we do, and we will never be influenced by any political pressure. People can say whatever they want, and that's fine, and that's not a question, but we're going to do what we do strictly without regard to politics or anything else that's irrelevant.

Q:

Okay, I have time for one last question. I know what's on your mind, and that's what you're going to do next on interest rates. But I'm not sure you know, and I'm not sure you'd tell me even if you knew. So I'm not going to ask that question. The question I want to ask is a more personal question, what do you most want to do at home after a tiring day in the office, a day of flipping coins?

POWELL:

You know, I play my guitar, I do Zoom calls with my kids and grandkids, and I also go to the gym a lot to stay healthy.

MODERATOR:

We need you to be healthy, we need you to be healthy. Thank you very much, Chairman Powell.

On behalf of the Economic Club of Chicago, let me thank Chairman Powell and Dr. Rajan for such a great conversation. You are a national treasure, and I wish we could all see what an important role Chairman Powell plays in our business and personal lives. Thank you for sharing your important insights.