Fed Chair Jerome Powell Press Conference Transcript December 16: Market Update

Jerome Powell: (02:43) ... so this remains low, especially in sectors that typically require people to gather closely. ... Reserve, we are strongly committed to achieving the monetary policy goals that Congress has given us, maximum employment and price stability. Since the beginning of the pandemic, we have taken forceful actions to provide relief and stability to ensure that the recovery will be as strong as possible and to limit lasting damage to the economy. Today, my colleagues on the FOMC and I reaffirmed our strong forward guidance for interest rates, and also provided additional guidance for our asset purchases. Together, these measures will ensure that monetary policy will continue to deliver powerful support to the economy until the recovery is complete. Jerome Powell: (04:09) Economic activity has continued to recover from its depressed second quarter level. The substantial reopening of the economy led to a rapid rebound in activity, and real GDP rose at an annual rate of 33% in the third quarter. In recent months, however, the pace of improvement has moderated. Household spending on goods, especially durable goods, has been strong and has moved above its pre-pandemic level. In contrast, spending on services remains low, especially in sectors that typically require people to gather closely, including travel and hospitality. The overall rebounded household spending owes in part to federal stimulus payments and expanded unemployment benefits, which provided essential support to many families and individuals. The housing sector has fully recovered from the downturn, supported in part by low mortgage interest rates. Business investment has also picked up. Jerome Powell: (05:06) The recovery has progressed more quickly than generally expected and forecasts from FOMC participants for economic growth this year had been revised up since our September Summary of Economic Projections. Even so, overall economic activity remains well below it's level before the pandemic, and the path ahead remains highly uncertain. In the labor market, more than half of the 22 million jobs that were lost in March and April have been regained as many people were able to return to work. As with overall economic activity, the pace of improvement in the labor market has moderated. Job growth slowed to 245,000 in November, and while the unemployment rate has continued to decline, it remains elevated at 6.7%. participation in the labor market remains notably pre-pandemic levels. Although there has been much progress in the labor market since the spring, we will not lose sight of the millions of Americans who remain out of work. Jerome Powell: (06:07) Looking ahead, FOMC participants project the unemployment rate to continue to decline. The median projection is 5% at the end of next year, and moves below 4% by 2023. The economic downturn has not fallen equally on all Americans and those least able to shoulder the burden have been the hardest hit. In particular, the high level of joblessness has been especially severe for lower wage workers in the service sector and for African-Americans and Hispanics. The economic dislocation has upended many lives and created great uncertainty about the future. The pandemic has also left a significant imprint on inflation. Following large declines in the spring, consumer prices picked up over the summer, but have leveled out more recently. For those sectors that have been most adversely affected by the pandemic, prices remain particularly soft. Overall, on a 12 month basis, inflation remains below our 2% longer run objective. The median inflation projection from FOMC participants rises from 1.2% this year to 1.8% next year, and reaches 2% in 2023. Jerome Powell: (07:20) As we have emphasized throughout the pandemic, the outlook for the economy is extraordinarily uncertain and will depend in large part on the course of the virus. Recent news on vaccines has been very positive. However, significant challenges and uncertainties remain with regard to the timing, production, and distribution of vaccines, as well as their efficacy across different groups. It remains difficult to assess the timing and scope of the economic implications of these developments. The ongoing surge in new COVID-19 cases, both here in the United States and abroad, is particularly concerning, and the next few months are likely to be very challenging. All of us have a role to play in our nation's response to the pandemic. Following the advice of public health professionals to keep appropriate social distances and to wear masks in public will help get the economy back to full strength. A full economic recovery is unlikely until people are confident that it is safe to re-engage in a broad range activities. Jerome Powell: (08:21) As we previously announced, we are now releasing the entire package of our SEP materials at the same time as our FOMC statement. Included in these materials are two new exhibits that show how the balance of participants' assessments of uncertainty and risks have evolved over time. Since the onset of the pandemic, nearly all participants continue to judge the level of uncertainty about the economic outlook as elevated. In terms of risks to the outlook, fewer participants see the balance of risks as weighted to the downside than in September, while a little than half of participants now judge risks to be broadly balanced for economic activity, a similar number continue to see risks weighted to the downside for inflation. The Fed's response to this crisis has been guided by our mandate to promote maximum employment and stable prices for the American people, along with our responsibilities to promote the stability of the financial system. Jerome Powell: (09:17) As noted in our statement on longer run goals and monetary policy strategy, we view maximum employment as a broad based and inclusive goal. Our ability to achieve maximum employment in the years ahead depends importantly on having longer term inflation expectations well anchored at 2%. as we reiterated in today's statement, with inflation running persistently below 2%, we will aim to achieve inflation moderately above 2% for some time so that inflation average is 2% over time and longer term inflation expectations remain well anchored at 2%. We expect to maintain an accommodative stance of monetary policy until these employment and inflation outcomes are achieved. With regard to interest rates, we continue to expect it will be appropriate to maintain the current zero to one quarter percent target range for the Federal Funds Rate until labor market conditions have reached levels consistent with the committee's assessment of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time. Jerome Powell: (10:16) In addition, as we noted in today's policy statement, we will continue to increase our holdings of Treasury securities by at least 80 billion per month, and of agency mortgage backed securities by at least 40 billion per month until substantial further progress has been made toward our maximum employment and price stability goals. We believe the increase in our balance sheet this year has materially eased financial conditions and is providing substantial support to the economy. Combined with our forward guidance for the Federal Funds Rate, our enhanced balance sheet guidance will ensure that the stance of monetary policy remains highly accommodative as the recovery progresses. Our guidance is outcome based and is tied to progress toward reaching our employment and inflation goals. Thus, if progress toward our goals were to slow, the guidance would convey our intention to increase policy accommodation through a lower expected path of the Federal Funds Rate at a higher expected path of the balance sheet. Jerome Powell: (11:14) Overall, our interest rate and balance sheet tools are providing powerful support to the economy and will continue to do so. The Federal Reserve has also been taking broad and forceful actions to more directly support the flow of credit in the economy for households, for businesses large and small, and for state and local governments. Preserving the flow of credit is essential for mitigating damage to the economy and promoting a robust recovery. Many of our programs rely on emergency lending powers that require the support of the Treasury Department and are available only in very unusual circumstances such as those we find ourselves in today. These programs serve as a backstop to key credit markets and have helped to restore the flow of credit from private lenders through normal channels. We have deployed these lending powers to an unprecedented extent, enabled in large part by financial backing and support from Congress and the Treasury. Jerome Powell: (12:05) Although funds from The Cares Act will not be available to support new loans or new purchases of assets after December 31, the Treasury could authorize support for emerging lending facilities if needed through the Exchange Stabilization Fund. When the time comes, after the crisis has passed, we will put these emergency tools back in the box. As I have emphasized before, these are lending powers, not spending powers. The Fed cannot grant money to particular beneficiaries. We can only create programs or facilities with broad-based eligibility to make loans to solvent entities with the expectation that the loans will be repaid. Many borrowers are benefiting from these programs, as is the overall economy, but for many others, getting a loan that may be difficult to repay may not be the answer. In these cases, direct fiscal support may be needed. Jerome Powell: (12:56) Elected officials have the power to tax and spend and to make decisions about where we as a society should direct our collective resources. The fiscal policy actions that have been taken thus far have made a critical difference to families, businesses, and communities across the country. Even so, the current economic downturn is the most severe of our lifetimes. It will take a while to get back to the levels of economic activity and employment that prevailed at the beginning of this year, and it may take continued support from both monetary and fiscal policy to achieve that. To conclude, we understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We are committed to using our full range of tools to support the economy and to help assure that the recovery from this difficult period will be as robust as possible. Thank you. I look forward to your questions. Michelle: (13:53) Thank you. Rich Miller. Rich Miller: (13:56) Thank you very much, Mr. Chairman. Thank you, Michelle. I wonder if I could start with this stat. We have unemployment now is at 6.7, the CEP median sees it falling to 5. Headline inflation is 1.2, the CEP median sees it rising to 1.8, and core inflation is 1.4, and the CEP sees it rising to 1.8 likewise. Would that constitute substantial further progress toward the committee's maximum employment and price stability goals? Jerome Powell: (14:27) Yes. Well, so we're not going to be associating that test with specific numbers at this point. So really the question is, what do we mean by that language? And really, the overarching message, Rich, is that our guidance for both interest rates and asset purchases will keep monetary policy accommodative until our maximum employment and price stability goals are achieved, and that's a powerful message. So substantial, further progress means what it says. It means we'll be looking for employment to be substantially closer to assessments of its maximum level and inflation to be substantially closer to our 2% longer run goal before we start making adjustments to our purchases. Jerome Powell: (15:13) I would also point out that by increasing our asset holdings, we see ourselves as adding policy accommodation. There will come a time when the economy does not require increasing amounts of policy accommodation, and when that time comes, and that will be uncertain, and in any case, is some ways off. So I can't give you an exact set of numbers. We, of course, as we approach that point, will be evaluating that, and when we see ourselves on a path to achieve that goal, then we will say so undoubtedly well in advance of any time when we would actually consider gradually tapering the pace of purchases. Rich Miller: (15:55) Very quickly on that, you mentioned the next couple of months is going to be very challenging and- Richard Miller: (16:02) You mentioned the next couple of months are going to be very challenging. And regarding asset purchases, why not increase the duration of the asset purchases at this time given what you see is a very challenging period ahead? Jerome Powell: (16:16) Again, I would start with what we actually did at the meeting which was, we provided this guidance about the path of asset purchases. And I just went through the guidance that we put forward. And so I guess since September, we've now adopted a flexible average inflation targeting framework. We have provided rate guidance that is tightly linked to the goals as expressed in that new framework. And now we've done the same for asset purchases. So we've been sort of... As the future has become clearer and as we've absorbed new developments in the medical sphere, and also in the economy, we have began to be able to see further. So we've started to be able to provide further important guidance. And we think that the asset purchase guidance is very important. Jerome Powell: (17:14) We think that the prior language in coming months was obviously temporary. This links those purchases to actual substantial, further progress toward our mandated goals. We think that's important and we think that, that is important to have done. I would just add though, that we also continue to think that our current policy stance is appropriate. We think it's providing a great deal of support for the economy. Financial conditions are highly accommodative, and we monitor a range of financial condition indexes. There are many of them, and they'll all pretty much tell you that. You can also look at the interest sensitive parts of the economy. For example, housing, durable sales, vehicle sales. Those parts of the economy are performing very, very well. The parts of the economy that are weak are the service sector businesses that involve close contact. Jerome Powell: (18:07) Those are not being held back by financial conditions, but rather by the spread of the virus. And I'll close by just saying, we do have the flexibility to provide more accommodation through the channel you mentioned, and through other channels. And we recognize that circumstances could shift in a way that warrants our doing that, and including by adjusting purchases. We are committed to using our full range of tools to support the US economy to achieve our goals. We will continue to use our tools to support the economy for as long as it takes until the job is well and truly done. No one should doubt that. Richard Miller: (18:43) Thank you. Thank you. Speaker 1: (18:46) Thank you. Nick Timiraos. Nick Timiraos: (18:50) Thank you. Nick Timiraos of the Wall Street Journal. Chair Powell, it's a two part question. What if anything would prompt the Fed to shift Treasury purchases toward the longer end of the curve as you did with your prior QE programs? And does the guidance today on asset purchases foreclose the possibility that you could at some point lengthen maturities while simultaneously tapering the monthly purchase amounts? Jerome Powell: (19:20) Well, Nick, on the first part of the question, I wouldn't want to sort of talk about hypothetical situations. We look at our overall stance of policy. We look at overall financial conditions. We look at what's going on in different parts of the economy and we ask ourselves, should we change our policy stance? We do that at every meeting. And we look at where financial conditions are now and we feel that they were appropriate for now. Any time we feel like the economy could use stronger accommodation, we would be prepared to provide it. Jerome Powell: (19:57) But right now we're providing a great deal, and we'd happen to think it's the right amount. And you mentioned, I think you're referring to the idea of maintaining the duration but reducing the quantity, which is sort of what the Bank of Canada did. And that is something that we talked about in the last meeting and was addressed in the minutes. And I would say the views on that were mixed. Some thought it was an interesting idea, others, not so much. I wouldn't say that, that's something that's high on our list of possibilities. Nick Timiraos: (20:28) Thank you. Speaker 1: (20:31) Thank you. Victoria. Victoria Guida: (20:35) Hi, Victoria Guida with POLITICO. I wanted to ask about the 13(3) facilities. Chair Powell, you've said that you accept Treasury Secretary Mnuchin's interpretation of the statute of the CARES Act on what should happen with those programs. So, first of all, I'm curious whether under a new Treasury secretary, you will accept whatever legal interpretation they put forward for those programs. And then also, given that there isn't a statutory requirement for you to have financial backing from Treasury for 13(3) facilities, do you have any plans for any future facilities that don't require Treasury backing? Jerome Powell: (21:12) So on your first question, we really have not thought about that. We have a lot to do now, and we have not focused on that question. And I really have nothing to add on that. Your second question is... Sorry. Oh. No, no. Certainly, we would have the ability to do facilities under 13(3) in some cases with no backing, but we can't do any 13(3) facilities without the approval of the Treasury secretary, right? But we did some facilities. I think one of our facilities this time didn't have any Treasury backing. And I think some during the global financial crisis didn't have any. Victoria Guida: (22:00) So do you have any [inaudible 00:22:01] plans? Would you consider doing more facilities if that became necessary without Treasury backing? Jerome Powell: (22:05) I would say that we have the authorities we have, we will use them if they're needed and if the law permits us to do so. We would always do that. We do not have any plans for the future about this. We're very focused on getting through year end. We've been very focused on the issues that are right in front of us. And honestly, we're not planning on anything or having any discussions about what we might do down the road. Victoria Guida: (22:36) Thank you. Speaker 1: (22:40) Thank you. Steve Liesman. Steve Liesman: (22:44) Thank you, Mr. Chairman, and happy New Year. I know how much you enjoy talking about fiscal stimulus so let me ask you directly about fiscal stimulus. There's talk right now of a $900 billion fiscal stimulus program in Congress. Is that sufficient? Is that what you're looking for? You think that will be sufficient for helping the economy? Finally, you talked about the idea of how concerning the recent surge is. I wonder if you could put some detail on that. How much concern do you have in terms of where could employment go? What could happen to GDP in the first quarter as a result of this surge? Thank you. Jerome Powell: (23:20) Okay. So on fiscal policy, I would just say a couple of things. The case for fiscal policy right now is very, very strong. And I think that is widely understood, I would say now. The details of it are entirely up to Congress. But with the expiration of unemployment benefits, some of the unemployment benefits, the expiration of eviction moratoriums with the virus spreading the way it is, there is a need for households and businesses to have fiscal support. And I do think that again. And I think that is widely understood. So I think it would be... I certainly would welcome the work that Congress is doing right now. It's not up to us to judge that work, it's really theirs. And I don't have a view on the size of it. It's obviously a substantial bill. On the surge, so it's a really interesting question. We have, and others too, have consistently expected there to be more economic... That a growth in cases would hold back the economy more than it actually has. Jerome Powell: (24:34) So we've overestimated the effects on the economy of these spikes we've been having. Now, this spike is so much larger that I think, and I think forecasters generally do think that this will have an effect on suppressing activity, particularly activity that involves people getting together in bars and restaurants, on airplanes and hotels and things like that. And you're starting to see that. In the high frequency data, you're now beginning to see that show up. And I think the case numbers are so high and so widespread across the country that, that seems like it must happen. Now, how big will it be? We don't really know. There are a lot of estimates. The general expectation is you're seeing some slowing now and you'll see the first quarter could well be... What we said is that coming months are going to be challenging. The first quarter will certainly show significant effects from this. Jerome Powell: (25:25) At the same time, people are getting vaccinated now. They're getting vaccinated. And by the end of the first quarter into the second quarter, you're going to be seeing significant numbers of people vaccinated. And so then how will that plan to economic activity? Again, we don't have any experience with this. You have to think that sometime in the middle of next year, you will see people feeling comfortable going out and engaging in a broader range of activities. And some people will be probably quick to do that. Some are doing it now without a vaccine, right? In many parts of the country. So nonetheless, my expectation, and I think many people have the expectation that the second half of next year, the economy should be performing strongly. We should be getting people back to work, businesses should be reopening and that kind of thing. The issue is more the next four or five months. Getting through the next four or five, six months, that is key. And clearly there's going to be need for help there. And my sense and hope is that we'll be getting that. Speaker 1: (26:33) Thank you. Jeanna Smialek. Jeanna Smialek: (26:39) Thank you, Powell. Thank you for taking our questions. I was wondering if you could talk a little bit about house prices. They were mentioned in the most recent minutes as potentially evaluation concern, especially as it related to your mortgage back security purchases. And you mentioned earlier today that the housing market looks more or less fully healed. And so I guess, I wonder, are you worried about valuation pressures there? And if so, what can the Fed do to contain those? Jerome Powell: (27:05) So we monitor basically just about every asset price in the economy and housing prices are something that we've been monitoring. And you see them moving up, you see very high demand. This is the housing market that people have been expecting since 2010. And then not many when the pandemic hit thought, Oh, this is what will produce that housing market, but it has now. I would say from a financial stability standpoint, housing prices are not of a level of concern right now. That's just reflective of a lot of demand. And builders are going to bring forth supply. Jerome Powell: (27:44) There's also a sense that some of this may be pent up demand from when the economy was closed, which would imply that once that demand is met, that the real level of demand will more manageable. So it's a healthy economy now. We met recently with a bunch of home builders and many of them in the business, 30, 40 years. So they'd never seen the likes of it. But no, housing prices themselves are not a financial stability concern at the moment. We will watch that carefully. But in the near term, I wouldn't think that that's an issue that we'd be concerned about. Speaker 1: (28:18) Thank you. Edward Lawrence. Edward Lawrence: (28:22) Thank you for the question, Mr. Chairman. So with the actions that you've currently taken, how do you further fight a slow down that you're seeing? We talked about retail sales numbers are a little bit sluggish this month, the unemployment, the job growth has slowed down. Is there more the Fed can do to fight this or is it now squarely in the Congress's realm? Jerome Powell: (28:44) There is more that we can do, certainly. We can expand our asset purchase programs. We can focus the more on the longer end. There are a number of options we would have to provide more support to the economy. So I would say though that in the near term, the help that people need isn't just from low interest rates that stimulates demand over time and works with long and variable lags, it's really support. We've talked about this as all of these government policies trying to work together to create a bridge across this economic chasm that was created by the pandemic. And for many Americans, that bridge is there and they're across it. But there's a group for which they don't have a bridge yet and that's who we're talking about here. It's the 10 million people who lost their jobs. It's people who may lose their homes. You see the many, many millions of Americans are waiting in food lines, in their cars these days, all over the country. Jerome Powell: (29:41) So we know there's need out there. We know there are small businesses all over the country that have been basically unable to really function, and they're just hanging on. And they're so critical to our economy. And by the way, now that we can kind of see the light at the end of the tunnel, it would be bad to see people losing their business, their life's work in many cases or even generations worth of work because they couldn't last another few months, which is what it amounts to. So we have more we can do. And I think more of the issue is we're going to need to continue to provide support to this economy for quite a period of time, because the economy will be growing in expectation. Should be growing at a fairly healthy clip by the second half of next year. But it's going to be a while before we really are back to the levels of the sort of conditions in the labor market that we had in early this year, and for much of the last couple of years. So that's how I think about it. Edward Lawrence: (30:43) Thank you. Thank you. Speaker 1: (30:46) Thank you. Howard Schneider. Howard Schneider: (30:48) Okay. Chair Powell, thanks for this and thanks Michelle. Two quick questions. One, on the vaccine, do you have, or has the Fed modeled of sort of a working estimate of when the US might reach something approaching herd immunity? And secondly, if you could please connect with me the decision to maintain the current pace and quantities of bond purchases with the fact that the steps are showing three years with inflation not reaching 2%. Some might argue that you need to do more to start fixing those expectations and to let this drift and say, we're going to miss our target for another three years. It doesn't show a very firm commitment to the new framework. Jerome Powell: (31:35) So in term of the vaccine, we do estimates of when the United States would reach herd immunity, and they're going to be similar to what other people think. It depends on your assumptions, such as how many people will actually take the vaccine and how fast will the rollout be. So it's assumption based on assumption, based on assumption. But sometime it's possible, sometime in the middle or second half of next year. I'm not going to try to be precise because it's just another estimate. Our people are very- Jerome Powell: (32:03) ... going to try to be precise because it's just another estimate. Our people are very good, but they're looking at the same data as other people are. And so, all the estimates are, it depends on what your assumptions are. But under a normal set of assumptions, it could happen as soon as the middle of next year. Jerome Powell: (32:17) In terms of the inflation and a couple of things, your second question, I think you have to be honest with yourself about inflation these days. There are significant dis-inflationary pressures around the world and there have been for a while and they persist today. It's not going to be easy to have inflation move up. And it isn't going to be just a question, it's going to take some time. It took a long time to get inflation back to 2% in the last crisis. And we're honest with ourselves and with you in the SEP that even with the very high level of accommodation that we're providing both through low rates and very high levels of asset purchases, it will take some time because that's what we believe the underlying inflation dynamics are in our economy. And that's sort of one reason why we're concerned about inflation is that we see that. And that's why we have adopted the flexible average inflation targeting framework, that's why we're aiming for an overshoot. But we're honest with ourselves and with the public that it will take some time to get there. Jerome Powell: (33:21) In terms of would it really speed it up a lot to move asset purchases? I don't think that would really be. I think it's going to take a long time however you do it. And we've been having very long expansions in the last several decades because inflation has not ... Really, the old model was inflation would come along and The Fed would tighten and we'd have a recession. Now, inflation has been low and we haven't had that dynamic. And the result has been three of the four longest expansions in modern history, in recorded history. So we're thinking that this could be another long expansion and that we'll keep our ... What we're saying is we're going to keep policy highly accommodated until the expansion is well down the tracks. And we're not going to preemptively raise rates until we see inflation actually reaching 2% and being on track to exceed 2%. That's a very strong commitment, and we think that's the right place to be. Speaker 2: (34:23) Thank you. Michelle: (34:23) Thank you. Chris Rugaber. I'm sorry, Mr. Chair. Jerome Powell: (34:32) I'm just going to add markets have actually found this fairly credible. If you look at inflation compensation and it's survey measures of when The Fed will lift off, there've been significant movements since we announced the framework in the direction that is consistent with the framework being credible to market participants. So I don't think it's something that, I mean, I'm actually pleased by the reception it's gotten in markets. And markets have moved in ways that suggest it is credible. Michelle: (35:07) Thank you. Chris. Chris Rugaber: (35:09) Hi, thank you. Yesterday, I guess The Fed said that it's joining the international financial greening group, and I just wanted to see if you could expand on how The Fed is thinking about climate change and how it might affect Fed policy going forward. Specifically, I think Janet Yellen drew a distinction between considering climate change when it came to financial regulation. But how do you see that also potentially affecting monetary policy? Obviously, [inaudible 00:35:39] The Fed for buying bonds of oil and gas companies. But leaving that specific case aside, I mean, is there any way that climate change considerations could affect monetary policy going forward? Jerome Powell: (35:53) So you're talking about the, sorry, the Network for Greening the Financial System, which we joined this week. And I'll just say a couple things about that. So first, I'll just start by saying that we're going to move carefully and thoughtfully on developing an understanding of how climate change affects our work, including the areas you mentioned. We're going to do so with a great deal of engagement with all of our external constituencies, including the public and their elected representatives who are charged with our oversight. We'll do it with great transparency. Remember that we are a nonpolitical agency whose goals and authorities to achieve those goals are set by Congress. We have great responsibilities and strong authorities that we'll use vigorously. We're not the forum where all the great issues of the day are to be hashed out, debated, and addressed unless and only to the extent that those issues are directly relevant to our statutory goals and are addressable through our legal authorities. And because we have a narrow remit, and because we stick to it, Congress has given us a precious grant of independence from direct political control. Jerome Powell: (36:53) So society's broad response to climate change is for others to decide, in particular elected leaders. But so let me get to your question. What does all that mean for an issue like climate change? And why did we join the NGFS? So Congress hasn't explicitly assigned us or other financial regulators a role, and we're not among the agencies who contribute to the National Climate Assessment, for example. But climate change is nonetheless relevant to our existing mandates under the law. And let me tell you why. One of our jobs is to regulate and supervise banks, and to look out for the stability of the financial system. That's a responsibility we share with other agencies. The public will expect that we will do that. So we'll expect that those important institutions will be resilient against the many risks that they face. Credit risk, market risk, cyber risk. Climate change is an emerging risk to financial institutions, the financial system, and the economy. Jerome Powell: (37:51) And we are, as so many others are, in the very early stages of understanding what that means, what needs to be done about it, and by whom. That's why 83 central banks have joined together to share research and identify best practices in this important emerging area. We've been attending NGFS meetings as an observer for more than a year, taking part in the work. We had discussed that it was probably time to join as a member. I'll just say that the financial system is really a global one. It's important that we work and discuss best practices with peer agencies around the world, especially in a field where we're just beginning to develop our understanding. Jerome Powell: (38:28) You asked about monetary policy. I'll say this. We have historically shied away strongly from taking a role in credit allocation. In fact, our agreement with treasury during the financial crisis from back in 2009 or '10 says that we will avoid credit allocation. It's something we've carefully avoided. So I would be very reluctant to see us move in that direction, picking one area as credit worthy and another not. Jerome Powell: (39:03) So you asked about monetary policy. For now, I would say the real concern is, the real place to focus for me, is supervision of financial institutions and then financial stability concerns. You can see a connection there. Monetary policy, maximum employment, stable prices. It's less obvious to me, I can make the argument, but it's less obvious to me that those should be first order things that we would look at in connection with climate change. But I think there's work to be done to understand the connection between climate change and the strength and resilience of financial markets and financial institutions. So I think that work is in its early days. And again, we'll be careful, we'll be thorough, and transparent, and engage with the public on all that. Chris Rugaber: (40:00) Thank you. Michelle: (40:02) Thank you. Rachel Siegel. Rachel Siegel: (40:08) Hi, Chair Powell. Thanks very much for taking my question. And thank you, Michelle. I wanted to ask specifically about state and local aid. Just as one example, the governor of Illinois announced roughly $700 million in early anticipated budget cuts to close a budget deficit. And the latest bipartisan stimulus proposal that's being debated this week seems to be leaving out state and local aid at this point. And I'm just curious if you can give some detail about the damage that these budget deficits or the lack of aid specifically to state and local governments will have on the recovery. And specifically, with the municipal lending facility set to expire, what more the fed might be able to do to fill that specific hole. Thanks very much. Jerome Powell: (40:50) Okay. So the state and local governments, they provide important, critical services, safety, fire, police, health, all kinds of things like that. They're really involved in people's lives, state and local governments are to a large extent. The decision whether to provide more fiscal support to them is entirely in the hands of Congress. And they're in the middle of these discussions, and those are issues for them to decide. I would say that the picture is mixed. What's happened is if you are a state that has a significant exposure to tourism or to extracting energy from the ground, oil from the ground, or gas, you are probably, at least in those industries, feeling a significant loss of revenue. A number of other states have been surprised on the upside where, and that's because good sales, for example, property taxes are what don't move much year to year. And the kind of sales taxes on goods. Good sales have been very high, income has been more or less replaced by the CARES Act, fully replaced, more than in many cases. Jerome Powell: (42:05) So the concerns that we had at the very beginning of really serious deep shortfalls and massive budget cuts on the part of state and local governments have not yet occurred. What we're seeing is that it's different state to state. And some states are having significant difficulties. Others, not so much. The real concern, though, that still emerges is state and local governments are very large employers. And one of the largest. And so far, since the pandemic began, employment has dropped by 1.3 million in state and local. So it's a very large number of people to be out of work from just that one source. It's actually significantly more than lost their jobs during the global financial crisis. Jerome Powell: (42:57) So a significant part of that group is in education. So when the schools reopened, a significant part of that 1.3 million would go back to work. Nonetheless, it's a concern. We're watching carefully to understand why that many people have been let go and what really are the sources. So we're monitoring it carefully, and it's a mixed picture. And I just have to leave the question of what to do with fiscal policy on this to Congress. Michelle: (43:30) Thank you. James Politi. James Politi: (43:34) Thank you, Michelle. And thank you, Chair Powell. You and The Fed have consistently said that The Fed was ready to provide the economy more monetary support if needed and really stressed to policy makers generally that the dangers of not doing enough outweigh the risks of doing too much in a situation where there's so much suffering in the economy. The guidance today sort of cements asset purchases for longer period of time, but it's not a big new easing step. Why was now, with the short-term outlook deteriorating due to the new coronavirus surges, not the moment for a big new easing step? And is it because of the medium term outlook improving? Or is it because The Fed just doesn't have the capacity to sort of build that bridge over the next four to five months for the people who are struggling? Jerome Powell: (44:28) Right. So I got to go back, James, to what I said earlier, which is this is a very, very large asset purchase program. It's providing tremendous amount of support for the economy. If you look at the interest sensitive parts of the economy, they're performing very well. The parts that are not performing well are not struggling from high interest rates, they're struggling from exposure to COVID, in a sense. These are the businesses that are really hit hard by people's reluctance to gather closely. So we do have the ability to buy more bonds or to buy longer term bonds. And we may use it. I'm not saying we won't use that. It may well come to using that. Jerome Powell: (45:15) But also, I would also note though, monetary policy works with long and variable legs is the famous statement. So we think that the big effects from monetary policy are months and months into the future. So this looks like, it looks like a time when what is really needed is fiscal policy. And that's why it is a very positive thing that we're getting that. So we remain open to either increasing the size of our asset purchases, if that turns out to be appropriate, or to just moving the maturities, moving to buying longer maturities. Because that also increases accommodation by taking more duration risk out of the market. But we think our current stance is appropriate. And we think that our guidance on asset purchases today will also provide support to the economy over time. Again, what we've done is we've laid out a path whereby we're going to keep monetary policy highly accommodated for a long time, really until we reach very close to our goals, which is not really the way it's been done in the past. Jerome Powell: (46:25) So that's providing significant support for the economy now. We don't think the economy suffers from a lack of highly accommodated financial conditions. We think it's suffering from the pandemic and people wanting to not engage in certain kinds of economic activity. And we expect that with the virus, that that will improve, that condition will improve. Nonetheless, again, we are prepared to use our tools. We will use them at such time and in such amounts as we think would help. Michelle: (46:58) Thank you. Scott Horsley, NPR. Scott Horsley: (47:03) Thank you, Mr. Chairman. Some forecasters have suggested that there is a lot of pent up demand for travel and entertainment and services and the like that might stop being pent up in a hurry if we do get to a point where the vaccine is widely distributed. And that the beaten down service sector might have trouble meeting that demand in a hurry. How might that affect inflation in your mind? And would that be just a transient problem or something that might warrant closer scrutiny? Jerome Powell: (47:38) So that has all the markings of a transient increase in the price level. So you can imagine that as people really want to travel again, let's say, airfare, I'm just imagining this, right? That they go up. But what inflation is is a process whereby they go up year upon year upon year upon year. And given the inflation dynamics that we've had over the- Jerome Powell: (48:03) If given the inflation dynamics that we've had over the last several decades, just a single sort of price level increase has not resulted in ongoing price level increases. The problem back in the 1970s was it was the combination of two things. One, when unemployment went down and resources got tight, prices started going up. But the second problem was that that increase was persistent. There was a level of persistence. So if prices went up 6% this year, they'd go up 6% next year because people would internalize. I mean, really, that's what happens is people internalize that they can raise prices and then it's okay to pay prices that are going up at that rate. Jerome Powell: (48:45) So that was the inflation. Those are the inflation dynamics of that era. Those dynamics are not in place anymore. The connection between low unemployment or other resource utilization and inflation is so much weaker than it was. It's still there, but it's a faint heartbeat compared to what it was. And the persistence of inflation, if you get, for example, oil prices go up and that'll send a temporary shock through the economy. The persistence of that into inflation over time, it's just not there. So, what you described may happen, and of course we would watch it very carefully. Jerome Powell: (49:23) We understand that we will always be learning new things from the economy, about how it will behave in certain cases. But I would expect though, going in that that would be a one-time price increase rather than an increase in underlying inflation. It would be persistent. Speaker 3: (49:40) So not the kind of thing that the Fed would be trigger happy to respond to? Jerome Powell: (49:44) No, definitely not. Speaker 4: (49:50) Thank you. Michael Derby. Michael Derby: (49:56) But what I wanted to ask was given the size of the government and borrowing and different regulatory changes in the financial sector, do you think that the treasury market long run can operate smoothly without some sort of an active Fed presence, buying predatory debt? [inaudible 00:02:17]. He had some questions about that. So I wanted to know where you stood on that issue. Jerome Powell: (50:25) Right. So you were breaking up a little bit. I think I got the sense of it, though. Yeah. I don't think it's at all a foregone conclusion that there needs to be a permanent Fed presence. And we certainly don't, that's not something we're planning on or intending. Right now, we're buying assets because it's a time when the economy needs highly accommodative monetary policy, and we think our asset purchases are one of the main delivery mechanisms for that, the size of the balance sheet. There's lots of demand for US Treasury paper from all over the world. Jerome Powell: (51:03) And I think we need to be thoughtful about the structure of the treasury market and look at ways to make sure that the capacity is there for it to be handled by the private sector. And there's quite a lot of work going on on that front, but I don't presume at all that this is something that needs to be where the Fed needs to be in there at all. I would think that this should be handled by the private sector and can be. Institutions need to be able to hold this paper. And there may be a central clearing angle, so that would net a lot of risk. Jerome Powell: (51:36) That's that's yet to be proven. There are a lot of things that are being looked at right now. Michael Derby: (51:43) Thank you. Speaker 4: (51:43) Thank you. Hannah Lang. Hannah Lang: (51:48) Hi. Thanks so much for taking my questions. So, as you know, the pandemic is really disproportionately impacted small and medium-sized businesses, and the Fed launched a few efforts this year through its 13(3) programs to reach out to those companies. But considering that some of those programs are ending, is there anything else that the Fed's actions can do to provide support to those companies, or is that solely Congress' domain? Jerome Powell: (52:15) I think the main thing that those companies need is a robust recovery, a strong, robust recovery. And so we contribute to that through highly accommodative monetary policy, through accommodated financial conditions that are supporting economic activity. Health authorities are contributing to that through management of the spread of the virus, and now through vaccines and the delivery of those vaccines and Congress contributes to that by helping them make it through this very difficult time. And I think my understanding is that there's support for small businesses in what's being discussed on Capitol Hill. Jerome Powell: (52:55) I would certainly think that would be something well worth looking at. Speaker 4: (53:02) Thank you. Paul Lamonica. Paul Lamonica: (53:06) Fed Chair Powell, I was wondering if you've had any conversations yet with any members of the incoming Biden Administration, particularly Janet Yellen, who obviously you can share some similar experience in running the Fed. So just curious to get your thoughts on how the relationship with treasury and the new administration might differ than the past couple of years. Jerome Powell: (53:31) So we've had, and I've had sort of the typical meetings with the transition team for treasury. They've met with quite a lot of people at our agency and other agencies, and really it's about learning what we do. And I really have only spoken to former Chair Yellen to congratulate her on being nominated and just to say that I look forward to working with her. I did work very closely with her for five years before she left and have stayed in touch, so I did that. But I have not discussed policy with her and I'm not going to do that until she's confirmed. Speaker 4: (54:17) Great. Thank you. Jeff Cox. Jeff Cox: (54:19) Yes. Sir, thank you for taking the question. You've been asked this question before in various forms, I'm going to try it a little bit differently now. The equity market and the bond market seemed to be telling two different stories about where things are heading. [Inaudible 00:54:36] on the stock market, bond yields remain very low. Does that concern you at all? Are you getting any more concerned about asset valuations in light of the highly accommodated Fed policies? Jerome Powell: (54:54) You were breaking up, but I think I got that. I think I got it. So financial stability, we look at a broad range of things. We actually have a framework so that we can evaluate changes in financial stability over time and so that the public can evaluate whether we're doing a good job at it. So, what do we look at? Asset prices is one thing that we look at, and we published a report a few weeks ago on that, maybe it was month or so ago, anyway. And I think you'll find a mixed bag there. It depends. With equities, it depends on whether you're looking at PEs or whether you're looking at the premium over the risk-free return. Jerome Powell: (55:32) If you look at PEs, they're historically high. But in a world where the risk-free rate is going to be low for a sustained period, the equity premium, which is really the reward you get for taking equity risk, would be what you'd look at. And that's not at incredibly low levels, which would mean that they're not overpriced in that sense. Admittedly, PEs are high, but that's maybe not as relevant in a world where we think the 10 year treasury is going to be lower than it's been historically from a return perspective. We also look at borrowing leverage of financial institutions. Jerome Powell: (56:11) We spent 10 years and the bank spent 10 years building up their capital. So far, they've been a source of strength through this crisis and their capital's held up well. We look at leverage in the non-financial sector, that's households and non-financial corporates. Non-financial corporate leverage is high. We've been watching that, but rates are really low. And so companies have been able to handle their debt loads even in weak periods because rates are quite low. Your interest payments are low. Defaults and downgrades have declined since earlier in the year. Jerome Powell: (56:44) Households came into this very strong and there certainly has been a hit there for people who are unemployed. But with the CARES Act, Congress replaced a lot of lost income. It's very important that the economy gets strong again. I mean, the ultimate thing to support financial stability is a strong economy. The last thing is really funding markets. We found that there was a lot of unstable funding for companies, particularly financial companies, and that's down to a very low level these days. So the broad financial stability picture is kind of mixed, I would say. Jerome Powell: (57:21) I would say, asset prices are a little high in that metric and in my view, but overall you have a mixed picture. You don't have a lot of red flags on that. Again, it's something that we monitor essentially ongoing almost daily. We're monitoring these prices for that and have published our framework and we'll be held accountable for what we saw and what we missed. So we work very hard at it. Speaker 4: (57:56) Thank you. And for the last question, we'll go to Michael McKee. Michael McKee: (58:00) Mr. Chairman, I have a couple of questions about the fiscal support for the economy. This year's budget deficit is $3.1 trillion, and Republicans have argued they don't want to spend more because we can't afford it. So I'm wondering if you can make the case for how much we can afford. At what point do deficits and the debt start to have an impact on the economy or on interest rates and how would we know when we get there? Jerome Powell: (58:27) People who run for elected office and win, they're the ones, the reward is they get to make those very difficult decisions. And so we're not charged with providing fiscal advice to Congress. But I would just say as a general rule, it is important to be on a sustainable fiscal path. For my way of thinking and many others, the time to focus on that is when the economy is strong and when unemployment is low and taxes are pouring in and there's room to get on a sustainable path because the economy is really doing well. You're still now in some part of an economic crisis. Jerome Powell: (59:12) And the fact that Congress is debating a fairly large bill today suggest that something fairly substantial is going to get done, we hope. But what's being discussed is of some size. In terms of what is a sustainable level, I think the question is we've always looked at debt to GDP and we're very high by that measure. By some other measures, we're actually not that high. In particular, you can look at the real interest rate payments, the amount of what does it cost. And from that standpoint, if you sort of take real interest costs of the federal deficit and divide that by GDP, we're actually on a more sustainable fiscal path, if you look at it through those eyes. Jerome Powell: (59:57) Again, these are issues for Congress. But, I'd just say in the near term, I think the case for fiscal is strong, and I'm certainly hoping. I think it will be very good for the economy if we did get something soon. Michael McKee: (01:00:14) But the argument for continuing to spend is that low interest rates make it affordable. Do you worry you get into a situation where you would have congressional interference in monetary policy making or at least feel significant political pressure to keep rates low because the country can't afford to pay a significant interest bill? Jerome Powell: (01:00:35) I mean, I think we're a very, very long way from that. The Congress has given the Fed independence on the condition that we stick to our knitting. We try very hard to do that. And I think that that's what people call fiscal dominance and I think we're just a very, very long way from that. I think, if we do our jobs well and support the economy and achieve maximum employment and stable prices, keep the financial system stable, I don't think that that is something that we'll worry about, certainly not in the near term. Speaker 4: (01:01:10) Thanks very much. Jerome Powell: (01:01:10) Thank you.