The tl;dr on Powell

The trillion-dollar question. Answers inside.

The Fed did what it was widely expected to do today, nudging the policy rate up another quarter of a percentage point (that’s 25 basis points). How many more rate hikes will we see? Will the Fed pause here or continue hiking?

Fed Chair Jerome Powell answered these questions—and more—during today’s press conference.

If your BINGO card had “ongoing increases,” then you can mark that spot. You can mark two more spots if you had “more work to do” and “restrictive for some time.”

You can also mark a spot if your card included the question, “Would the Fed accept a trillion-dollar platinum coin from the Treasury?” But you might not have realized that was the question.

If you missed the live commentary, you can watch the whole thing here. If you’re pressed for time and just want a rough summary, I’m here with another tl;dr. So here’s my (very) loose paraphrasing of the question-and-answer portion of the news conference.

Question: Financial conditions have loosened since fall. The market is up. Will you have to go harder to blunt Wall Street’s enthusiasm?

Powell: Financial conditions have tightened very significantly over the past year. And we’re not done.

Question: Inflation is decelerating. Can’t we just let this play out? Do you still think we need to see rising unemployment in order to bring inflation back down to target?

Powell: We can tell a good story about disinflation except where it matters most—core services ex housing. And that’s bad news.

Question: It’s January. Have your views on inflation changed since December?

Powell: No.

Question: You’ve been trying to bring the ratio job openings relative to job seekers closer to balance. The ratio just moved higher.

Powell: I know. The labor market is stubbornly strong.

Question: Do you still think you’ll have to push rates to 5.25 percent?

Powell: That was our December view. We’ll update you in March.

Question: You’re walking a fine line. How do you view the balance of risk? 

Powell: We might do too much. If we over tighten, we can reverse course pretty easily. But if we do too little, inflation expectations could get entrenched, and then we’ll get accused of “wimping out” like Arthur Burns.

Question: Financial markets want to put inflation in the rear-view mirror. You think they’re getting ahead of themselves.

Powell: The disinflation process has started. We see it most clearly in the goods sector, where we actually have transitory deflation. We know disinflation is coming in housing services. And we expect to see it soon in core services ex housing, but we don’t see it yet. And that’s our focus. Until we see it there, we’re not convinced inflation is in the rear-view mirror.

Question: You were wrong in the past re: the Phillips curve. You might be wrong again. So why not pause now and see if inflation will keep falling even if the labor market remains strong?

Powell: The story we’re telling ourselves is that the Phillips curve is right.

Question: In the privacy of your closed-door meetings, is the FOMC talking about what—specifically—it will take to reach the end of this tightening cycle?

Powell: We talk about a lot of things. You can read the minutes when they’re released.

Question: When Secretary Yellen sends you a trillion-dollar platinum coin, will you credit the Treasury’s General Account (TGA) without hesitation—in keeping with your fiscal agent duties—or do you think you need to check with legal council first?¹

Powell: Um, can you repeat the question. 

Question: You’re the Treasury’s fiscal agent. If a platinum coin shows up, what do you do?

Powell: So you’re asking about prioritization of payments.

Question: The Fed has raised rates at every meeting since March 2022. Instead of talking about “ongoing increases,” has there been any discussion of pausing and restarting the rate hikes if you feel you need to later in the year?

Powell: We obviously didn’t pause today, and we anticipate the need for further rate hikes. We’ll write down new forecasts in March. 

Question: I get that. What I’m asking is, could you have gaps in the tightening? Like a pause and then a restart if inflation isn’t stepping down the way you want?

Powell: There was a time when the Fed would hike every other meeting and it was considered fast. We go every meeting now.

Question: The Summary of Economic Projections (SEP) from December already seems inconsistent with the facts-on-the-ground. Could your understanding of the inflation dynamics be wrong?

Powell: Goods deflation is transitory. To get core PCE back down to 2 percent, we’ll need to see a better balance in the labor market. We could get there without a significant decline in economic activity and rise in employment.

Question: Can we get there if you stop raising rates after you get to 5 percent? 

Powell: There’s a chance.

Question: Recession indicators are flashing red. They’re telling us we’re going to see recession this year. You’ve baked in a lot of tightening that hasn’t even hit yet. Are you close to tipping us into recession?

Powell: Well, there are a lot of tailwinds. The labor market is “very, very strong.” We think we’ll eek out enough growth to avoid recession. State and local governments are flush with cash, and there’s federal spending in the pipeline too.

Question: When you say that the Fed needs to see “substantially more evidence” that inflation is retreating, how many months are we talking about? Or are you really just focused on the labor market?

Powell: We want to see a lot of things but especially wages coming down.

Question: We’ve seen inflation come down without hammering the labor market. Is the hard part yet to come? Could inflation get stuck at a level much higher than 2 percent?

Powell: It could. We’re in disinflation, but “we’ve got a long way to go.”

Question: How long do you expect to hold interest rates at an elevated level?

Powell: Do not expect rate cuts this year.

Question: You talk of “ongoing increases,” which implies at least two more hikes. Markets expect one more rate hike, followed by a pause. Who’s right?

Powell: We have different views, and I don’t care about the divergence. The market is optimistic. I don’t see us cutting rates this year. 

Question: Is the pandemic no longer weighing on the economy? You’ve dropped references to public health in your assessment of economic conditions.

Powell: Eventually, you have to take it out. We’re “handling” COVID better, so it’s not an ongoing economic risk, even though it remains a health issue.

Question: Vice-chair Lael Brainard isn’t worried about a wage-price spiral. Do you agree?

Powell: We don’t see it but that doesn’t mean it’s not a risk.

Question: You believe consumer’s expectations are important?

Powell: Inflation expectations are a very important part of the process of creating inflation. But expectations are “well anchored” so I agree with the Vice-chair Brainard.

Question: In the December minutes, the Fed raised concerns about an unwarranted easing of financial conditions. You haven’t mentioned that today. Is it still a concern?

Powell: Markets need to reflect the tightening of financial conditions because we are tightening. And—don’t forget—we expect to keep rates higher for longer. 

Question: Does the Fed take into account the debt ceiling when it comes to unwinding its balance sheet? More aggressive Quantitative Tightening (QT) runs the Treasury up the debt ceiling even faster.

Powell: It’s hard to think about our role in accelerating the timeline. It’s really up to Congress to act. If they don’t raise the debt limit, it puts everything—the economy, financial markets, inflation—at risk.

1. This was the trillion-dollar question. You had to know something about the whole platinum coin debate to recognize it immediately. Here’s how the question was actually posed: “I want to ask about the debt ceiling. If the US goes past the X-Date, will the Fed do whatever the Treasury directs as it relates to making payments as the fiscal agent, or will it do its own analysis of any legal constraints?” In other words, does the Fed recognize a clear obligation to deposit the coin, or would it feel compelled to check with its lawyers first? I’m reasonably certain this piece by Nathan Tankus inspired the question.