In a fairly rare turn of events, Fed Chair Powell gave a rather lengthy radio interview with Marketplace’s Kai Ryssdal. Here’s a rather lengthy transcript. Note: This is far from “required reading” given that there’s been essentially no market reaction, but it is nonetheless useful insight for those who like to dissect every communication from the Fed Chair (not a bad habit for anyone who cares about big picture market themes. Dissecting all of Bernanke’s communications helped us get ahead of what was happening during the taper tantrum, for instance). Here’s the interview:
Kai Ryssdal : So this is a weird way to start this interview. But the thing is that Fed chairmen don’t do a whole lot of interviews. And this is, I think your first broadcast interview, right, since you got this job?
Jerome Powell: That’s correct.
Ryssdal : Why are you doing this interview?
Powell: You know, part of it just is that I feel that we have an obligation to explain ourselves as clearly as possible, the things that we do affect everyone. And you know, there’s a professional audience that follows us very carefully, every comma, every word change.
Ryssdal : Does that make you crazy by the way?
Powell: It’s just part of the job. But I think we’re shifting our focus a little bit to you know, address (sorta) the American people more generally and try to explain what we do, why we’re doing it, and how we carry out the important jobs that Congress has given us.
Ryssdal : I don’t know if you heard Marketplace the last time you had a press conference back at the beginning of June. I made a little fun of you, and I guess of myself too, because you started that press conference by saying in essence, “I’m going to try to explain what the Fed does” and I said “Hey, whoa, that’s my job.” You’re being extremely intentional about this.
Powell: Yes, very much so. Again, I think, first of all, it’s been a long march to transparency on the part of the Fed. If you go back 25 years, we were very inscrutable. We didn’t explain ourselves to the markets or to the public. And there’s been a revolution really, and I’m really just continuing the work that began really under Chairman Greenspan, Chairman Bernanke, Chair Yellen and I’m just carrying that forward in my own particular way, with my colleagues.
Ryssdal : What kind of public figure then do you intend to be?
Powell: You know, I’m not focused on me as a public figure.
Ryssdal : But no, you’re the man, right? So?
Powell: Well, you know, I’m really focused on this. Congress has given us these jobs, really important jobs, which are, you know, maximum employment, stable prices, regulate the banks, protect the consumers and look after financial stability. And I want to explain that in a way that is comprehensible very broadly — particularly to the public, but also to Congress, which has this important oversight role. And I think that will serve us well going forward. And I think it’s important in a democracy that transparency enables accountability, which is what gives us democratic legitimacy.
Ryssdal : So to that point about financial stability and ensuring American consumers are protected. This is, as I’m sure you’re aware, the 10th anniversary of the financial crisis. I don’t want to spend a whole lot of time on the past, because there’s a whole lot of things in the future that I want to talk to you about, coming in the future. But I do want to go back to your confirmation hearings for a minute and run this quote by you from part of your testimony during those hearings. You said “Above all, even as we draw on the lessons of the past we must be prepared to respond decisively and with appropriate force to new and unexpected threats to our nation’s financial stability and economic prosperity.” What, other than the need for appropriate force, what did you learn from the financial crisis? What lessons did you take that you now bring to this job?
Powell: Well, if you look back to the financial crisis, what happened was we had a housing bubble and then we had widespread defaults and things like that. And that shock, if you will, hit the financial system, and the financial system should have been able to handle that and wasn’t. So what the big storm showed was a whole bunch of weaknesses in the way we supervise banks, in payment utilities, in the financial markets broadly.
So we spent a decade going back and fixing, addressing all of those weaknesses which essentially require the government and the taxpayer to step in behind the financial system, and the banks in particular, and put the taxpayer at risk. So we don’t want to do that again. I think nationally everyone looked around and said, “Let’s not do that again any time soon.”
And I think it’s really important that we protect and extend the main pillars of what we did: higher capital, higher liquidity, better risk management, stress testing, living wills and resolution plans, in case banks do fail. We’re not going to forget those lessons, but we’re going to try to make sure that the things that we’ve done have been right and efficient too.
Ryssdal : I want to get to the regulatory part of your job, which you address right there in a second, but I want to first talk about some of the things that came out of the financial crisis that we’re still dealing with. And maybe the most relevant for consumers in this economy is the idea that wages now for a decade or more really have been stuck. And the question is: As you consider your dual mandates of price stability and maximum employment, where are wages on your list of things to worry about? And what really power do you have?
Powell: So wages were low, and that was understandable after the financial crisis because unemployment was extremely high. Unemployment was 10 percent in 2009. As unemployment has declined — now all the way down to 4 percent, the lowest it’s been in 20 years — we would have expected wages to move up fairly significantly. We now just in the last year or so, we have seen wages move up.
Ryssdal : A hair, right?
Powell: We look at a range of — there’s no one wage indicator. We tend to look at sort of the four big ones in particular. And if you look back to five years ago, they were all in the low twos — this is annual rate of increase — and now they’re all close to three. So there’s been this very gradual move up. I think, you know, part of that is that wages should reflect inflation plus productivity. So if you’re delivering more output per hour, it should be reflected. Productivity has been very low.
But there is still a bit of a puzzle in that we’re hearing about labor shortages now all over the country in many, many different occupations in different geographies. And one would have expected, I would have expected, that wages would move up a little bit more.
So I think we don’t directly look so much at wages as we do price inflation, but I think we’re looking very carefully at maximum employment, and that is one of the things that pushes up wages and price inflation.
Ryssdal : Right. But why are they stuck? Is it just that we’re not producing enough widgets per hour? Is it robots? I mean, what is going on? Because that’s the thing that people want to know about.
Powell: So, one big part of the explanation is certainly that inflation has been low and productivity has been low. So productivity just means how much your output per hour increases. And that’s what you should expect as a worker to get paid for, is enough to cover inflation plus how much did your output go. So if you take that at the aggregate national level, if you add those two up, that’s actually pretty consistent with what’s been happening with wages.
So again, there’s no — I wouldn’t call it a mystery, but I would say that it’s a bit of a puzzle given how tight labor markets appear to be. And what we’re hearing from employers really is that they can’t find workers, and you’re wondering, well, why aren’t wages going up faster?
Ryssdal : Why aren’t they paying them, right?
Powell: It’s a good question. It’s a good question. We don’t really have the answer to that question.
Ryssdal : Which is a little troubling, if you’re the guy running the economy.
Powell: I don’t think of myself as the guy running the economy. You know the economy is a $20 trillion economy.
Ryssdal : The economy runs itself. You keep close tabs, let’s put it that way.
Powell: A lot of decision makers out there on it. You know, it’s not a mystery really, because as I said, wages are consistent with where they should be in economic theory. The place where there’s a bit of a puzzle, as I mentioned, is that you would have expected as markets get tighter you expect the price to go up. And I think we’re starting to see that too. I do think we’re starting to see that.
Ryssdal : Let me ask you then about inflation and about prices which are as you say starting to tick up to where the Federal Reserve wants it to be. I’ll note here that we’re talking at 8:24 in the morning on the day that consumer prices come out. They come out in six minutes. With the caveat that this is going to air now in five, six hours from now, whatever it is, you have the number in your back pocket, you know what the number is. Inflation CPI?
Powell: Well, let’s just say that I do get a look in advance at these things. Yes.
Ryssdal : You’re not going to tell me what it is even though we are not going to air this until —
Powell: Definitely not. Definitely not.
Ryssdal : Score one for the chairman’s adherence to the rules.
Powell: Not going to say anything that would suggest what it might be.
Ryssdal : Absolutely fair enough. So asking this question blind then, if we can’t figure out what’s going on with wages and if inflation is only ticking up slowly, how satisfied are you that the Federal Reserve is doing it right, when they adjust interest rates, and when they are looking at these things in the macro economy?
Powell: Let me take a step back for that. I think the economy’s in a really good place. As I mentioned, unemployment is now 4 percent and another bright — which is the lowest it’s been in 20 years. The other thing that’s good that’s been happening is for five years we’ve seen people coming back into the labor force or not leaving it, which is a healthy thing. The United States has relatively low labor force participation compared to other advanced economies and that’s not good. So this strengthening, tightening labor market that you know we’ve been supporting with low interest rates has really been working for American workers and families.
Inflation has been below our 2 percent — we target 2 percent PCE inflation which is a little bit lower than the CPI number that will be published later this morning. So it’s been low really since I got here in 2012. I joined the Fed in May 2012. I think the last month was the first month that we’ve actually had 2 percent core PCE inflation.
Ryssdal : Which is kind of amazing, because you guys have been grinding away on this for years.
Powell: Yes. So low inflation, you know, is partly a function of just that there was a lot of slack in the economy. There’s a relationship between say, for example, when unemployment is really high then or when there’s a lot of loose, a lot of you know resources that aren’t being used in the economy, we think of inflation as being low. And as the economy gets tighter and tighter, and you have to pay up for labor and, you know, other inputs to production that inflation tends to go up. That used to be a really strong relationship. It’s not very strong at all now. This is the Phillips Curve I’m talking about.
But, I think, now, you say how are we doing now, inflation has very gradually moved up and it’s now just touching 2 percent. So we’re really close to our target. I wouldn’t say we’ve fully achieved it yet. We’re not declaring victory there. We want inflation to be symmetrically around 2 percent, so just kind of reaching up and touching it once doesn’t fulfill that goal. And you know the labor market is very strong by any measure. So I think we’re in a good place.
Ryssdal : Do you worry about overshooting, about raising interest rates and tightening up a little too much too soon, as you look at this 2 percent inflation?
Powell: Yes, so, there is always and there is now this challenge of moving at the right pace in whatever direction you’re going in. So, right now, I would say that we’ve been, since you and I last spoke in December 2015, we’ve been gradually raising interest rates. And I would say, I’m very pleased with the results. We didn’t stay at zero. We held the federal funds rate close to zero for many years after the financial crisis to support economic activity.
As unemployment came down and inflation began to move up, we began very gradually increasing our policy rate, which affects rates throughout the economy and tightens financial conditions.
So we’re returning rates to a more normal level. If we leave rates too low for too long, then we can have too high inflation or we can have asset bubbles or housing bubbles. If we move too quickly, then we can unintentionally put the economy into a recession or cut off the return of inflation at 2 percent. So we’re always balancing those two things. I think for many years there was nothing to balance, we had to keep rates low. I think as the economy’s gotten healthy, now we’re into balancing those two things we’ve got to steer between.
Ryssdal : As this economy gets more normal and as your function in it gets more normal with interest rates and inflation, there are some unusual and arguably not normal things happening, and I’m speaking now specifically about trade policy in the United States and how things are going. You said at your last press conference that members of the Federal Open Market Committee had remarked on uncertainty and risk being a factor in businesses that they’re talking to. I wonder how worried you are. Granted, the Fed does not have trade policy as one of its mandates, but how much does trade policy weigh on you?
Powell: So that’s right. I would say Congress and the administration really have that responsibility. Congress has given us specific responsibilities that do not include conducting trade policy. But you’re right, and through the 12 reserve banks and our own personal contacts, we have really deep contacts all around the country and with business leaders — and by the way also other leaders and nonprofits at universities and that kind of thing. And we are hearing a rising level of concern about the effects of changes in trade policy. We put that in the things that we publish. It comes up in the FOMC, and we put it in the minutes. I think if you’re picking up a newspaper today you’re hearing that from a lot of businesses.
The truth is this: Since War II we’ve had this trading system develop, and consistently tariffs have come down and trade has grown. And I think that’s served the global economy, and particularly the United States economy, very well. It drives productivity. It’s driven incomes up but it doesn’t help everyone. There are there are always particular groups of people, particular populations and geographies that are that are negatively affected by trading and the country hasn’t done, no country has really done a good job of addressing those concerns. We need to do that.
I think this process that is going on now is a new one. It’s very difficult to predict how it turns out and we’ll just have to see.
Ryssdal : Which, I mean I’m going to poke you in the eye a little bit, because that kind of sounds like a punt, right? “We’re just going to have to see.” The fact is that trade policy today is changing the way people are behaving, businesses are behaving. If you call farmers, hog farmers and soybean farmers and apple farmers like I do, they are deeply worried. And the question is, even though you don’t have it as a formal responsibility, what are your tools if a trade war slows this economy?
Powell: So again, the administration says that what it’s trying to achieve is lower tariffs. So if it works out that way, then that’ll be a good thing for our economy. If it works out other ways, so that we wind up having high tariffs on a lot of products and a lot of traded goods and services, let’s say, and that they become sustained for a long period of time, then yes, that could be be a negative for our economy. Again, we don’t know. It’s very hard to sit here today, and say which way that’s going.
So you asked what are tools are. We essentially have our our interest rate tool, so if the economy weakens, we can lower interest rates. We can slow the pace at which we’re increasing them. There could be an effect on inflation. I wouldn’t want to, you know, dive into a bunch of hypotheticals here, but I would say, you can imagine situations which would be very challenging, where inflation is going up and the economy is weakening.
Ryssdal : And you’re lowering rates all the same, just waiting for stuff to get better.
Powell: Again, it’s not at all clear how it would evolve. Inflation could move up, just sort of a step up in the price level, which wouldn’t affect future inflation, and that would be something you tend to look through what we call a supply shock. But this will, it it’ll have to be a question that we think about. But again I don’t want to get into a lot of hypotheticals. I just think at this point we’re watching carefully and hoping for a good result.
Ryssdal : Are you watching with concern?
Powell: You can ask me the same question about a lot of different areas. When we don’t make the policy, we don’t praise it, we don’t criticize it. We take it as, as a given. And in this particular case, it’s not our policy. Part of the independence that we have is to stick to our lane, stick to our knitting, so really wouldn’t want to comment on fiscal policy really, or trade policy.
Ryssdal : Of course we’re going to have to ask you now about fiscal policy, because as you know, Congress passed a tax law which greatly increases our debt, deficits. There’s talk now of a second tax bill. Acknowledging that fiscal policy is not a thing you can do anything about, debt does affect this economy. It does affect the way consumers behave. [I’m] asking again, I guess, the concern question: Where is that on your list of things to worry about?
Powell: Let me take that with short-term sense, and then a long-term sense. So in the near term, the fiscal changes that were made at the end of last year and earlier this year, the tax reform, the tax cuts and the spending increases are very likely in our view, and in my view, to support economic activity here in the United States for at least the next few years. When you lower taxes and increase spending you’re going to see more economic activity in all likelihood. So you’re going to see significant support for, demand for economic activity probably for at least the next three years.
You may also see, you know, longer-term positive effects from the supply side. You could see higher investment and higher productivity. All of this by the way is relatively uncertain. There aren’t hundreds of episodes we can look at. There are relatively few. So there’s a range of perspectives, a very wide range of perspectives on how that would happen. So that’s the near term.
Longer term, it is widely understood that the United States is on an unsustainable fiscal path, largely due to the the the interaction between an aging population and a health care system that delivers pretty average health care at a cost that is much higher than that of any other advanced economy.
Ryssdal : When you go to talk to members of Congress about this, do they get it? Do they understand that part of fiscal policy?
Powell: There are a range of perspectives on that. But, you know, my general takeaway would be that elected officials generally do understand the issues. They may have a range of opinions, but they generally do understand them. Just it’s not easy to get things done, particularly in a political context. It’s really hard. We have our tools, we can use them. We have a statute that gives us the independence to use them without political considerations. But it’s not easy to get things done in elected bodies anywhere in the world. It’s a hard thing to do to address these issues.
Ryssdal : When you got this job, much was made of the fact that you’re not an academic economist. You come from the law, from banking, from private equity. How does that affect how you do your job?
Powell: Well, I’d start by saying that I did join, as I mentioned, I’ve been here for more than six years now, so I’ve had an awful lot of time to learn the economics. And I find it really interesting and I’ve worked hard at that so–
Ryssdal : And there are a lot of economists here, so you’ve got the academic support, right?
Ryssdal : But as as you go about your day to day, how does that influence how you think about this? I’m sure you saw the Reuters story about your calendar, how you meet more with bankers and lawmakers than other chairs have, who meet more with economists. How does who Jay Powell is affect how he does this job, is the question.
Powell: You know it’s a hard question for me to answer about myself.
Ryssdal : Maybe I should ask the staff.
Powell: I would say as far as meeting with Congress is concerned, I’m going to wear the carpets of Capitol Hill out by walking those halls and meeting with members. I feel like that’s a really important thing that the chair can do, and part of what I want to accomplish with clarity and explanation and transparency. I want to push really hard on that. And I want them to think that we’re responsive to their concerns and their thoughts and that we’re here to be as clear as we possibly can.
I think my natural inclination is to explain things in a way that is that is probably clear, I hope, intended to be clear to a general, to the general public, and people, people in general. So that probably comes also with someone who you know who didn’t spend 30 years for example teaching you know economics to graduate students. It would be harder I think to do it. Not impossible but harder.
Ryssdal : What keeps you up at night?
Powell: I sleep pretty well on the economy right now. But, you know, I think, frankly the United States economy is in a good place from a cyclical standpoint close to our maximum employment and stable prices target. I think the banking system is well capitalized and much safer, better managed than it was.
I’m more concerned about longer term issues that the U.S. economy, we face some real longer-term challenges, again associated with how fast the economy can grow and also how much the benefits of that growth can be spread through the population. We’re an aging population, so workforce growth is going to be slower. That’s going to mean slower growth. Productivity growth has been slow, but I expect that to pick up over time.
I also look at things like mobility. You know, if you judge the United States against other similar, well-off countries we have relatively low mobility. So if you’re born in the lower end of the income spectrum your chances of making it to the top or to the middle are actually lower than they are in many other countries.
Also, frankly, the stagnation of the middle-class median incomes over the last 40 or 50 years. These are not things that the Fed can really can really address directly, but these are these are broader economic concerns that I think we face as a country.
Ryssdal : You know it’s interesting, through the course of our chat here, 20 minutes whatever it is, and I guess this is intentional because you’re a purposeful guy doing a purposeful thing, it seems that you’ve been trying to temper expectations for what the Fed can do. And it’s interesting to me, because the Federal Reserve has been so central in this economy for the past 10 years, right? I mean Ben Bernanke and Janet Yellen couldn’t sneeze without people going, “Oh my God, what’s going on?” And now here you are in a different place with the economy, thinking more about the future than being tied to the past than those two were. And it’s interesting to me that you’re tempering expectations.
Powell: It’s interesting. I think as a general rule, I find very, very strongly find that people attribute much too much certainty to what economists say and much more certainty than economists really intend to convey. So people take a economic forecasts and things that we say as pretty literal and strongly believed and I think economists try to communicate that the economy is — it’s difficult to forecast the economy and these concepts that we have. It’s not like the fact that water boils at 212 degrees. The economy doesn’t boil at 4 percent unemployment. It’s very hard to say these things. So if it’s coming across as a little bit less certain then I would say it’s working. I don’t want to go all the way to highly uncertain but I would like to be getting through that economic activity is always subject to great uncertainty.
Ryssdal : This being radio, people can’t see the very slight smile on your face.
Ryssdal : A word here about regulation and about your role in it and about how you come to it. Congress, as you know, has started pulling back from some of the post-financial crisis reforms. You have said, generally speaking, you’re in favor of that. You want to tailor regulations. You come from a banking and private equity background. The question then is with the guy with your background working to tailor financial regulation, where does the consumer fit in? How critical is consumer protection versus big banks and their strength in the economy?
Powell: Consumer protection is utterly central to what we’re doing. Let me give you the broader context too. We spent a decade doing a lot of things pretty quickly. Work that needed to be done. As I mentioned, higher capital, much greater levels of liquidity, stress testing — which was really I think the most successful post-crisis innovation for bank regulation. And something that we were at the center of here at the Fed. And also resolution.
Those things are central. We’re going to keep them. We’re going to strengthen them. We’re going to make them more transparent, more sustainable. So we’re not looking to go back to the pre-crisis era, but we want the strongest, toughest regulation and supervision to be aimed at the largest, most systemically important financial institutions. I think as you move down into the regional banks and the smaller and local community banks, we’re really going through that quite carefully to make sure that we didn’t overdo it. And I think in some respects we did, for those smaller institutions, who weren’t at the heart of the financial crisis, who need to be delivering financial services to everyday Americans. That’s really the heart of what we’re doing. Just because we put something in a rule once doesn’t mean it’s perfect. It can be improved and that’s really what we’re trying to do.
Ryssdal : There is a question that has to be asked — actually a couple of them — about the political environment in which this economy operates right now. Granting that the Fed has always been a source of political frustration for many in the executive branch, it’s worth pointing out here that Larry Kudlow, the chairman of the president’s National Economic Council, and the president himself have said they are low-interest rate guys. Larry Kudlow encourages the Fed to move very slowly on interest rates on the theory that rising interest rates would be a tricky thing for the president politically. Do you think it’s appropriate for the White House to be not telling the Fed what to do, but saying these things in public?
Powell: Let me just say I’m not concerned about it, and I’ll tell you why. We have a long tradition here of conducting policy in a particular way, and that way is independent of all political concerns. We do our work in a strictly nonpolitical way, based on detailed analysis, which we put on the record transparently, and we don’t consider political considerat — we don’t take political considerations into account.
I would add though that no one in the administration has said anything to me that really gives me concern on this front. But this is deep in our DNA. For a long, long time the Fed has felt it important to conduct our business that way. I’m deeply committed to that approach. And so are all of my colleagues here.
Ryssdal : Which I understand, but you’re also humans. And when the White House leans on you, you must feel it.
Powell: Again, nothing has been said to me publicly or privately that gives me any concern about our independence.
Ryssdal : Circling back to where we started, just as a way to wrap this up. You are taking great pains to make what the Federal Reserve does more transparent, and in a way, the economy more transparent and more understandable to the people living in it. The president the United States tends to politicize the economy. He says things that are not always entirely accurate about the economy. I wonder how that complicates your job.
Powell: So I had a great colleague and mentor back in the day who used to bring meetings into focus by saying, “Let’s control the controllable.” So what we control is what we do. And I just told you what we do and we’re always going to do. That’s who we are. It’s always who we’re going to be. We’re going to do our business in a way that’s strictly nonpolitical, without taking political issues into consideration, and that carries out the mandate Congress has given us. And we have the tools to do that. We have a statute that allows us to do that in a way that is independent of political considerations. I’m strongly committed to it and so are my colleagues.
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