Jerome Powell

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0:39The current chairman is Jay Powell, someone I've known for many years. I had a chance to sit down with him recently to talk about interest rates, inflation, and the overall economy. There are a few billion people in the world who are waiting to see what interest rates are going to be doing. Do you have any insights on where interest rights might be going. So I'm going to take that as a great opportunity to talk a little bit about the economy and then talk about where that leaves us with policy. So I would just start by saying that the U.S. economy has performed really remarkably well over the last couple of years.

1:142023 last year was a year in which the economy grew well above 3 percent. The labor market remained very strong. unemployment remained very low and inflation came down at quite a sharp pace particularly in the second half of the year by a very large amount and and that forecast was almost unheard of it was unheard of before 2020 so big upside surprise that year this year we had expected the economy to slow a bit gradually the labor market to continue to gradually cool off after being overheated a couple of years ago and inflation to continue to make progress And something like that is basically what has happened.

1:54The economy is growing now at about 1.5 % in the first half of the year. Most forecasters have about a 2 % growth rate for the full year. The labor market, again, has moved into better and better balance to the point where I think you can now say it's essentially no tighter than it was in 2019 before the pandemic. Remember that the labor market of 2019 was a very strong labor market. So we're back to that place no longer overheated. On inflation, in the first quarter, we didn't make any more progress. The second quarter, actually, we did make some more progress. We've had now three better readings, and if you average them, that's a pretty good pace.

2:31So turning to policy, your question, what we've said is that we didn't think it would be appropriate to begin to loosen policy until we had greater confidence that inflation was moving sustainably down to 2%. We've been waiting on that, and I would say we didn't gain any additional confidence in the first quarter, but the three readings in the second quarter, including the one from last week, do add somewhat to confidence. We've also said that we're a dual-mandate bank. For a long time since inflation arrived, it's been appropriate to focus mainly on inflation, but now that inflation has come down and the labor market has indeed cooled off, we're going to be looking at both mandates.

3:09They're in much better balance, and that means that if we were to see an unexpected weakening in the labor market, then that might also be a reason for reaction by us. Okay, I think I understand. So to put it in terms I can for sure understand, the markets are suggesting, the futures markets, that there's a 90 % chance that the Fed will lower its discount rate in September. Do you think the markets know what they're talking about? So today I'm not going to be sending any signals one way or the other on any particular meeting. So just to ruin the fun right at the beginning. I simply, you know, we're going to make these decisions meeting by meeting, and we're going to make them on the basis of the data as they come in, the evolving data, the evolving outlook, and also the balance of risks now that the two mandates are basically close to being in balance.

4:06All right. There are some people who say that the Fed would not like to lower interest rates in a presidential campaign period because you could be criticized for helping one party or another. Do you have any comment on whether that's an accurate view? I do. So our undertaking at all times is that we'll make our decisions based on the incoming data, the evolving outlook, balance of risks, and only on that. We don't take political considerations into account. We don't put up a political filter on our decisions. It's hard enough to make these decisions based on the appropriate factors. If you're going to add a whole different filter in an area where we're not experts, that's not going to improve the quality of our decisions.

4:44And it's also not the orders we have from Congress. our orders from Congress sort of use our tools to foster maximum employment and price stability and to do so without political considerations. That's what we're always going to do. If you look at the modern record, that is what we do. And we don't think about election cycles or anything that's political. Many people use the phrase hard landing to describe hard landing as a euphemism for a recession, I guess. People thought in 2023, we might have a hard landing. People thought in 2024 we might have a hard landing. And none of these people were economists, professionally trained economists, but they seem to be wrong.

5:20So do you rely on these economists very much in the future when you're projecting whether you should listen to their views on where the economy is going? Or how do you react to the fact that we haven't had a hard landing and disappointed all those economists? So I'll just say that, you know, as someone famously said, predictions are very difficult, especially about the future. On the hard landing question, I have always felt like there was a pathway to getting inflation back down to our 2 % goal on a sustainable basis without the kind of pain in the labor market, the kind of high unemployment that has been typical of tightening cycles and getting inflation down.

6:05And the reason why my colleagues and I thought that was that the labor market was so overheated that it could cool down quite a bit without having to. There still is apparently no slack in the labor market. The labor market does not have slack. Essentially, you're at equilibrium now. But look where inflation is. Inflation is at 2.5%. So this was in defiance of a lot of conventional wisdom, but we thought that was right. And that says that you have to be, one thing you learn is humility in forecasting. So I wouldn't rule it out, but I would say that the kind of hard landing scenario is certainly not the most likely or a likely scenario.

6:44I think you have said somewhere that when the Fed does lower interest rates, not saying that you're saying it's going to do that, But if the Fed does lower interest rates at some point, you didn't think it was ever going to go back to kind of the free money practically of years ago when interest rates were almost zero. Is that a fair statement that you don't think it's a good idea to go back to interest rates as low as they once were? The period between the global financial crisis and the pandemic was historically unusual from the standpoint that we had ever lower interest rates through that era, including part of the era when, for example, sovereign debt of major European sovereigns was trading at a significantly negative rate.

7:27And still, even with rates that low, inflation was very low below target. And so the question is what caused that, and are the forces that caused that gone for now? And I think most people attribute the low inflation era to slow-moving forces like demographics, globalization, technological evolution, things like that. And those may or may not have changed. But nonetheless, I look at where we are now. Our funds rate is 5.3%, roughly, give or take. And it feels like it's restrictive, but not severely restrictive. So it tells me that rates, at least for now, the neutral rate must have risen, probably has risen from where it was during the inter-crisis period.

8:15And I think instinctively, I can't prove this. We're going to learn about this empirically. But it seems to me that the neutral rate is probably higher than it was during the inter-crisis period. And so rates will be... In business, they say you can have better, cheaper, or faster, but you only get to pick two. What if you could have all three at the same time? That's exactly what Cohere, Thomson Reuters, and Specialized Bikes have since they upgraded to the next generation of the cloud. Oracle Cloud Infrastructure. OCI is the blazing fast platform for your infrastructure, database, application development, and AI needs, where you can run any workload in a high availability, consistently high performance environment, and spend less than you would with other clouds.

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9:47And what does it mean to be within sight? So when we change interest rates, that tightens financial conditions, and that in turn affects economic outcomes, you know, growth, labor markets, and ultimately inflation. But with lags that can be long and variable, as Milton Friedman famously said. And the implication of that is that if you wait until inflation gets all the way down to 2%, you've probably waited too long. Because the tightening that you're doing or the level of tightness that you have is still having effects which will probably drive inflation below 2%. So we've been very clear that you wouldn't wait for inflation to get all the way down to 2%.

10:24Our test has been for the past quite some time that we wanted to have greater confidence that inflation was moving sustainably down toward our 2 % target. And what increases that confidence in that is more good inflation data. And lately here, we have been getting some of that. So if you go back in history, when inflation began to arise after COVID, at some point, people said, including you, that it was transitory. In hindsight, what do you think people missed about the nature of the inflation? Why was it more enduring than people initially thought? So this is a question that people will be writing papers about and debating longer after all of us are gone.

11:09And it's early to say it's actually kind of soon to be answering it. But I think it's – so here's my answer to that question. When inflation arrived, it was really coming out of the goods sector, and it was connected to really high demand for goods, and it was – and, you know, the supply chains, global supply chains, which account for most manufactured goods, collapsed because of too much demand and because of COVID. And to us, that looked like a temporary fleeting situation. We also lost several million people out of the labor force. So wages went way up as the economy really boomed when we reopened the economy.

11:48And we thought, you know, we were getting vaccines were coming in and we thought that that would fix itself too, kids would go back to school. We essentially overestimated how quickly the economy would return to normal. These things finally did happen in 2023, but they didn't happen in 2021 or 2022. What we meant by transitory was that it would go away fairly quickly without the need for our intervention. You don't want to intervene with interest rates if something is going to go away quickly without us intervening because monetary policy, as I mentioned, works with long and variable lag. So the lure is you look through things like a temporary oil shock.

12:29So that was the mistake, was that it actually didn't reverse itself. The problems with the supply side didn't reverse themselves until 2023 when they really did, when we got a big burst of employment and also the supply chains were fixed. So in hindsight, now knowing everything you now know, would you have done anything differently? Would you have had less quantitative easing? Would you have changed interest rates differently? What would you have done differently now knowing everything we now know? You know, it's almost unfair. Hindsight's always 20-20, right? You know, we remember what we were doing in real time.

13:03We went from a really nice economy in December of 2019 to a global partial shutdown of the economy. And we were contemplating. There was no thought that vaccines were around the corner. The economy's closing down. we were looking at severe and perhaps prolonged downside risks. Literally people thinking and doing work on, are we going to have another depression? Is it going to be the 1930s? So governments around the world, and in particular the United States government, really went to work to provide a lot of support to the economy. We did everything we could, including many things that were right, you know, that we, red lines that we never crossed, we crossed them to support the economy and support the financial system.

13:46And it was all done because we were managing severe downside risks, which did not materialize. We did not have a depression. And part of that is because of what we did. Then the economy reopens, and demand is very, very strong. And we saw, basically, we saw a big burst of inflation everywhere, including in the United States. It was different in different places. But, you know, so that's what happened. And, you know, it's not, that's how I would answer that. Okay, but so what you did, you're happy with what you did in hindsight. you would say? In foresight. I think that the work that we did in 2020 in response to the pandemic will stand up very well in history.

14:28I think people will look at the things that we did and essentially the financial system was grinding to a halt all around the world. We acted, we were the first central bank and we were the most supportive. And I think that work will hold together when historians are looking back on it in a long time. I think when you get to the inflation era, that becomes a different question. And, you know, people were going to be arguing about that for a long time. The FOMC, for those who don't follow Washington acronyms, it stands for what? What is the FOMC? It's the Federal Open Market Committee. And who is on that committee?

15:06It's a little bit complicated, our structure is. We have seven governors here in Washington, all nominated by the president and confirmed to staggered 14-year terms, and we have 12 Reserve Bank presidents at Reserve Banks around the country. All 19, seven plus 12, are participants on the FOMC. In any given year, all of the seven governors vote and five of the 12 Reserve Bank presidents vote, but one of the voters is always the New York Fed. Okay, and so when you have an FOMC meeting, how many do you have a year? We have eight a year. Okay, so you have eight a year, and when you get together, you get together for two days or so?

15:43We do. So it generally starts at noon or in the morning of a Tuesday, and we go all day. We generally talk about the economy, the financial stability issues, whatever special topics there may be. And at the end of the day, each person speaks on those things, and I speak at the end of that day. Then there's a brief presentation on monetary policy, and then we go to dinner upstairs in the Martin building, and we come back the next morning. We come in at 9 o 'clock, and we talk about monetary policy until we're satisfied with the outcome of monetary policy, and that usually takes most of the morning.

16:17Okay, so when you go into an FOMC meeting the first day, do you pretty much know where you want to come out at the end of the second day, or do you want to listen to everybody and you haven't made up your mind yet? You know, the way it works is that, you know, I talk to the other 18 participants regularly, and I talk to all of them at least once in the 10 days before the meeting. And I'm thinking about this three or four weeks before the meeting. You know, what should we want to achieve? What data do we need to see? How do we want to change our communications? All those things. And so I talk to people, listen to them, and I try to put together an answer that has broad support on the committee.

16:57And so when we go into the committee on Tuesday morning, you know, I'm confident, usually, that I know where this is going to go. But, you know, things happen. We get data during the meetings sometimes. Events happen. But largely you go in kind of knowing what the likely outcome is. And that's the design of it. So a lot of people in Washington, government agencies, are very good at leaking things. You're not that good at that. Why doesn't the Fed leak more? Why don't you kind of leak a lot more about what you're going to do? You just don't leak that much. I'm kind of proud of that, actually. We do take our obligations to confidentiality very, very seriously, because we know how consequential it would be for someone at the Fed to be leaking.

17:46Our whole success depends on having the public's confidence that we're ethical and that we're working on behalf of all Americans and not on behalf of ourselves, and we're not leaking and that kind of thing. So we do have a culture. When we're working on, for example, a regulatory matter or some matter involving one of the banks, it never leaks out of the Fed. So I am proud of that record. Some people have suggested that the Fed's independence is not as good as people talk about it being, and that maybe we'd better have more White House coordination with the Fed. I'm sure you've heard about this.

18:24I think that— Any comments on that? I'd be happy to comment on what independence, on the point of central bank independence. So I think a long time ago, people learned that a central bank that's independent of political consideration does a better job getting inflation under control. And that has now, that has accepted wisdom in all advanced economies around the world. It's also a principle that has very, very strong and broad support where it really matters, which is in Congress. You know, you talk to senior leaders in both chambers, in both political parties, and they all understand that you want an independent central bank that doesn't run monetary policy to support or oppose any particular politician or political party.

19:10You ever get a call from the president saying interest rates are too high or something like that? So, ever? No, I would say that, you know, meetings with the president are rare and appropriately so. So you are you've been you were originally appointed to the board of the Fed by President Obama and you're appointed chair by President Trump and reappointed by President Biden. And your term as chair goes through, I think, May of 2026. So any thought about staying through all the way through May 2026? You're going to do that? Yes. Okay. And if some president came along and said, well, you did a great job, I'd like to reappoint you, would you consider that?

19:56I have nothing for you on that today. Okay. All right. And is being chair of the Fed an enjoyable job or not so much? It is, actually. I think I enjoy it. I enjoy it quite a bit. I do. First of all, it's a great honor. It's incredibly interesting. I love the people we work with. I love the institution. At this time in my life, it's just been a great thing. I'm in my 13th year there now, and it's just been really challenging and all that. But what else would you want? I'm very happy doing the job. Now, the Federal Reserve is over 100 years old. It was created under Woodrow Wilson. If you were around then, what would you have suggested they do better than they did in creating the system?

20:45or do you think the system works pretty well after 100 years and you wouldn't change it very much? So I'm giving myself perfect hindsight here. I would do what Congress did in 1933. So the original Fed didn't have an FOMC, and it really didn't function very well during the early parts of the Depression or during other. So in 1933, the current structure was put in place, and that's with the FOMC, with the number of governors, and the voting arrangements. And I think that arrangement is fine. It works really well. In the 70s, the dual mandate was added. But ultimately, we're not looking for any law change.

21:25We think we have the authorities that we need. We think that the law is in just a fine place. So basically, you think the system works reasonably well as it is today. And today, what is the biggest economic challenge you think facing the country? Is it growth? Is it inflation? hard landing potentially? What are you most worried about? What keeps you up at night, if anything, in the economy? So I'll say in the short term, that's what keeps me up at night. Literally, the thing I'm thinking about in the middle of the night is always this balance we have between not wanting to, if we ease too early, we can undermine the progress on inflation.

22:03And if we wait too late, we can undermine economic activity. We can undermine the expansion. And so we want to get this right. and getting it right is incredibly important for the people we serve. So that is really, that's what I spent a lot of my, you know, thinking time on. You know, longer term, there are lots of things to worry about, but that's really what keeps me up. So most people, they have dinner with friends or sometimes, how can you have dinner with friends without hinting what you're thinking about? And do you ever get suggestions from your friends at dinner, this is what you should do?

22:33And how do you respond when they kind of say, maybe you should lower interest rates? Do you just keep eating or what? You might define the word friend to mean doesn't ask you about interest rates. No, people don't do that generally. People I don't know will always say, hey, cut rates. Somebody said that in the elevator this morning. Did that influence you or no? I said, thank you, sir. No, but I mean, people say things, but it's fine. So in some parts of the society these days, people are making decisions based on something called artificial intelligence, AI. Have you thought about calling up ChatGBT and saying, here's all the data we have, what do you think about it would be a good idea?

23:20Have you ever thought about that, or they're not going to likely do that? We haven't done that. I mean, we have done little things, like we've asked ChatGBT to generate questions for the press conference. And I'm happy to report for any journalists who are here that the questions were not as good as the ones we get from real journalists. What about my questions? How do they compare to my questions? Okay. No comment. So they weren't that great. Okay. Thanks for listening. To hear more of my interviews, you can subscribe and download my podcast on Spotify, Apple, or wherever you listen.