Prepared Remarks Summary
https://www.federalreserve.gov/newsevents/speech/powell20250416a.htm
1) Dual mandate
Focused on the dual-mandate goals given by Congress: maximum employment and stable prices. Despite heightened uncertainty and downside risks, the U.S. economy is still in a solid position. The labor market is at or near maximum employment. Inflation has come down a great deal but is running a bit above our 2 percent objective.
2) Recent Economic Data
- The data in hand so far suggest that growth has slowed in the first quarter from last year’s solid pace. Overall, consumer spending has grown modestly.
- Strong imports during the first quarter, reflecting attempts by businesses to get ahead of potential tariffs, are expected to weigh on GDP growth.
- Surveys of households and businesses report a sharp decline in sentiment and elevated uncertainty about the outlook, largely reflecting trade policy concerns.
- Outside forecasts for the full year are coming down and, for the most part, point to continue slowing but still positive growth.
- In the labor market, during the first three months of the year, non-farm payrolls grew by an average of 150,000 jobs a month. While job growth has slowed relative to last year, the combination of low layoffs and lower labor force growth has kept the unemployment rate in a low and stable range. Overall, the labor market appears to be in solid condition and broadly in balance and is not a significant source of inflationary pressure.
- Inflation has significantly eased. Progress on inflation continues at a gradual pace, and recent readings remain above our 2 percent objective.
3) The new Administration is in the process of implementing substantial policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation. Those policies are still evolving, and their effects on the economy remain highly uncertain. The level of the tariff increases announced so far is significantly larger than anticipated. The same is likely to be true of the economic effects, which will include higher inflation and slower growth. Both survey- and market-based measures of near-term inflation expectations have moved up significantly, with survey participants pointing to tariffs. Survey measures of longer-term inflation expectations, for the most part, appear to remain well anchored; market-based breakevens continue to run close to 2 percent.
4) Tariffs are highly likely to generate at least a temporary rise in inflation. The inflationary effects could also be more persistent. Avoiding that outcome will depend on the size of the effects, on how long it takes for them to pass through fully to prices, and, ultimately, on keeping longer-term inflation expectations well anchored.
5) The Fed is well positioned to wait for greater clarity before considering any adjustments to our policy stance. The Fed continues to analyze the incoming data, the evolving outlook, and the balance of risks.
Q&A Summary (Conversation with Raghuram Rajan, the former head of India’s central bank)
https://www.youtube.com/watch?v=1o_9kO0zZQg&t=3062s
Reciting 2024 with GDP at 2.4%, unemployment at low 4% (close to mainstream estimates of maximum employment), and inflation at the end of year at 2.5%. Today, the Administration is implementing significant policy changes with trade in particular being the focus. The effects of that “are likely to move us away move us away from our goals” for the balance of this year.
There is a strong likelihood that unemployment will go up as the economy slows, and inflation is likely to go up as some parts of the tariffs are to be paid by the public.
TARIFFS & INFLATION
There are three things that are unknown, yet which will affect inflation, and the Fed would like to keep them under control:
- Size of the effects as the tariffs are larger than forecasters had expected and larger than what the Fed predicted, even in its upside case.
- The longer the length of time it takes for tariffs to have their effects on inflation and the longer it will raise the risks, the more the public will begin to experience higher inflation.
- Keep inflation expectations well anchored.
It is hopeful that this is a one-time price adjustment and does not turn into an ongoing inflation process. This is highly uncertain. These are just the Fed’s thinking now before the tariffs take effect and how they may affect the economy. The Fed wants to see what the policies ultimately are and then make a better assessment of their economic effects.
IMMIGRATION
The contribution to growth strength in the last couple of years was high levels of immigrants who want to work with high demand resulting from labor shortage. Immigration has fallen sharply since and the growth of workers has really stopped. But, at the same time the demand for labor has also fallen. Since they have fallen in tandem, the unemployment rate has been pretty stable. Wages have moved back down to sustainable levels as well.
STAGFLATION
When inflation is low and unemployment is high, it calls for lower interest rates to support activity. But with the impulses of likely higher inflation and higher unemployment, the Fed is in a difficult place. The Fed will look at how far the economy is and at what pace it is to each of the two goals (maximum employment and price stability). We are not in this situation now.
UNCERTAINTIES
Now, there are changes to policies without any real modern experience on how to think about this. Businesses and households are expressing that they are experiencing incredibly high uncertainty. Studies have shown that this leads to businesses and households stepping back from making decisions. If uncertainties remain high for longer, people will expect higher rates of return and make the U.S. less attractive as a jurisdiction.
FINANCIAL MARKETS
The Fed put will not be used to intervene if the stock market plummets. Currently, markets are processing the trade policy and where it is going and land. The market is struggling with lots of uncertainty and that means volatility. Yet, the market is still functioning and orderly.
In bonds, markets are processing historically unique developments with great uncertainty. There is de-levering going on in hedge funds and levered trades. Further, at the current size of the Fed balance sheet, the reserve remains abundant, and it is not close to the point of stopping quantitative tightening (QT). The slowing pace of QT allows the market to adjust gradually without disruptions as the process continues.
INTERNATIONAL DOLLAR-BASED SYSTEM
The U.S., through the Central Bank, has standing swap lines with five large central banks where there are big overseas U.S. dollar funding markets. We will continue to do that.
U.S. NATIONAL DEBT
U.S. federal debt is on an unsustainable path even though no one really knows how much further the U.S. can go. The U.S. is running very large deficits at full employment. The biggest parts of spending that are growing are Medicare, Medicaid, Social Security, and now interest payments. Domestic discretionary spending is where work is being done, but that is not where the problem is.
STABILITY & REGULATIONS
The U.S. banking system is well capitalized with liquidity and is quite resilient. Separately, the Fed has been working for 4 to 5 years with small and medium size banks with concentration in commercial real estate loans, and it will take years to work through.
Non-bank financial sectors have grown enormously. Most of it has been funded through private, credit-like structure where limited partners signed up for 10 years to a general partner to invest. They are not depositors who can run. This funding model is “run proof”. This large and fast-growing private credit part of the economy has not gone through a significant credit event, and the Fed has a close eye on it. Banks are also lending to this sector.
BASEL III END GAME
The Fed should proceed in conjunction with FDIC and the Office of the Comptroller of Currency (OCC). We need international minimum standards.
CRYPTO CURRENCIES
There is now mainstreaming of the whole sector. The Senate and the House are looking at a legal framework for stable coins. Stable coin is a digital product that could have fairly wide appeal and should contain consumer protection and transparency. There will likely be a loosening of guidance and rules to banks to permit and foster appropriate innovation.
MONETARY FRAMEWORK REVIEW (regarding inflation)
Distinguishing price level change (absolute price increase) from inflation rate (i.e., the rate of change of prices) is important as people are concerned about the price level change even as inflation is coming down, but prices do not go down in the aggregate except in extreme times. So the framework will not be to bring prices down. The framework is to look at the best way to foster 2% inflation over time.
ARTIFICIAL INTELLIGENCE
Throughout 250 years of technological innovation, people have worried about human labor being replaced. That may be in the short run but, in the long run, technology has raised human productivity and thus living standards. AI is one of two to three things that will bring dramatic change to the economy in the next 20 years globally, and it is hard to say how that will shake out.