Fed's Powell Sees Slack in U.S. Economy, Inflation Too Low and Following Greece Events Carefully
Economics / US Economy Feb 10, 2015 - 05:20 AM GMTBy: Bloomberg
Federal Reserve Governor Jay Powell spoke with Bloomberg's Peter Cook following his speech at Catholic University today. Powell said that low inflation gives the central bank time to remain patient as it considers when to raise interest rates. He said, "There's plenty of slack out there in the economy" and that "wages do not suggest any tightness in the labor market."
PETER COOK, BLOOMBERG NEWS: I am joined by Governor Jay Powell. Thank you for the time, rare opportunity for us to have a chance to chat with you. I want to ask you first of all about your speech today. You made a pretty strong argument against audit the Fed, the push that we're seeing right now in Congress. The fact that you're making this speech at all tells me that you and your colleagues at the Fed see this as a real threat right now.
JAY POWELL, MEMBER, BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM: So I really felt that I had to speak out. I feel very strongly that the bill is misguided and -- and frankly mislabeled. It's really not about a financial audit. People hear about it and they think, oh sure, auditing the Fed makes a lot of sense. The fact is we are financially audited. I would know that. I chair a committee that oversees the audits. This is about a Congressional policy investigation of monetary policy in real time, in a way that is very likely to interject short-term political considerations into the making of monetary policy.
COOK: You think the independence of the Fed is at stake with this debate?
POWELL: Well, I would say this is an incursion on the part of the Fed that needs to be independent. Most of the Fed is just like any other agency. Bank regulation doesn't have any meaningful claim to independence any different from another federal agency. Monetary policy, for great historical reasons, has traditionally been insulated from short-term political pressures. And Congress did that in 1978. And the results have with -- by eliminating the GAO's right to audit monetary policy, the result has been much lower inflation, which has been under control for 30 years. To go back on that now, given the country's financial challenges going forward, just makes no sense at all.
COOK: In your speech you did point out that what the Fed's been up to the last couple years, unprecedented actions, the expansion of the balance sheet to $4.5 trillion, steps that you and others of the Fed have said made a difference in rescuing the U.S. economy. But at the same time those actions, because they were unprecedented, don't they in and of themselves obligate the Fed in some way to some sort of review by Congress or by others? These were big steps.
POWELL: So these were unprecedented steps, and we absolutely welcome transparency with open arms, and accountability as well. I went through in my speech all of the ways in which we are transparent about monetary policy. We publish statements immediately after the meeting, we publish minutes that are highly detailed after that. We -- the chair does press conferences. She gives speeches. I give speeches. The other governors do. We testify. We talk in public. Nothing the Fed does happens on monetary policy without the whole world watching. So the idea that there's some secret thing happening is just -- it's just false. It's in violent conflict with the facts.
COOK: Violent conflict with the facts. Right now the facts are, Governor Powell, you've got at least three potential Republican presidential candidates in the U.S. Senate alone who support audit the Fed, at least the concept of it. Are you worried the politics are running against the Fed right now?
POWELL: So I don't hold myself out as an expert or commentator on politics. My approach is really just to state the facts and let people understand. And the most important thing they need to understand is that this is not about an audit. Everyone who hears this thinks, oh, of course the Fed should be audited. This is -- this not that at all. And people who are expert in the area, people who follow this closely really understand that pretty uniformly.
This is about getting Congress into the meeting by meeting making of monetary policy. Over time we have learned that when that happens, inevitably elected politicians want more accommodative policy. It results in higher inflation and bad economic outcomes. Since the GAO exclusion was enacted in 1978 we've had lower inflation. It's been under control. Why we would change that now is a mystery to me.
COOK: Are you and Chair Yellen going to make a concerted effort, others at the Fed to try and meet with members of Congress to satisfy their concerns? Can you beat this basically?
POWELL: So I speak only for myself, and this was my idea to -- I put myself forward to do this because I feel really strongly about this. And, yes, I engage with elected members all the time. And I quite like doing it. I did it my prior lives as an appointee under President George H.W Bush. And I enjoy engaging with members. And so do the other governors of the Fed. We're out there quite a lot. It's part of our accountability and transparency to Congress. We are accountable. We are transparent. We embrace that. And so that's part of that.
COOK: Final question on this before I ask you a little bit about the economy. Are you confident that if it were to pass in Congress that President Obama would stand up and veto this kind of legislation?
POWELL: So that's a great question, but it's really not one for me. Again, I don't do the politics. I don't hold myself out as understanding it. I'm going to address the merits. This is what I do. I'm just going to talk about the facts of what the bill is, the risks, the history. And I think it's quite compelling. And my experience is if you put that out there, people of goodwill are going to get it and they're going to see that this bill really threatens the performance of the U.S. economy and will be bad for the American people.
COOK: Let's talk a little bit about the economy. We had a jobs report on Friday that was pretty good. I was there at the lockup at the Labor Department. How did that report, if it did, alter your own view about where the U.S. economy is right now?
POWELL: So we've actually had a couple of pretty good years back to back here. Growth in 2013 and 2014 has been two and half or three percent. Job creation has been very healthy during that period. In fact last year was the most job creation in 15 years, as you probably know. And over the last half of 2014 and into this year, the momentum has clearly built to the point where we're having job numbers that were simple unthinkable when I joined the Fed in 2012.
And this last -- this last report just kind of had everything in it you would want. It had higher wages, it had people coming back into the labor force and very good job creation. So it's a great report. It's just one report though. So what I'm looking at is really continued progress, looking at a bunch of different factors, continued progress on getting back to two percent inflation. Inflation is too low. I want to see -- I want to have some reason for confidence that it's coming back up to two percent, and also….
COOK: And you don't have that -- you don't have that yet?
POWELL: So I think the time is coming, but it's not here. And I would want to see some evidence. I mean if you look at the evidence right now is that core inflation is down in the low ones, headline inflation is below one. That is a lot because of low oil prices and a stronger dollar, which drives down import prices. Those should be transient and when the transient effect wears off, we should be back in the middle one and half percent for core inflation. I would like to see something that makes me confident that we are in fact on a path back to two percent.
COOK: Larry Summers said in an op-ed today, a message he delivered in Davos as well, the Fed should be sitting on its hands at this point until it sees the whites of inflation's eyes, and that we're nowhere near to that. Do you subscribe to that? Are we looking at a potential liftoff now further down into 2015, if not 2016?
POWELL: So I did read that piece of course. And again I would just say that what I want is -- is data that give me some confidence that inflation is moving back up toward the two percent goal in the medium term.
COOK: Patience in normalizing monetary policy, that was the key line from the statement before. What is your message about patience right now? How patient can you be at this point?
POWELL: So I think patience is the appropriate term. I think that low inflation through the channels that I mentioned gives us some time, although it will be transient. The effects of the oil and are -- will probably be transient, assuming that the prices of oil and the dollar stabilize. And that gives us the ability to be patient. And I think that's the right thing to do.
It does feel very much like there's plenty of slack left out there in the economy. You've got people working part time for economic reasons, you've got people who want to come back into the labor force who are not currently in it, and most of all, wages. Wages have been low and wages do not suggest any tightness in the labor market yet. So those things tend to indicate that in fact the natural rate is pretty low, the natural rate of unemployment might be lower than it's been estimated to be.
COOK: Is that word going to pose a communications challenge for you all at some point? You're going to have to drop that, aren't you, if you're going to make a move, for example, in June.
POWELL: So what we can do is try to be as transparent and clear as possible about the path. That path is going to be heavily data-dependent. At the end it's going to be about the incoming data. And that's our role. And I think we've done pretty well with it in the last year or so. And I think that's what we can strive to do. That's a part of it that we control.
COOK: two outside factors here to end with if I could, first of all, the stronger dollar. I know it's the Treasury Department's responsibility to worry about the dollar, but you all have to factor it in in terms of the economy overall. Isn't the stronger dollar having in effect a tightening of financial conditions and doing some of the heavy lifting for you?
POWELL: Well so just to echo that, the Fed doesn't -- is not responsible for dollar policy, as you mentioned that the Treasury Department really is. So we don't talk about of that dollar policy. But the dollar is strong in part because of the strength of the U.S. economy compared to the rest of the world. So it's a sign of our strength and the sign that the Fed is nearing that point at which it would be appropriate to raise interest rates.
So that's good. It's a sign of strength. That's a positive thing. It's also true that it will weigh a little bit on our exports, and it will certainly in the short-term hold inflation down through import prices. So it might be a slight headwind but I don't see it -- I don't see it stopping the momentum. We really have an economy that's under way here at a sustainable pace, and printing numbers again that we didn't even think about two and half years ago.
COOK: Final question for you. I want to see if this is on your radar scanner, or to the extent it is, and that is what's happening in Greece right now. What impact would it have on the U.S. economy if there was a Greek exit from the euro? And have you all started to factor that in at all into your deliberations?
POWELL: So of course we do think about various things. And the Greek election and the events since Greece of course we're following that carefully. And there's lots of discussion of it publicly. Markets are reacting and that kind of thing. These are really matters for Europeans to sort out. And as an American policymaker, I would just hope that they can be sorted out in a way that is not disruptive to financial markets and the economy.
COOK: Governor Jay Powell, really appreciate you joining us here on Bloomberg.
POWELL: Thanks, Peter.
Courtesy of Bloomberg Television
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