Refinitiv Newscasts - Powell speaks at Brookings on the economic outlook 1

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30/11/2022 20:58

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Source: Reuters

Description: Federal Reserve Chair Jerome Powell speaks on the economic
outlook, inflation and the labor market before a hybrid Brookings Institution
event, in Washington.
Short Link: https://refini.tv/3is77Dl

Video Transcript:

>> Probably accounts for about one-and-a-half million worth missing workers.
Policies to support labor supply are not the domain of the Fed are tools work
principally on demand and without advocating any particular policy however, I
will say that policy to support labor force participation could overtime,
bring benefits to the workers who joined the labor force and support overall
economic growth. Such policies would take time to implement and have their
effects. For the near-term, a moderation of labor demand growth will be
required to restore balance to the labor market. Currently, the unemployment
rate is at 3.7% near a 50-year lows in job openings exceed available workers
by about four million. That is about 1.7 job openings for every person looking
for work. So far, we've seen only tentative signs of a moderation and labor
demand. With slower GDP growth this year, job gains have stepped down from
more than 450,000 per month over the first seven months of the year to about
290,000 per month over the past three months. But this job growth remains far
in excess of the pace needed to accommodate population growth over time. About
100,000 per month by many estimates. Job openings have now fallen by about a
million and a half this year, but remain higher than at anytime before the
pandemic. Wage growth too shows only tentative signs of returning to balance.
Some measures of wage growth have ticked down recently, but the declines are
very modest so far relative to earlier increases and still leave wage growth
well above levels consistent with 2% inflation over time. To be clear, strong
wage growth is a good thing. But for wage growth would be sustainable, it
needs to be consistent with 2% inflation. So let's then sum up this review of
economic conditions that we think we need to see to bring inflation down to
2%. Growth in economic activity has slowed to well below its long-run trend,
and this needs to be sustained. Bottlenecks in goods production or easing and
good's price inflation appears to be using as well, and this too must
continue. Housing services inflation will probably keep rising well into next
year. But if inflation on new leases continues to fall, we will likely see
housing services inflation begin to fall later next year. Finally, the labor
market, which is especially important for inflation in core services
ex-housing, again accounting for more than half of the category, shows only
tentative signs of rebalancing and wage growth remains well above levels that
would be consistent with 2% inflation over time. So despite some promising
developments, we have a long way to go in restoring price stability. Returning
to monetary policy, my FOMC colleagues and I are strongly committed to
restoring price stability. After our November meeting, we noted that we
anticipated that ongoing rate increases will be appropriate in order to attain
a policy stance that is sufficiently restrictive to move inflation down to 2%
over time. Monetary policy affects the economy and inflation with uncertain
lags. And the full effects of our rapid tightening so far are yet to be felt.
Thus, it makes sense to moderate the pace of our rate increases as we approach
the level of restraint that will be sufficient to bring inflation down. The
time for moderating the pace of rate increases may come as soon as the
December meeting. Given our progress in tightening policy, the timing of that
moderation is far less significant than the questions of how much further we
will need to raise rates to control inflation and the length of time it will
be necessary to hold policy at a restrictive level. It is likely that
restoring price stability will require holding policy at a restrictive level
for some time. History caution strongly against prematurely loosening policy.
And I'll close by saying that we will stay the course until the job is done.
Thank you. >> Thank you very much, Chair Powell. Think you spared me the chore
of asking you to pick between 50 and 75, so I won't have to ask you that.
Thank you for your last paragraph. But I want to talk a little bit about wages
and inflation. So as you said, wages are rising faster than it's consistent
with a 2% inflation rate, assuming reasonable productivity. You said in
November that wages are not the principal cause of prices going up. But for
many workers, real wages have been falling lately. So I wonder, isn't there
room for wages to rise a bit faster so workers can make up lost ground. And
what level of wage increases do you think is consistent with a 2% inflation
target? >> So I guess I would start by saying that the inflation that we saw
at the beginning of this episode back in March of 21 was not really related to
wages at all. It is related to tightness in goods markets largely due to
supply chain issues. Over time though, inflation is now spread broadly through
the economy. And while I would still say that the inflation we're seeing now
is not principally related to wages. We think that wage increases are probably
going to be a very important part of the story going forward, particularly as
it relates to that third category of of course, services ex-housing. So we
think it is an important thing going forward. And ultimately, in the service
sector in particular, where wages and benefits are by far the largest cost.
Wages need to go up. Of course, we want wages to go up strongly, but they've
got to go up at a level that is consistent with 2% inflation over time, making
basic assumptions about productivity. So if you look at the principal wage
measures that we look at, I would say that your one-and-a-half or 2% above
that with current wage increases. So particularly the employment compensation
index and the average hourly earnings index. Look at those two. It's about
one-and-a-half percent higher than what would be consistent making various
adjustments, including for productivity from nominal wages. So as we look at
the labor market today and including today's jolts data. Which you see is the
labor market, that there's a real imbalance between supply and demand there
1.7 job openings for every unemployed worker, everyone looking for a job there
are the so-called jobs-workers gap is about four million, meaning if you look
at all of the available jobs, including people who are working and then look
at people who are in the labor force or looking for a job. There's a four
million shortfall. So you're in that world and we think that there's a job for
moderating demand in there and getting the labor force back into balance. >>
You don't think that there's a possibility that we should have a period of
catch up of wage increases above the sustainable level and that businesses
with relatively fat profit margins can absorb some of that without passing it
through? >> So that's the question of the worker share of profits in that kind
of thing is not really related to this. Right now, people's wages are being
eaten up by inflation. So what you want to do is you want to have inflation
stable and then have a very strong labor market where the biggest wage gains
are going to the people at the bottom end of the spectrum. And we had that at
the end of the very long expansion that ended with the pandemic. That's not
what we have now. For most workers, the increases are getting in wages are
being eaten up by inflation. That's actually not true at the bottom end, where
we're, wage increases are higher than inflation. And that's a good thing. But
if you want to have sustainable, strong labor market where real wages are
going up right across the age spectrum, especially for people at the lower
end, you got to have price stability. And until we restore that, we can't get
back to that place where we were for the two years before the pandemic hit. >>
When you look at today's jolts data Which measures the vacancies and quit
rates. Where did you find that encouraging? >> More or less in line with
expectations but that's going the right direction. That's a good thing, right?
Yeah. So yeah. So I guess job openings came down by several hundred thousand
to where they are now. And that's a positive thing. As you know, the
relationship between job openings and unemployment is a very fraught one. And
job openings right now compared to unemployment art, they're all near their
all-time high levels. So it has been our view that there's a possibility that
in this highly unusual situation in the labor market, labor market could come
back into balance to some extent through a decline in job openings. And that
there has been a typical relationship between increasing unemployment and
declining job openings. But that our thinking has been, many labor economists
share this, that you could get a decline in job openings that wouldn't produce
a smaller increase in unemployment, then it's typically the case looking back
in history because of the very outsized level of job openings, and we've seen
that so far, but it's way too early to say that that'll. >> So traditionally
the Fed looked at the unemployment rate is a measure of labor market
tightness. And we've seen recently that that may be misleading. Unemployment
rate is still very low. And as you pointed out, that job vacancies is trying
to come down. But to the extent that the Fed still relies on a Phillips curve
relationship, going forward, is the natural rate of unemployment useless
concept? What measures will the Fed use to judge labor market slack as we look
ahead policy in the coming years. >> I think the way we think about it, of
course it a standard way to think about it is it's the gap between the actual
unemployment rate in the natural rate of unemployment that matters, right? And
the issue really, it's not that, that framework doesn't make sense, it does
make sense. But the issue is that the natural rate of unemployment is it's
very hard to identify with certainty even in normal column times. But when
there's a violent disruption of the labor market, it can move very
substantially. So that happened at the beginning of the pandemic. You had the
labor market was very much disrupted and we assume that the natural rate had
moved up, meaning that for any level of unemployment, the labor market is
tighter. So we knew that. What was different in this cycle was really that you
had to look at things like job openings and quits and reservation wages and
just wages overall, to tell you that the natural rate of unemployment had
really moved up quite a lot. But I don't think there's a problem with a
framework, but it's a fact though, that it's very hard to pin down where the
natural rate of unemployment might be when there's this massive disruption in
the labor market going on. >> So do you think that this jolts data, the job
vacancies per unemployed worker, that that's going to be a lasting measure of
labor market tightness for you at the Fed. >> Yes. >> I think for now people
will tend to look at it. >> When you tell them you're looking at it, they tend
to look at it. >> To look at it. >> I've noticed that. >> That's right. I
think I'm just saying in this particular situation, we think it's important
and we're going to find out empirically whether that was true. For the reasons
I explained, we think that we can see a big decline in job openings and less
than you would expect of an increase in unemployment. So this was a unique in
so many different ways. The series of events was different from one, in
particular, is just that so much of the inflation was due to supply-side
constraints. Which is not a feature of the US economy for a long time. >>
Well, but vice chair Brainard said the other day in the speech that she raised
the question of whether long-term changes of the economy, like labor supply,
deglobalization, climate change could reduce the elasticity of supply and that
this may be a problem going forward. Do you share that? >> So this a great set
of questions that we've all been thinking about a lot. A little speech was
really terrific on that. Augustine Carson has given a couple of speeches on
the same topic, including one at Jackson Whole this year. >> The head of the
Bank for International Settlements? >> Yes, exactly. So I mean the question
is, what is the new normal going to be? Unlike this normal that we've had
where supply-side disruptions and constraints were relatively, you can look
through them. The lower has been for a long time that you don't need to worry
about that it'll sort itself out. A supply shock from oil prices or whatever.
Are we going into a situation a little bit like the 70s where there'll be
ongoing repeat shocks and which would tend to put more upward pressure on
inflation over time? We don't really know. I mean, it's a great question. But
I guess the real question, if that's true, what are the implications? We still
have a 2% inflation target and we still have to use our tools to achieve it
and to keep inflation expectations anchored. But it's very hard to know the
answers to these things. I mean, we tend to assume things will go back to the
way they were just naturally. But that doesn't seem to be happening so far. >>
Then you mentioned in your remarks that forecast of inflation have not only
those that the Board of Governors, but in the private sector as well have been
lousy. The inflation does not behave the way the forecaster said. So I wonder
how you think about using forecast of inflation and making policy if you can't
tell us or if your staff can't tell you with some degree of confidence what
inflation is going to be 6, 12, 18, 24 months out. How do you think about that
and deciding when you make policy decisions? >> So I'll say that it is very
difficult to forecast inflation now, and one of the reasons is just that the
situations or the situation is so different from the normal one. As I
mentioned, a lot of it is just that the difficulty is just the supply side
constraints that we've had. We had no experience in forecasting that, this was
a case of first impression. So that was very difficult. Nonetheless, we do
make forecasts, we'll continue to make forecasts. The way I tried to get
around that end my remarks was to say, let's put the forecasts aside for a
second and let's try to identify the macroeconomic conditions that we think we
need to see that would put downward pressure on inflation. So that's a way to
think about it. We'll continue to make forecasts, but we're going to have to
be humble and skeptical about forecasts, I think for some time. And that calls
for a lot of risk management. And the other difficulty, of course, is that
monetary policy works with long and variable lags in particular, or inflation
is at the end of that train. And so if you're waiting for actual evidence and
inflation is coming down, it's very difficult not to over-tighten if that's
all you're doing. So we have a risk management balance to strike, and we think
that slowing down at this point is a good way to balance the risks, on the
face of rate hikes. >> I see. But it's still a problem if you can't use
today's inflation rate to set policy and you're not sure what tomorrow's
inflation rate is. You're saying the inflation forecast will be secondary to
the economic conditions that you think are likely to generate more or less
inflation is that risky? >> Well, first of all, I'm agreeing that it's a very
difficult situation in which to forecast inflation. And really very few
professional forecasters have gotten it right. So I think we will look at
various things. We'll look at our forecasts, we'll look at the actual data,
we'll look at, I gave you this three pieces and the elements of those three
pieces of core inflation that we're looking at. We will look at these
macroeconomic conditions where for example, we will try to identify a level of
a stance of policy that's sufficiently restrictive to bring inflation down.
You can identify that with great precision and confidence, but we'll look at
the changes in financial conditions and the effects that those financial
condition changes are having on the real economy, we'll look at all of those
things and make a judgment. And it'll have to be judgement as to what that is.
>> But when you think, you've talked frequently about the need to have policy
restrictive, and that often is used as the definition of restrictive is above
some neutral rate of interests, the one that will prevail when all is common.
You gave a speech of Jackson Whole a number of years ago pointing out how
identifying all these things, the natural rate of unemployment, the natural
rate of interest. The problem is that we don't know what they are. So how will
you know when policy is restrictive? How do you think about what the neutral
rate is under the current conditions of the economy? >> And the answer to that
is that there wasn't any one perfect summary statistics. So the way I think
about it, and I think the way we generally think about it is we make our
policy changes and they affect financial conditions actually works the other
way around. Financial conditions tightened in expectation now different from
what it used to be. So they tighten it so we monitor the tightening of
financial conditions. We look at the history of these financial conditions
index and we ask how tighter financial conditions. We also look at the effect
that tighter financial conditions are having on the real economy, particularly
now interest-sensitive spending, but also other things as conditions
tightened. What are the financial conditions we look at? We'll look at the
entire rate curve. If you think about risk-free the treasury rate curve, we'll
look to see significantly positive real rates across the curve. And you have
that. You can argue about the short end, but you've got to pick some a
forward-looking reading for inflation and I think inflation compensation and
the markets definitely reflects a confidence in us bringing down inflation. So
you've got real rates really across the whole yield curve. You also look
though at credit spreads and what are private companies borrowing at? Because
most borrowing doesn't happen at the federal funds rate. It happens in many
other places. We look in asset prices, we look at exchange rates, which are
just another asset price. We look at all those things and we try to make a
judgment about whether looking at and put some weight on the real interest
rate curves, some weight on the other aspects I talked about. I think you have
to make a judgment at the end though that your restrictive. >> So an estimate
of the neutral rate of interests didn't seem to be one of the big factors. >>
No, it's in there when looking at the real rate curve. So you'd look at the
real rate curve, you'd want policy real rates to be above what we estimate is
the longer-run neutral rate. The issue is, the longer-run neutral rate is a
rate at a time of full employment and 2% inflation and the economy and perfect
equilibrium. That isn't where we are. >> I noticed. >> Can you turn to the
balance sheet, I'm going to turn to questions from the audience in a minute.
What criteria you're going to use to decide when to end the shrinking of the
balance sheet. Is it the economy is it whether the money markets are
functioning well, is it whether the treasury is having trouble raising money?
How do you decide when you've shrunk enough or when you end the shrinking? >>
So I should refer you to a piece of a document that lays all this out in
detail but I really shouldn't be reading to you, but I'll paraphrase it. >>
Thank you. >> But I don't get it exactly right. >> No one will pay attention,
if you don't get it exactly right, don't worry about it. >> Way much way in
it. >> Relax. >> So we're in an ample reserve regime and what that means is
that changes in the reserve level will generally not affect the federal funds
rate. So there's more than enough reserves in the system, we're not close to
reserve scarcity. So what we said is that we would allow reserves to decline
until we're somewhat above the level that we think is consistent with
scarcity. And then for awhile, what you do is you hold the balance sheet
constant and non reserved liabilities grow while reserves shrink. So we'd
shrink gradually down to that and then at a certain point we're just going to
call it, we're not looking to really go back into proving that they're scarce.
Because what happens is, and you saw this back a few years, the demand for
reserves is not stable and it can move up and down very substantially. So we
want to stop at a place that's safe, having a lot of reserves in the system is
really a good thing. It's really a public benefit to have plenty of reserves,
plenty of liquidity in the markets, in the banking system, in the financial
system generally, that's how we would do it. >> In the minutes, the last FOMC
meeting, it said the staff had a forecast below potential growth, but not a
recession. But then there was this interesting sentence where the staff said
the possibility that the economy would enter a recession sometime over the
next year is almost as likely as their baseline forecast, is that how you look
at it? >> I have resisted the temptation to handicap it. >> Go ahead. >> I
think I'll continue. The way I think about it is I do continue to believe that
there's a path to a soft or soft dish landing, I do believe that. >> And the
definition of a soft dish landing is what, unemployment goes up a little, but
we don't have a recession. >> Yeah, unemployment goes up, but it's not a hard
landing, it's not a severe recession, you could think of unemployment going
up, but not really spiking as it does in some recessions. So that's how I
think about and I think the path is pretty clear, the labor market conditions
soften. We see inflation and the goods inflation gets better, housing services
inflation gets better, and the labor market softens but doesn't go into
recession. And you see inflation starts to come down and I think that's very
plausible, I don't want to be the handicap on it. And of course our job is to
try to achieve that and I think it's still achievable. Although if you look at
the history, it's not a likely outcome, but I would just say this is a
different set of circumstances. >> But you said at the last press conference
that you thought the path to that soft landing had narrowed, has it continued
to narrow or is it widened or I don't know if you can have a wider soft
landing? >> I don't know that it's changed since that was what, 5, 6 weeks
ago.I was asked the question has it narrowed, is it still possible and has it
narrowed? I said, it's definitely still possible and it has narrowed because
if you look over the course of this year, nobody expected us to raise rates
this much. No one expected inflation to be this strong and this persistent to
spread so broadly through the economy. And so the extent we need to get keep
rates higher or keep them higher longer, that's going to narrow the path to a
soft landing. On the other hand, if we get good inflation data and we get
evidenced, all the things that I talked about. If all of those things start to
swing the other way then we could very much achieve this. >> In August 2020,
you announced a new framework for monetary probably the flexible average
inflation targeting framework. I wonder whether there's anything in that that
you think we should be rethinking now in light of the recent experience. >> So
we said we would do another framework review in five years and so that would
be to bear fruit in '25 or '26. So that's what we're going to do, we're going
to stick to that. I think we need to see this through a full cycle, we need to
see the other side of inflation and what the economy looks like after this
historic episode to really make good judgments about that. I will say though
that, aside from the framework itself, we implemented it through guidance of
various kinds. And we'd put in really strong guidance because there were a lot
of doubters that we would ever achieved 2% inflation, if you remember, that
was the main criticism , little did we know. But one piece of guidance that we
gave was and I don't think this had anything or much to do, let's say it that
way didn't have much to do with all this inflation we're experiencing. But the
one piece of guidance that we gave that I probably wouldn't do again, we said
we wouldn't lift off until we saw both maximum employment and price stability,
I don't think I would do that again. >> Because? >> I think it's the tail
risk, we tend to as human beings to underestimate tail risk. And we didn't
think it seems so unlikely if you remember 25 years of low inflation and many
years after the global financial crisis of inflation everywhere in the world,
it's all disinflation just didn't seem likely and yet here we are. >> So it
turns out that when you invite the Chairman of the Federal Reserve to speak at
Brookings, a lot of people email you questions. Most of them are questions
that I've already asked or questions that were so poorly framed that I
couldn't even understand the question. But somebody asked me this one and so I
want to give that person an opportunity to get an answer. What do you like to
do in the morning before you start work? >> Work. No, I get I'm super early
person and I read a bunch of newspapers and drink my coffee in peace and then
that's what I do. >> Now, that your charity used to ride your bike. >> Some, I
ride down well, I want to tell you where I ride but I do, yeah I run. >> The
security guys thank you for that. >> So here's the deal, we're going to take
questions from the audience, you need to wait for a microphone to get to you,
because we have a lot of people online. You need to say who you are and you
need to remember that this is not an opportunity for you to make a speech or
tell the Fed what it should do. It should be a question, it should be short,
and questions end with a question mark. So come down here, somebody, Joe and
then Jonathan. >> Thank you, Joe Beaulieu from Brevan Howard. So you've spoken
both about risk management considerations and the inherent danger of inflation
becoming entrenched. So I was wondering how much do risk management
considerations suggest a terminal rate higher than would normally be expected
to achieve your policy goals? >> So I think there are a number of dimensions
and one of them would be potentially higher rate but more I would think, one
risk management technique is to go slower, to go slower and feeling away a
little bit to what we think is the right level. Another is to hold on longer
at a high level and not loosen policy too early. I don't want to over tighten
and certainly my colleagues and I do not want to over tighten because we think
that cutting rates is not something we want to do soon. So that's why we're
slowing down and I'm going to try to find our way to what that right level is.
But theoretically it's another dimension, but it wouldn't be my first choice.
>> Thanks. >> Jonathan. >> Thanks, Jonathan Pingle with UBS. So I had a
question about the imbalance between labor supply and labor demand. One of the
things that's a little obscured when we look at and discuss the labor force
participation rate is there is a pronounced downward trend due to population
aging. So when you think about realigning labor supply and labor demand, FOMC
officials hoping or expecting the participation really moved back up all the
way to a pre-COVID peak. And related to that is the follow-on question, how
much of the realignment do you think needs to be done through restricting
labor demand as opposed to the ability of supply to catch up? >> On labor
force participation, I think it's useful to go back 10 years and the forecasts
that mainstream labor economists had was and you're right. Aging of the
population leads to declining labor force participation, notwithstanding that,
labor force participation was in effect flat and a little bit up from
2013-2020 roughly. And that was because you had a strong, tight labor market,
people were staying in the labor market longer than expected, that was really
what it was. So our ability to predict is not perfect in this except over long
periods of time you have an aging population, so you're probably going to have
declining labor force participation. I don't think it's reasonable to expect
that we get all the way back to where we were with labor force participation
in 2020, it's 63.7, I guess population adjusted, I don't see that. But I
wouldn't rule it out and we're nowhere near that now, we're pointing to half
below that now. So the real question is, do we expect to see big chunks of
labor force participation? I got to say this year we've seen in the aggregate,
not much and it's been very disappointing and a little bit surprising. That's
part of the story, the other part as I mentioned is population is that the
labor force, a big part of the short form labor force is actually population
as well as participation. >> So given population trends, given that there's
still some workers are clearly anxious about going to work during COVID and
given that immigration is well below the levels that were projected before the
pandemic, does most of the balancing have to come on the demand side? >> Well,
I think for now, we have to assume that and that's why I talked about supply
side policies on labor, but rather they're not for us to recommend or to
answer questions about. >> Noted, please. >> So yeah, the answer is yeah I
said that in my speech, we have to do what it takes to restore balance in the
labor market to get back to 2% inflation. And that's what we're doing really,
just by slowing job growth rather than putting people out of work. >> Go
Danielle. >> Thank you. Joe, can you on Peterson Institute. Chair Powell, back
in 2018, you gave a speech questioning the role of the so-called star
variables that the Fed uses to navigate. And there was a simple possibility
raise that maybe unemployment could fall well below what the staff thought the
natural rate u-star was then without causing inflation. But then COVID came
and turned everything around it, as you just said, one interpretation of COVID
is that your star went way up than we were in the wrong side of it, which is
inflationary. My question is, going forward, do you think it's likely that
things could reverse as a dust settles from COVID and we could end up back in
that world where maybe we're on the other side of u star and we don't know
what it's hard to tell. What lessons did you learn from that period that got
forgotten because of COVID perhaps? >> Well, unemployment went below. So what
we write down and what the star writes down is a longer run u-star, a longer
run estimate of the natural rate of unemployment. I guess one thing I would
say is that during the course of a long, relatively gradual, I mean, so we
only have one experience to generalize from but what I learned from that
experience was long, relatively slow, not super fast expansion. You really saw
the natural rate of unemployment, the shorter term natural rated come way
down. We had 3.5% unemployment with really little sign. Wages were just
getting up to that level of productivity and 2% inflation. So I think we could
certainly be back in that place. With what we've seen, it's another n equals
one situation with the pandemic, it's also unique. I would also point out
though, the inflation we saw at the beginning, we did have natural rate of
unemployment go up probably significantly. But again, the original inflation
we saw, it's not to do with a labor Phillips curve, it was not to do with
that, it was to do with goods more. >> So I think another way to frame Joe's
question is, I think a lot of us thought that the lesson we learned when
unemployment fell very far and we didn't get inflation that maybe over time
before you were in charge, the Fed was aired on the side of being too tight,
that it was too worried about the unemployment rate falling. And I think the
concern is that while we fight the last war and because of this experience,
the federal be reluctant to experiment with a low rate of unemployment in the
future. >> I'd love to have that problem again. If we can get back to it. >>
So you got like three years left in your term. Do you think you can pull this
off in the next few years so we can run the n equals two experiment? >>
Absolutely. >> Claudia Psalms. >> Claudia Psalms, I'm consulting. So the
question I had is we've had unexpectedly fast and large rate increases this
year. And that has pushed up the dollar relative to basically any currency in
the world. We've seen likely more financial market instabilities. So the
Federal Reserve's dual mandate is for the United States. And yet, are you
worried that a severe global recession or financial market turmoil would come
back to make it harder for us to achieve the US dual mandate? Thanks. >> So we
do of course, look at global developments. We have a domestic mandate, of
course, every central bank does. But in this world, global financial markets
and the global economy really matter for us. So we monitor all that very
carefully. We really think, and my colleagues and I really think that the best
thing we can do for ourselves and for the global economy is to get inflation
under control as quickly as possible. We don't think the world is going to be
a better place if we take our time and inflation becomes entrenched and then
we have to go in later. The evidence is that the employment costs of bringing
inflation down only rise with delay. So at the same time, we don't want to do
any more than we have to do, but we feel like as a risk-management matter, we
needed to do what we did and feel like we're now in a place. Again, as I said,
where we can slow down and try to reach that ultimate level. >> But how much
do you worry about? What qualities question implies is we do something with
rates. Other people are forced to do things with rates, and that ends up
spilling back to us and makes it harder for you to do it. So you have to kick
that possibility into consideration. >> We absolutely believe that we take
that into consideration. The model is explicitly taken into consideration. Of
course, they're not perfect. No one would say we do it perfectly, but we have
a very large global model that we use for the global economy. And it
absolutely takes into account what's happening with the real economy and
monetary tightening and currency and all those things won't be perfect, but we
do that. And we also understand generally that there's a lot of research and
things talk. People are talking about this a lot right now that, maybe the
whole is bigger than the sum of the parts when it comes to tightening, maybe
it is, maybe it isn't, but we're aware of the risk of that. But again, I come
back to look where we are. We've raised 375 basis points. Markets are working.
I think we're now in a position where we're in a place where we really can get
inflation under control. And we unemployment at 3.7%. So, I don't regret
getting to where we are in. And I think broadly the world will be better off
if we can get this over quickly. >> Thanks, Julia. You can stand up so that
the mic can find you. And can you bring a mic down here to Flori? >> Can I ask
two questions? >> If they're short? >> Very short. So one question on the
labor market is how do you reconcile the characterization of the labor market
is very tight with the fact that wage growth isn't keeping up with inflation
and the labor share of GDP really hasn't risen since 2020. And then second
question is, how much credence or what kind of research do you rely on to
think about the notion that a very tight labor market will lead firms to
invest in an innovate and become more productive over time, and what could
that be a tailwind to productivity growth? >> I wrote those down really fast
now is the problem with reading my handwriting. >> The labor market is tight,
but wages are not rising faster in relation to inflation. And the labor share
of GDP, which has been depressed for some time, it hasn't really started to
rise. So how do you put that into your thinking? >> So naturally we understand
that real wages are not going up for most people, but to me that's true, but
it's not really dispositive. I think the issue really is that it's one of
salience really. So at what point did people start saying, I need higher wages
because my real wages are going down. You're giving me these 6% wage
increases, but inflation is 7.7%. I need more of that. So we don't really know
when that point is, but when you get to that point, you're in serious trouble.
And we don't think we're at that point, but it can't be that we can go on for
five years at very high levels of inflation. And that it doesn't work its way
into the wage and price setting process pretty quickly. So that's a serious
concern. So on the second question, yes, I think we're seeing that, you're
seeing in the service industries. You're going to see this labor shortage that
we have. As I mentioned, it doesn't look like it's going away anytime soon.
And that's absolutely I think certain to lead to a lot of investment in
technology and labor replacement technology where there isn't labor. And I
think you'll see quite a bit of that. And it couldn't be a dividend going down
the road. Now, I would think it'll have to be to provide the services that the
public wants to buy. >> Thanks Mike for early JP Morgan. So you spoke about
going somewhat restrictive and then staying there for a long time. Why would
you prefer that over a shock and all approach that goes very restrictive but
for a shorter period of time? And I ask that because there's some evidence
that sacrifice ratios are lower in a more aggressive regime like that. >> I
think we've been pretty aggressive. I would say. No, I don't agree. I mean, we
wouldn't just raise rates and try to crash the economy and then clean up
afterwards. I wouldn't take that approach at all. I think we're in a position
where the right thing to do is to move really quickly as we have and now slow
down and get to that place where we think we need to be. And by the way,
there's high uncertainty around that. We have a broad set of thoughts about
where that destination might be, but we can be wrong, it can be higher than
that, it could even be lower than that. We'll have to see. But I think that's
the right approach and that's also the approach that it would allow us not to
throw away the option value of appending a lot of lives, which we would do if
we crash the economy and raise them, we might get rid of inflation, but at
very high human cost. >> There's a question in the very back, a woman in front
of the camera. Do you want to stand up? Thanks. >> Thank you so much for
seeing me in the back here. Nancy Marshall Ginser, from marketplace, just
wondering Chair Powell, is the fading danger of neglecting its maximum
employment mandate. Is the maximum employment mandate taking a backseat to the
stable prices or inflation mandate? >> No, absolutely not. The thing is this,
without stable prices, we can't have maximum employment. And that's how I
think about it. And I think my colleagues as well, in the sense that if you're
constantly fighting off inflation and having these battles, and having to
raise rates. And it goes on for five or 10 years, as it can, you're not going
to have maximum employment. The situation we would love is to have another one
of these very long expansions, and we've had four of them now in the last
several decades we really when inflation was low after the 70s. We got out of
the habit of these short, inflation driven business cycles and we were able to
reach, you saw where we were 3.5% unemployment. Those are really good for,
very beneficial to our society to have these long expansions and the benefits
start to go to people at the lower end of the spectrum in the seventh or
eighth year in the last cycle. So I think the two things go together right
now, the labor market is incredibly strong. Again, before this thing, we'd
never had 1.7 job openings for every unemployed person. So this is a great
labor market in that sense. It's too great in a way because it's going to be
adding to inflation. >> Time for one more, on the back gentleman on the aisle,
two questions. Two gentlemen on the aisle, keep them short. >> Thank you. I'm
Orange from South China Morning Post of Hong Kong. So I would just like to ask
a question related to Chinese economy. So right now, a lot of analysts arguing
or believe that China's zero COVID policy is continuing to take a toll on the
Chinese economy. But also likely to weigh on the global economy due to the
size of China's market and its position in the global supply chain. So we're
just wondering about what impact or how much impact do you except that
continuously slowing Chinese economy would have on the US economy or the fast
next, interest rate moves. And is China's current economic situation, these
inflationary factor or inflationary factor to the US. Thanks. >> I guess I
just say that to an extent China's having shutdowns in the parts of the
country and the parts of the economy that are deeply connected to global
supply chains. That's going to make those supply chains less efficient, less
effective. And so that will have an effect on the prices of some of these
goods that we did or manufacturer or assembled in China. So it does have an
implication for the US. It's hard to say how big that will be without knowing
how persistent, how long these lockdowns take place for. >> The gentleman
behind you. >> Thank you, Yaugen Chicago with public citizen. I was wondering
how you think about the trade-off of restrictive policy and the supply
constraints you mentioned. So in particularly when it has negative effects say
on housing production, that makes it harder to meet housing demand. Or on the
congressional investment through the inflation reduction act in climate change
mitigation and in energy policy that will make energy cheaper log term. How do
you think about that trade-off? >> I don't think our restrictive policy would
have much of an effect on the climate mitigation investments you're talking
about in terms of housing, there are two things. One, there's a longer-run
housing shortage that we have. But in the meantime, we had coming out of the
pandemic. Rates were very low. People wanted to buy houses. They wanted to get
out of the cities and buy houses in the suburbs because of COVID. And so you
really had a housing bubble, you and housing prices going up, but very
unsustainable levels and overheating and that thing. So now the housing market
is going to go through the other side of that and hopefully come out in a
better place between supply and demand. But none of this really affects the
longer run issue, which is that we've got a built-up country and it's hard to
get zoning, it's hard to get housing built in sufficient quantities to meet
the public's demand. >> So I'm going to thank you, Chair Powell, for being
generous with your time and thank you all for coming in. I want to appreciate
everybody asked the short question, which that's the first time in my
experience in eight years in Brookings that's happened. I'd like you for all
you just stay in your seats for a minute until the chairman can leave safely.
And if you have paper at the coffee cups or something, take them to the back
of the room and dispose of them there. >> So thank you very much