Transcript of the October Federal Reserve Interest Rate Meeting: Powell Unexpectedly Takes a Hawkish Stance

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Susan M. Collins; Lisa D. Cook; target range for the federal funds rate by 1/2 percentage point at this meeting, and Jeffrey R. Schmid, who preferred no change to the target range for the federal funds rate at this meeting.

This contrasts with the long-standing, very moderate deflationary trend in commodity prices. This is pushing up inflation. On the other hand,The good news is that housing services inflation has been declining and is expected to continue declining. If you remember a few years ago, people were expecting it to be like this, and now it's been going on for a while, and we expect it to continue. That leaves the largest service category besides housing services. This category has been largely flat for the past few months. A large portion of it is non-market services. We don't get much of a signal about the tightness of the economy from that part of the data. So, if you put all of these together, there are a few things to say. First, inflation excluding tariffs is actually not far from our 2% target. We estimate—people have different estimates, but it's probably 0.5 or 0.6 percentage points higher. If core PCE is 2.8%, then excluding tariffs it's probably in the range of 2.3% or 2.4%. Roughly like that, so not far from your target. So, we're watching that. The basic assumption about tariff inflation is that it will come, and probably rise further, but it will be a one-off increase. We've been very focused this year on making sure that's the case and carefully considering how it might evolve into other problems, namely troublesome inflation. One path is a very tight labor market. We haven't seen that. Another possibility is runaway inflation expectations, but we haven't seen that either. So, we're watching this very closely. I think we're not just assuming it will be a one-off inflation. We fully understand that this is a risk we must monitor and ultimately manage. Question: What can we do to address this persistent service sector inflation, especially given the possibility of labor supply challenges? Powell: Please repeat. Questioner: Persistent service sector inflation. Powell: Oh, service sector inflation. To reiterate, the part of service sector inflation that hasn't declined as we'd hoped is the non-market portion of non-housing services. Overall, we expect this portion to decline. The non-market portion should decline, and it primarily reflects higher inventory prices and financial services (which are accrued, not actually paid for), which constitute a large part of it. Additionally, we believe policy remains, in my view, mildly restrictive. This situation should lead to a gradual cooling of the economy. This is one of the reasons you're seeing a gradual cooling in the labor market. The Fed's policy is mildly restrictive, so this should also help achieve this. I would say we are absolutely committed to getting inflation back to 2%. If you look at long-term surveys or market pricing, you'll find this is a credible commitment, and there should be no doubt that this is our target direction. Questions: Thank you. As you know, there is currently a huge systemic boom in the field of artificial intelligence infrastructure. I'm wondering if this boom suggests that interest rates aren't actually that restrictive, and whether further rate cuts at this point could fuel an absolute level of investment or market bubbles. How does the Fed consider this issue? Powell: You're right. A lot of data centers are being built across the country and around the world, along with other investments. Large U.S. companies are investing heavily in how artificial intelligence will impact their businesses, and that AI will be based on or run through these data centers, so it's a big deal. I don't think spending on building data centers across the country is particularly sensitive to interest rates. It's based on a long-term assessment that this is an area that will see a lot of investment and will drive higher productivity, etc. I don't know how these investments will turn out, but I think they're not particularly sensitive to interest rates compared to other industries. Question: A quick follow-up question. You did mention that you have inflation and growth data to watch in the absence of government data. I think we know a lot about employment data. Could you tell us what you're looking at to track inflation in the absence of government data? Thanks. Powell: There are many things. It can't replace government data. You all know those. I'll name a bunch of names. Price snap, Adobe, and other companies. For wage inflation, there's ADP data, and for spending—you'll ask about spending later—we look at a lot of other things. But again, it's from many different sources. Again, including the information we get from the Beige Book, which will come out in the middle of the cycle as usual. It can't replace government data, but it gives us a picture again. I think if something significant happens, if there are significant developments, I think we'll catch it. I think we can't have a detailed understanding of the economy while that data isn't available. Question: I'd like you to elaborate on what you said about the continued government shutdown making it more difficult to take action in December and potentially making you more cautious. To what extent do you rely on private data, or your own surveys or Beige Book, are you worried that at some point you'll have to start making policy based on hearsay? Powell: You know, this is a temporary situation. We'll do our job, collect every piece of data we can find, evaluate it, and think about it carefully. That's our job. That's what we're going to do. If you ask me if this will affect the December meeting, I'm not saying it will, but yes, you can imagine—what do you do if you're driving in fog? You slow down. So, it might or it might not. I don't know how this will affect things. We might get the data—the data might come back, but there's a possibility that acting more cautiously makes sense. Again, I'm not promising this, but I'm saying it's certainly a possibility, and you'll say, we really can't see clearly, so let's slow down. Question: As a follow-up to the debates at this meeting, we've recently seen Amazon and other companies announce some rather large layoffs, and I'm wondering if this was mentioned in the discussion, that is, are you starting to see this tension, the tension between growth and jobs, starting to be resolved, but at the expense of jobs? Secondly, some pressure is starting to emerge at the bottom of the so-called "K-shaped" economy. Family health insurance premiums could rise significantly, and things like that. Have these become a factor in your policy discussions? Powell: These are things we're watching very, very closely. Starting with layoffs, you're right. You're seeing quite a few companies either announcing they won't be hiring much or actually laying off workers. A lot of times they're talking about artificial intelligence and what it can do. So, we're watching that very closely. Yes, this could absolutely have an impact on job creation. We haven't really seen it in the initial jobless claims data yet. It's not surprising that we haven't seen it yet. It will take some time to reflect, but we're watching very closely. But again, we haven't seen it in the initial jobless claims data. Regarding a "K-shaped" economy, I would say the same or something similar. We—if you listen to earnings calls or reports from large consumer-facing publicly traded companies—many, many of them are saying there's a polarized economy, with lower-income consumers struggling, buying less, and turning to lower-cost products. But at the top, high-income and high-wealth people are consuming—so there's a lot of anecdotal data on this. So we think there's definitely something to it. Question: Mr. Chairman, I'd like to explore the claim that further rate cuts are not predetermined. You said "far from it." If a rate cut in December is unlikely due to a lack of data, where do other concerns come from? If a lack of data isn't the reason December isn't predetermined, what other concerns might there be? Powell: The view among the Committee is that we've now cut rates by 150 basis points, and we're in the 3% to 4% range, which is the majority estimate of the neutral rate—many estimates put the neutral rate in the 3% to 4% range. You're there now. You're above the Committee median. I think some people on the Committee estimate the neutral rate even higher, and you can argue those positions because it's not directly observable. I think for some people on the Committee, you know, it's time to step back and see if there really are downside risks in the labor market, or see if the stronger growth we're seeing is real. Typically, the labor market is a better indicator of economic momentum than spending data. That's tempting. In this case, it gives us more downside readings. So people have, again—we've cut rates by another 50 basis points in the last two meetings. For some people, there's a feeling that we should pause here. And others want to keep going. But that's why I say there are differing opinions, strongly differing opinions. Question: So, regarding the disagreements, you're talking about the future direction. In this disagreement, what's more important? Is it the risk of inflation, the risk of unemployment, or a deeper philosophical divergence within the Board? Powell: Look, everyone on the Board is committed to doing the right thing to achieve our goals—deeply committed—some of which are different forecasts, but many are also different risk aversions to different variables, which is common in all Feds. People just have different risk tolerances, so to speak. That leads to different opinions. You've already heard that from my colleagues' presentations. So, where we are now is that we've actually cut rates twice more. Now we're 150 basis points closer to the neutral rate than we were a year ago, regardless of what the neutral rate is. There's a growing sense that perhaps we should at least wait one cycle. Something like that. That's it. That's exactly what you're thinking. Again, you've already seen this in the September forecast summary and public statements from FOMC participants, and I'm telling you, you can expect this in the meeting minutes. I'm telling you, that's what happened at the meeting. Question: What's your explanation for the current weakness in the job market? How will this rate cut improve the employment outlook? Powell: I think there are two factors affecting the job market. One is the sharp decline in the supply of new workers. There are two aspects to this. First, there's the decline in the labor force participation rate, which is a cyclical phenomenon, followed by a decrease in immigration, a major policy change that the previous administration started and is now accelerating. So, a large part of the whole story is a supply-side story. Furthermore, labor demand has also declined. The unemployment rate has fallen. This means that the demand for workers has fallen slightly more than the supply. So, this is what's happening. It's primarily a supply function. I think many people agree that it's primarily a function of supply changes. So the question is, what can our tools, the tools that support demand, do? So, I would say that when you're in a situation where job creation, if you adjust for possible over-calculations by the Bureau of Labor Statistics, is very close to zero. So, maximum employment, on a sustainable basis, if you create zero jobs, if that's a balance or an imbalance, it's a very strange balance. So, I think, and many of my colleagues agree—in fact, you've seen in the last two meetings—it's appropriate for us to respond by supporting demand with interest rates. We've already done that. We lowered interest rates, so interest rates are more accommodative. I wouldn't say they're loose now, but they're significantly less tight than before. This should help at least prevent the labor market from getting worse, but it's a complex situation. Some people think it's a supply-side issue, and we can't really influence it much with our tools, but others, like me, think there's an impact on the demand side, and we should use our tools to support the labor market when we see that happening. Question: You also mentioned that tariffs cause a one-time price increase. Should American consumers and households expect prices to continue to rise this year due to tariffs? Powell: The basic expectation is that there will be some additional increase in inflation because tariffs take time to pass through the production chain and eventually reach consumers. We are now seeing those effects from the tariffs implemented a few months ago. But if you implement tariffs—and they're in effect in February, March, April, and May—all of this is happening. So, this situation will continue for a while, possibly until spring. These aren't big increases. These are about a tenth of the impact on inflation, or perhaps on a specific product subject to a tariff, but overall they're fairly modest. 2.8% inflation, you might add another 0.2 or 0.3 percentage points, maybe. But once all the tariffs are in place, they stop generating inflation. You get a one-off price increase. This is how we believe and hope it will unfold. Once the last tariff is added to something, at that point it becomes a higher price level, but it stops rising, if you will. Prices stop rising. They'll just stay at that level. Then, the measured inflation will fall back to the level of inflation without tariffs. Inflation without tariffs is now not far from 2%. Now, consumers aren't interested in this story. Their prices are higher. More importantly, the reason they are so unhappy about inflation is because of the inflation we experienced in 2021, 2022, and 2023. You could say prices aren't rising as fast, but that doesn't mean people aren't feeling the higher prices that were there two or three years ago. They are, and that's why, for the majority of the public, if you sample people, inflation still makes them very unhappy. It's a good thing prices aren't rising as fast as they used to, but they're still much higher than before. That effect takes some time to subside. As real income increases, the feeling will improve over time, but that takes time. Question: Are you worried that the stock market is currently close to being overvalued? Powell: We don't look at any single asset price and say, hey, that's wrong. That's not our job. We're looking at the entire financial system. We're asking if it's stable, if it can withstand shocks, right? So, banks are well-capitalized, and while some households are clearly under pressure, overall household finances are good, and debt levels are relatively manageable. Among low-income groups, you're seeing a decline in long-term auto loans, but otherwise, things are very good. It's a complex picture, but not one that's overly worrying. Again, this isn't appropriate. We don't set asset prices. The market does that. Question: You must be well aware that by lowering interest rates, you are fueling further increases in asset prices. I'd like to know how you balance the idea that lowering interest rates helps the labor market with the reality that it seems more likely to stimulate more investment in artificial intelligence, which is the reason for the thousands of layoffs announced in the past few weeks. Powell: Yes. I don't think interest rates are a major part of the data center story. I think people think there's a good economic benefit to building these data centers, they make a lot of money building them, they think they have a very high present value, and so on. It really has nothing to do with 20 basis points here or there. You know, we use our tools to support the labor market and create price stability. That's what we do. Those are our two jobs, right? So, we're here, supporting demand by marginally lowering interest rates, which will support more hiring, and that's why we're doing this. Right now, none of those 25 basis point or even 50 basis point rate hikes will be the deciding factor, but ultimately lower interest rates will support more demand, which will support hiring over time. Of course, we also have to be careful about this, which is what we've been doing because we know where inflation is, and we also know—I told you this story. This is a complex story, but it's the best assessment we can make, and, you know, because of the uncertainty surrounding inflation and its future path, that's why we've been moving forward at a cautious pace. Question: Regarding artificial intelligence, I'm wondering, much of the economic growth we've seen seems to be driven by investment in AI. How worried are you about what a sudden contraction in tech investment means for the overall economy? Are other sectors strong enough? Specifically, have you learned any lessons from the 1990s, and how would you handle what's happening now? Powell: The difference this time is that those highly valued companies actually have something like earnings. If you go back to the '90s and the dot-com bubble, those were ideas, not companies. There was a clear bubble there. I won't go into specific names, but they're profitable, and it seems they have business models and profit margins, so it's really a different thing. You know, our investments in equipment, albeit the stuff used to create data centers and power AI, are clearly a huge source of economic growth. Consumer spending, much bigger than that, has been growing, defying many negative predictions, and continues to do so this year. Consumers are still spending. Maybe primarily high-end consumers, or maybe leaning towards that, but consumers are spending, and that's a huge chunk of what's happening in the economy, much bigger than AI. You could point to growth, I mean, actually—growth, not levels, but consumer spending is a much larger part of the economy. Question: Why do you think the labor market has slowed so much even with strong consumer spending? Powell: What we're seeing is a sharp drop in the supply of workers, primarily due to immigration, but also because of the low labor force participation rate. This means there's less demand for new jobs because there's no flow of people into the labor pool, you know, those who need jobs. There aren't those people now. There's no supply of workers looking for jobs. Furthermore, demand is also declining, so with the labor force participation rate declining, it's more of a sign of demand and trends, so I think you're seeing some weakness. You know, the economy is growing slower than before. Last year it was 2.4%, and we expect it to be 1.6% this year. Without the government shutdown, it might have been a fraction of a percentage point higher, of course, that would have reversed, but you'd still see the economy growing at a modest pace. Question: I'd like to ask if you could elaborate on how you view policy in the context of the data drought. Will this make you inclined to stick to your plans, or to proceed more cautiously because of the uncertainty? Powell: Well, when we face that question, if we face that question, we'll know. There are probably two arguments, but as I've said a few times here, if you really don't have the information, if you really don't know, and the economy looks solid, stable, and hasn't really changed, there's an argument. I don't know how convincing that will be, but there's an argument that when you can't see that far ahead, you should slow down. Others might argue—but you're absolutely right—you could also argue that things haven't really changed, but you might not know. I don't know if we'll face that question. I hope we won't. I hope by the December meeting we'll have a better flow of data, but we have to do our job anyway. Question: I'd also like to ask, I think you said a few years ago that the total amount of capital in the system was roughly the same. Has that changed with the Fed moving forward with the revised proposal and shifting to the G-SIB surcharge? Or do you plan to significantly reduce the amount of capital in the system? Thank you. Powell: There are discussions going on between the agencies, and I don't want to comment before those discussions. I still believe, as I said in 2020, that the level of capital is roughly the same. Since then, a lot of capital has been added through various mechanisms, but I expect—and I know these discussions are just beginning. They haven't reached the point of having a complete plan or anything like that, so I really don't have much to say. Question: Mr. Powell, this is NBC News. Is the weakness in the job market accelerating? If interest rate cuts are not an effective remedy for the further slowdown in the labor market, who is at risk? Powell: So, we are not seeing the weakness you're talking about, the weakness in the job market accelerating. I want to say—again, we don't have the September jobs report, the nonfarm report, but we do have it—the unemployment claims we're seeing are still supported. You can look at the numbers. The same goes for the job openings we get from Indeed. There hasn't been much of a story in the last four weeks. It's stable. You don't see any indication that the job market, or any part of the economy, is experiencing a major deterioration. But I mentioned that you see large companies announcing layoffs, or the idea that they—they don't need to—hire. Their headcount isn't expected to increase for several years. There may be different people working there. They say that, but they don't need more staff. You don't see that in the totals. But job creation is very low, and the rate of unemployed people finding work is very low. The unemployment rate is also very low; 4.3% is a low unemployment rate. Question: When you make these rate cuts, are you considering low-income workers, or those whose jobs might be automated, or are you specifically targeting a particular market? Powell: Our tools don't allow us to target any demographic or income level. I do think people—we saw that during the global financial crisis and the long recovery—will benefit if you have favorable labor market conditions. Over the past two or three years, people at the bottom of the income ladder have benefited the most, and a lot of very constructive things have happened in that demographic. We are no longer in that position. A stronger labor market is the best thing we can do for the public. That's part of our job, half of our job. That's absolutely the best thing we can do for people, while keeping prices stable, both things. Inflation also hurts people living on fixed incomes more than others. Question: As you know, the terms of the 12 Reserve Bank presidents will expire at the end of February. I'd like to know if you can provide a timeline of when the Council will consider these appointments, and whether we can expect everyone to be reappointed, or whether we can expect some changes? Powell: This is a process we are following by law. The way the law works is that we have a reappointment process every five years for all the Reserve Banks—each and all of them. We're in the middle of that process. We'll get it done in time. That's really all I can say. Question: Okay. Thank you. Question: What I wanted to say was that in three consecutive meetings, you've had objections moving in two directions, and regarding the future path of interest rate cuts. Does this reflect your role at the FOMC meetings, and if so, how? Powell: I wouldn't say that. No. You have to accept reality. The reality right now is a rather challenging situation. First, we have an unemployment rate of 4.3%. Our economic growth is close to 2%. So, you know, overall, it's a good picture, but in terms of our policy, we face upside risks to inflation and downside risks to employment. That's a very difficult thing for the central bank because, you know, one of them calls for lower interest rates. The other calls for higher interest rates. We can't have both, so we have to balance them. That's a challenging thing. As we go through this process, you'd expect a wide range of opinions within the committee about what to do and how quickly we should do it. And that's what we have. That makes a lot of sense to me. All these people are people who take their jobs very seriously, work very hard for it, and want to do the right thing for the American people, but they have different opinions about what that is. It's an honor to work with people who care so much. Yes, but I don't think it's unfair, or anything like that. This is just a period in which we are making some rather difficult adjustments in real time, and I believe we will get through it. I think we have done the right thing so far this year. I think it is appropriate for us to be cautious about this. I think it is inappropriate to ignore or assume that the inflation problem does not exist. At the same time, the risk of higher, more persistent inflation has decreased significantly since April. If we eventually resume rate cuts at some point, we will. But at some point, we are trying to end this cycle with the labor market in good shape and inflation heading towards 3%, or at 2%. That's all we are trying to do, and doing it in a rather challenging situation, and doing our best.

Question:Thank you very much, Chairman Powell, Jennifer from Yahoo Finance. Whether it's regional banks or large banks, they are suffering losses on loans and there are defaults, and when you see one that might be a cockroach, there are probably more, Jamie Dimon said. I'm curious how you view low losses, or whether it poses a risk to the economy. Is this a warning sign? Powell: We're looking at credit conditions very carefully. You're right. We've seen subprime default rates rise for some time now. Now you're seeing significant losses in some subprime auto loan companies, some of which are showing up on banks' books. We're looking at it very closely. We're watching it very closely. I don't see a broader problem right now. It doesn't seem to be a problem that's very widespread in financial institutions. But you know, we're going to monitor this very carefully and make sure that's the case. Question: Also, many people, including yourself, have said that we're now in a divergent economy where high-net-worth individuals continue to consume, while low-income earners are cutting back on spending. To what extent will the sustainability of consumer spending depend on a strong stock market? To some extent, do markets help keep the economy active? Powell: So, there's some correlation, but remember, the more wealth a person has, the less important an extra dollar becomes. So, when you reach a level of stock market wealth, your marginal propensity to consume drops sharply. So, the stock market, if it falls, will affect spending, but unless there's a significant drop in the stock market, spending won't drop sharply. People at the lower end of the income and wealth spectrum have a much higher marginal propensity to consume an extra dollar of income or wealth, but they don't have stock market wealth. This is certainly a factor supporting consumption right now. But—if you see a major correction in spending, you'll see it. But it won't—and you shouldn't think it will—stop spending dollar-for-dollar, because that's not going to happen. Thank you very much.