FOMC Press Conference

Federal Reserve

Federal Open Market Committee Press Conference

Wednesday, July 28, 2021

Opening Statements
In his opening remarks, Chair Jerome Powell said the Federal Reserve (Fed) highlighted key steps that have supported the economy throughout recovery: Fed asset purchases, progress in vaccinations, and fiscal policy actions. Powell noted that real GDP is on track to post its fastest growth in decades, and household spending is growing at a rapid pace. He said that although employment rose in June, the labor market still has room for significant improvement as the unemployment rate was 5.9 percent, further stating that this understates the shortfall in employment. He mentioned factors that weigh on employment, including the ongoing fears of the virus and caregiving needs, but believes these will wane in the coming months. On inflation, Powell said as the economy continues to open, there will still be upward pressures on prices since production and supply have been limited in their capacity to respond to increased demand. He reiterated that the long-term inflation goal is two percent, and if they see signs of longer-term inflation expectations moving persistently beyond that goal, the Fed is prepared to adjust its monetary policy. Powell said they expect to maintain the current monetary policy until employment and inflation outcomes are achieved and until labor markets have reached consistent maximum employment. Powell added that the Fed is continuing to increase holdings of Treasury securities by at least $80 billion per month. He said the Committee earlier today reviewed considerations for how asset purchases may be adjusted once economic conditions warrant a change. Powell said they also announced the establishment of two standing repo facilities, particularly one for foreign and international monetary authorities, which will serve as backstops in money markets to support the effective implementation of monetary policy and smooth market functioning.

Question & Answer
Inflation
The Wall Street Journal asked about the rise in inflation this year and if it has met the threshold of moderately exceeding 2 percent for some time. Powell said that would be a question for the committee, and that it is not relevant now or even on the radar screen because the Fed is not yet considering raising interest rates.

NPR asked for a broader definition of “transitory” and if Powell supports mandated vaccines. Powell said increases in prices will happen, but that does not mean it is inflation. He said the term transitory means it does not leave a permanent mark on the inflation process. He clarified that it does not imply producers are going to take prices back, but rather that prices will not go up indefinitely by the same amount each year. Regarding vaccines, Powell said the Fed is operating virtually right now and they plan to follow public health guidance.

The Financial Times asked about the risk of inflation after the latest data released came out higher than expected and if Powell is worried there could be a hit to demand from the delta variant that could tilt inflation risks upwards. Powell said the most recent inflation report came in significantly higher than expected but that essentially all of the overshoot can be tied to a handful of categories, and it is not the kind of inflation that is spread broadly across the economy. Powell emphasized that they see inflation as temporary because the supply side will respond. He added that in the near term, risks to inflation are probably to the upside, but noted that since inflation is half of the Fed’s mandate, if they were to see it moving up persistently, they would use tools to address it and expressed some confidence that in the medium term it will move back down.

Bloomberg asked Powell if he would be prepared to raise interest rates if there is a danger of inflation, even if the economy is not at maximum employment and the Fed is still buying assets. Powell said most of the time, if you have high inflation, you also have high employment, but that in this situation, they are temporarily in different directions. He said we are not at full employment, but we are having high inflation. He added his view that we will make good progress over the next couple of years toward maximum employment. He said it is not timely for them to be thinking about raising interest rates. He added that ideally, they would not be still buying assets and raising rates because that means adding accommodation by buying and removing accommodation by raising rates, which makes no sense.

Asset Purchases
CNBC asked what counts as “substantial further progress,” what it would look like, and if that would then lead to an announcement of an actual reduction in the purchases of Fed assets. Powell said for maximum employment, there is no single number they can target because they look at all aspects of the labor market to arrive at a picture of what maximum employment looks like. He said for substantial further progress, there is a lot of ground to cover on the labor market side. With inflation, he said it has been running above the two percent objective for a few months and believes it will continue for a few more months before it moves back down to their objective.

Global Recovery
The NY Times asked how the divergence of global growth and multi-speed recovery around the world impacts Fed policies and their thinking about tapering and liftoff. Powell said an important feature of this recovery is how uneven it is and noted that in many cases, it is related to limited access to vaccines and significant outbreaks in some countries. He said other countries, such as the United States and Europe in particular, are having a very strong rebound. Powell said it impacts Fed policy because economies, due to financial markets and trade, are deeply interconnected now, so a stronger global economy will lead to more U.S. exports and help boost economic activity.

Bond Markets
Politico mentioned bond market pricing and how it seems to suggest the Fed might over tighten and asked if markets have bought into the central bank’s new framework and how Powell plans to balance that with inflation concerns. Powell said in terms of what has been happening in bond markets, he does not think there is a real consensus on what explains the moves between the last meeting and this meeting. He said they have seen long-term yields go down significantly, some of which is a fall in real yields and may have been connected to some sentiment around the spread of the delta variant. Powell added he does not see any of that as a challenge to the credibility of the Fed’s framework.

Delta Variant Concerns
The Washington Post asked how vulnerable the labor market is to the delta variant. Powell said that with the southern wave last year, the economy performed much better than anyone expected. He noted that today, many people are vaccinated and have somewhat learned to live with the virus. He explained that with the big wave last winter, just before the vaccines arrived, it did have significant employment effects in hospitality and leisure. He estimated that this time around the effects will be much less and that significant lockdowns will be unlikely.

Tapering
Bloomberg TV asked about decisions regarding the Fed’s taper plans and timing. Powell said he is not suggesting anything about a particular time at which they might taper, and they have not made that decision yet.

Reuters asked if the recent surge in COVID-19 has any impact on the Fed’s tapering plan. Powell said they are continuing to assess the economy’s progress toward Fed goals and will give advanced notice. He added that they will try to provide additional clarity about their thinking, both in the post meeting statement and via minutes and public comments. He said they have not reached substantial further progress yet, and that there is still ground to cover to get there. He said COVID-19 and the delta variant will have significant health consequences for many and that the Fed will keep that in mind before it considers economic questions. He added that it is very plausible people will pull back from some activities due to risk of infection.

Capital Requirements
American Banker asked Powell if he thinks the Fed’s bank capital requirements have penalized lower income households seeking loans. Powell said strong capital requirements are essential for banks, particularly for the largest banks because an undercapitalized bank system can be a real threat to the economy. He said that higher capital requirements are a good thing because they allow banks to weather downturns. Powell added that they will support the flow of credit to low and moderate income households as part of the anti-lending discrimination statutes that they enforce.

Standing Repo Facility
Michael Derby asked about the standing repo facility and what it will do for market trading conditions. Powell said the standing repo facility is a backstop, so it is set at 25 basis points and added that it is there to help address pressures in money markets that could impede the effective implementation of monetary policy.

Money Markets
Derby asked Powell if he sees any issues with disaggregating markets from investing in private money market securities or the idea that the Fed’s footprint in money markets is getting too big. Powell said not at this point and noted that private money market funds are choosing to invest because the rates are attractive and at some point, the rates will not be so attractive as the whole rate cluster normalizes and shrinks back down.