Real estate, alternative real assets and other diversions

Letter from Washington

Political Insider

CQ NEWSMAKER TRANSCRIPTS

Federal Agency

Jan. 10, 2019 – Final

Federal Reserve Board Chairman Jerome Powell Delivers Remarks at Economic Club of Washington

LIST OF SPEAKERS

RUBENSTEIN:

So we’re very honored at the Economic Club of Washington today to have as our special guest the 16th chairman of the Federal Reserve Board, Jerome Powell, also known as Jay Powell.

(APPLAUSE)

Jay, you were nominated to be chairman of the Fed by President Trump, and you had previously served as a member of the Fed as your predecessors had, as well. Ben Bernanke and Janet Yellen both served as members of the Fed before they became chairs. Now that you’ve been a member and you’ve been chair, is being chair all that it’s cracked up to be?

(LAUGHTER)

POWELL:

First, thank you, David. Thanks. It’s great to be here today. So I did; I was a governor for six years, and I think I had every job on the Board of Governors that there is to have other than chair, and it’s a very different job. Whereas I was focusing on a million different things, now I’m really focused on the economy, public communication, monetary policy and the institution. And so it’s quite a different thing. And yes, it’s a great job, and it’s a great honor to come to work every day.

RUBENSTEIN:

Do you enjoy the job but you don’t wish you were just a member?

(LAUGHTER)

POWELL:

No, I do enjoy the job. I really do. I’m very grateful for the opportunity. It’s a great honor, and I do, I enjoy it.

RUBENSTEIN:

Do you find that as a chairman your jokes are laughed at out more quickly as than a regular member?

(LAUGHTER)

Or do you get any putts in golf that you didn’t get before?

POWELL:

Well I guess we’ll find out about the jokes.

(LAUGHTER)

I don’t play much golf anymore, but no, I think my jokes have always been well received, frankly.

(LAUGHTER)

RUBENSTEIN:

So last week you had a very interesting interview at the American Economic Association with your two predecessors, and at that interview you seemed to say that the Fed’s position going forward is that you’re reasonably comfortable where you are with the Fed funds rate. Is that the proper interpretation, or should people be reading more into what you said last week?

POWELL:

So maybe I’ll provide a little bit of context there. So 2018 was a very good year for the U.S. economy. It’s the strongest growth we’ve had in more than a decade by so many measures. The labor market is very strong, historically low unemployment, the lowest in 50 years, wages going up, labor force participation going up, which is very important for us. And inflation’s staying right near our target. So, and we see continued momentum from the data right through the beginning of this year. We also see, though, we see the financial markets expressing a view of concern about downside risks, really associated with–with global growth and with trade. So how do we put those two different signals together? So, and I think we’re actually in a good place. I think where that leaves us, particularly with inflation low and under control, is we have the ability to be patient and watch patiently and carefully as we see the economy evolve and figure out which of these two narratives is going to be the story of 2

019.

RUBENSTEIN:

But at the end of last year, in December, people thought that perhaps two Fed fund rates increases in 2019 were part of your plan. Is it fair to say that that is not part of your plan right now, today?

POWELL:

I think the better way to think about it is that there is no such plan. We–you know, we don’t actually vote on a path or a plan for interest rates. We have–each individual participant on the FOMC submits his or her individual projections four times a year, and we did that in December, and two rate increases was the median. And it was conditional on a very strong outlook for 2019, an outlook which may still happen. But the good thing is we’re in a place where we can be patient and flexible and wait and see what does evolve. And I think for the meantime we’re waiting and watching.

RUBENSTEIN:

All right, so I shouldn’t anticipate at your next FOMC meeting a big increase in interest rates?

(LAUGHTER)

POWELL:

You should anticipate that we’re going to be patient and watching.

(LAUGHTER)

RUBENSTEIN:

Okay, all right, okay, all right, well–

POWELL:

And waiting and seeing.

RUBENSTEIN:

I have no doubt. Okay, so by the way, FOMC, what does that stand for?

POWELL:

Federal Open Market Committee.

RUBENSTEIN:

And who’s on that?

POWELL:

So that consists of all of the members of the Board of Governors, which there can be seven but there are currently five. Those are nominated by the president and confirmed by the Senate and all 12 of the Reserve Bank presidents around the country who are actually chosen by their Boards of Directors, subject to the approval of the board.

RUBENSTEIN:

Have you thought of a better acronym because FOMC is hard to say? Can you pick some other acronym for that?

(LAUGHTER)

POWELL:

You know, we actually–we may have to hire a branding consultant and–

(LAUGHTER)

RUBENSTEIN:

Okay.

POWELL:

–and get some better thinking on that. But we–for us it’s, you know, it’s a very basic acronym.

(LAUGHTER)

RUBENSTEIN:

All right, last–

(LAUGHTER)

–yesterday the Fed released the minutes of your last FOMC meeting. Now you release your minutes not the day after the meeting. Why don’t you release your minutes the day after a meeting?

POWELL:

We release a statement which summarizes the decision, and the language is very carefully structured to express the rationale for the decision, and then we actually go back and read the transcript very carefully. We cumulate the perspectives offered by 17 different members, and it takes sort of three weeks to go through that process, and we publish them. We used to publish them with a couple of month delay. Now we publish them with a three-week delay. So they’re meant to amplify what’s in the decision.

RUBENSTEIN:

Okay, in those meeting–minute meetings, it said that there was (INAUDIBLE) about whether you should increase interest rates, the Fed funds rates or not, but the opinion was unanimous. So was it fair to say that it was the united view of the FOMC that you should increase interest rates when it turns out that the debate was more divided than maybe the vote was?

POWELL:

You know, so I would say one of the great things about our system is that we really have institutionalized diversity of perspectives. Twelve different Reserve Bank presidents, each of whom has his or her own economic staff, and they come in, and so at every meeting we have a robust discussion, debate, and often disagreement over the path of policy. And I personally think that’s a great way to reach a better decision. So in the end people have to choose to vote with the proposal or not. In this case every one voted for, although there were disparate views expressed at the meeting, as the minutes reflected.

RUBENSTEIN:

And when people don’t vote for the proposal it’s recorded that they didn’t vote for it. Is that right?

POWELL:

That’s right. They dissent, and they’ll often issue a, you know, a statement of why they dissented, and they’ll explain themselves. The whole thing, explain yourself carefully to the public and transparently, and we try to put all of that out on the record for people to see.

RUBENSTEIN:

On Capitol Hill when your committee chair, it is said you don’t call for a vote unless you know that you’re going to win that vote. When you’re the head of the FOMC as the chairman of the Federal Reserve Board is, do you know where the vote’s going to be before that meeting starts?

POWELL:

Yeah, so I speak to, and I think my predecessors did, too, I speak to every Reserve Bank president and every member of the Board of Governors in great detail before every meeting. We discuss the issues, and I certainly know, you know, what people will support and what they won’t. So the proposal that gets made is generally one that attracts overwhelming support, but often not unanimous, though. Dissents are not uncommon.

RUBENSTEIN:

So if you call somebody who is a member of the FOMC and you say we’re going to have our meeting in a couple days, and this is what I think, and they say they think a different view, do you try to lobby them, or you don’t do that in the FOMC; nobody lobbies anybody else?

POWELL:

No, I really don’t. I really respect the right of each individual participant to make up his or her own mind, and express that view, and put it on the record and explain it. I see nothing but value in that. It’s not a question of lobbying. You know, we–it would be more likely that–and this hasn’t happened, but more likely that we would adapt a proposal to be something that a person could support than it would be for me to actually lobby someone.

RUBENSTEIN:

Now your immediate two predecessors had PhD’s in economics, one from, I guess Princeton, and one from Yale.

POWELL:

Actually Harvard and–Ben was from Harvard, yeah.

RUBENSTEIN:

Ben was from Harvard. He taught at Princeton.

POWELL:

Oh, Ben was MIT actually.

RUBENSTEIN:

MIT; you’re correct. He was at MIT. He taught at Princeton, and Janet had hers from Yale, if I recall.

POWELL:

Right.

RUBENSTEIN:

So you don’t have–you have a law degree from Georgetown. You’ve practiced law, but is there a disadvantage to not having a PhD, and is there an advantage to having a private equity background?

(LAUGHTER)

POWELL:

You know, I wouldn’t say it’s a disadvantage not having a PhD. I’ve been at the board seven years. I’ve had a lot of time to learn the monetary economics. You really have to do that if you’re going to serve at the board and you’re not a PhD economist. You’ve very much got to invest in learning, and of course I’ve done that. But my career–part of my career is doing different things and learning different things. I have an interesting story for you, as a matter of fact.

RUBENSTEIN:

Okay.

POWELL:

I know a guy–know a guy who founded a private equity firm with no business degree, no experience–

(LAUGHTER)

–and made a success of it. So it can be done.

(LAUGHTER)

(APPLAUSE)

RUBENSTEIN:

Sometimes–sometimes it’s better to be lucky than anything else.

(LAUGHTER)

But, so let me ask you this. Recently the president of the United States, who appointed you, has been less than favorable in some of–about some of your decisions. Does that bother you in any way?

POWELL:

No. So we’re very, very focused on our job. Congress has given us a very specific job. It’s an important job. We’re here to serve the American people, all of the American people, try to use our tools to achieve maximum employment and stable–price stability. So that’s what we’re focused on. We don’t get distracted by other things. We do not take political factors into consideration, either in our discussions or in our decisions at all. And that’s just who we are.

RUBENSTEIN:

The president’s head of the National Economic Council, Larry Kudlow, has suggested that maybe the president will have a meeting with you. Have you received that invitation yet?

POWELL:

No, no invitation. I will say Fed chairs do meet with presidents. I’m not aware of any Fed chair in my lifetime that hasn’t met with the president. These tend to be–meetings tend to be rare. I think there’s only been one or two during my time here. And I’m not aware of any Fed chair turning down an invitation from the White House, nor do I think that would be appropriate. So, but I really don’t have any news for you on that.

RUBENSTEIN:

All right, so if you had an invitation you’d be happy to accept it, right?

POWELL:

I’m not aware of anyone not accepting it.

(LAUGHTER)

RUBENSTEIN:

Okay, so let’s talk a moment about the economy. The Fed in its–in its FOMC minutes pointed out that there is a disparity a little bit. The financial markets seem to be a little bit uncertain from time to time but the core economy seems to be doing quite nicely. So how do you explain why the financial markets seem to be nervous and the core economy seems to be growing at a pretty good rate?

POWELL:

So financial markets, really beginning in the fourth quarter, got more volatile and–and seemed to be pricing in a more pessimistic outlook, which as I mentioned seems to be rooted in concerns about slowing growth and–and a related concern of the ongoing trade negotiations. So if you–but if you look at the incoming data right through the end of the year and into the beginning of this year, you don’t really see any evidence of a slowdown. And so we–we’re in a situation where we have factors pointing at different directions.

And by the way, this is not uncommon. This is–this is something that actually happens not infrequently. And when we–when we–when we have that what we do is we–we apply sort of risk management principles. In other words, we’re not just concerned about the baseline case. We’re thinking about what are the risks and we’re–we’re–we’re using our–our tools to address those risks.

So in that case, what does it mean? It means first there is no preset path for–for rates. There really isn’t. There never is, but there particularly isn’t now. Second, as I mentioned, it gives us the opportunity to be patient and watch and see what–what does evolve. Are we going to see the more positive view that most forecasters have of this year or are we going to see slowing global growth and are we going to see that affect U.S. growth? If it does, then I can assure you, we, you know it’s–it’s a common thing for the economy to behave in ways that are not exactly as we expect. And when that happens, we can flexibly and quickly move policy. We can do so in significantly as well if that’s appropriate. So we will always use our tools to try to sustain this expansion and–and keep the labor market strong and–and inflation low.

RUBENSTEIN:

So currently, the Fed is part objecting the projecting the U.S. economy is going to grow in 2019 at 2.3 percent. I believe that’s your number. It previously was a little bit higher, 2.5 percent I think last year. You’ve lowered it, is that correct? And are you going to lower it again because of the government shutdown? Is that going to fit the economy in your view?

POWELL:

Let me say first, we–there is no official fed projection. What 2.3 percent was–was the median of 17 participants. So they were half above and half below that. You know, we’ll–we’ll–during the year, not infrequently, in fact, typically when we submit new projections every quarter the projections will change. I mean, it’s very difficult to forecast the economy to that level of precision. And you know, so we’ll take into account a tightening fight natural conditions, which we’ve seen, and will also, you know, lower our rate path and–and–and try to have monetary policy offset weakness before it even happens.

RUBENSTEIN:

The shutdown, what’s the impact on the economy in your view?

POWELL:

In–in the short term, if–if government shutdowns don’t last very long. They’ve typically not left much of the mark on the economy, which isn’t to say that there’s–there’s plenty of personal hardship that–that people undergo, but at the aggregate level, the economy generally does not reflect much damage from a shutdown. A longer shutdown is something we haven’t had. If we have an extended shutdown, and I–I do think that–that would show up in the data pretty clearly and I would–I would say particularly from our standpoint one of the agencies that shutdown is Commerce, which has the Bureau of Economic Analysis and the Census Bureau and some of the pretty important data that we get is published by them. It would not be published including retail sales and GDP and a bunch of other things that are coming out this month. So we would–we would have a less clear picture into the economy if it were to go on much longer.

RUBENSTEIN:

You don’t gather your own information? You rely on other agencies to give you information?

POWELL:

In most cases we are getting information from the Bureau of Labor Standards and BEA. We–we do have a handful of data series that we collect ourselves.

RUBENSTEIN:

Okay. And so today, let’s talk about the economy going forward. We were close to the longest period of expansion since World War II and we could break that record. Do you see anything on the horizon that would make it likely that we would go into a recession in 2019?

POWELL:

I don’t see anything that suggests that the possibility of a recession in the near term is at all elevated. Recessions are–are most often caused by two things. One is inflation that is–that is high enough that the Fed has to hit the brakes. We don’t see that. More–more common recently in the last several cycles it’s really been a matter of mounting financial imbalances, by which I mean asset bubbles, the housing bubble, the .com bubble, or just excessive leverage, as you saw in the–in the subprime mortgage area where those–those things happen. We don’t see that either so we don’t see the two most basic recent causes of recessions, we don’t see those risks so I would say it’s–the possibility is not edible elevated at the moment.

RUBENSTEIN:

So you don’t worry–you’re not worried in 2019 about anything close to a recession?

POWELL:

I don’t–I don’t see a recession, I would say that if you asked me what am I worried about I would say the U.S. economy is solid. As I mentioned, there’s good momentum going into this year. The–the principal worry I would have is–is really global growth. If you look at Asia, look at Europe, you’re seeing slowing and growth. And the question will be how much does that affect us? It’s a tightly integrated global economy and global financial markets and we will feel that.

RUBENSTEIN:

Now, talk about inflation for a moment. One of the Fed’s main jobs is to worry about inflation. What do you think the inflation rate is likely to be for 2019?

POWELL:

I think it’s going to be right around 2 percent. We–I think sort of a capital asset that we inherited from Chairman Volcker and Greenspan is strongly anchored in inflation expectations. So what that means is that when the economy is really weak, inflation doesn’t go down very much and when the economy is really strong, it doesn’t go up very much. So inflation tends to be rooted pretty close to 2 percent.

RUBENSTEIN:

Historically, it used to be thought that when oil prices were high, very high, that was not good for our country’s inflation rate, not good for our economy. Now the we’re the biggest producer of oil in the world, is it good when the (INAUDIBLE) prices go down or is it better when oil prices are, like, $70 a barrel because we produce so much of it?

POWELL:

So as you point out, it’s a much closer call than it used to be. We have a very large domestic oil industry, but still on balance we think there’s still a modest benefit overall in the aggregate to–for lower oil prices.

RUBENSTEIN:

Lower than–

POWELL:

–Not if you work in the oil industry or you live in an area that is heavily leveraged to the oil industry.

RUBENSTEIN:

Lower than 50 or lower than 60 or are there any price that you think that’s an equilibrium for oil prices in our economy?

POWELL:

It’s–it’s hard to say. I mean, the question would be what is the–what is the breakeven for–for these shale producers and there are different views on that.

RUBENSTEIN:

And let’s talk about the Chinese economy for a moment. Are you worried about the slowing growth rate in the Chinese economy and its impact on our economy?

POWELL:

It is a concern, something we are watching. You know, the Chinese economy has slowed down and it’s–it’s showing up a lot in consumer spending so weak retail spending. Everyone will have seen the Apple news last week, I suspect of, you know, weak sales of their phones in China, so we’re seeing that. We also saw two weak manufacturing and services surveys, PMI’s they’re called, early last week. So you’re seeing some weakness there.

The thing you’re also seeing though is the Chinese authorities are–are–are doing repeated rounds of things to support the economy as–as they can do, just over and over again, different things. And so I–I still think the baseline–most likely baseline case for China is going to be another year of solid growth. I–I don’t see–there’s no reason to think it will be–it’ll be something worse than that.

RUBENSTEIN:

Do you think the tariffs that we’ve imposed in Chinese imports is a good thing for our economy or harmful thing for the Chinese economy? How much longer do you think this could go on before it’s really going to hurt our economy?

POWELL:

So I don’t think the tariffs on either side have had much of a visible mark on either the Chinese economy or the United States economy. So you–you–in other words, Chinese exports and imports are–don’t show any mark from that and we have a $20 plus trillion-dollar economy that the amount of tariff so far it just doesn’t show much of a mark.

So and–and–and again, I–we don’t do trade policy, we don’t give the administration advice on that. I would never comment on the administration’s trade policy. I will say this though, if–if this leads us to a–to a fairer–if this process leads us to a fairer, more open, lower tariff environment for trade, that’ll be good for the global economy, it’ll be good for our economy. If instead it leads to a more protectionist environment where tariffs are higher and they’re mutual and they’re long-lasting, the that’ll lead to, you know, a less productive economy here the United States and around the world.

RUBENSTEIN:

Now what about Brexit? Do you think that Brexit, if it occurs or however it occurs is going to hurt the European economy and the British economy and therefore hurt our economy? What is your view on that?

POWELL:

You know, with–with Brexit, our main point of contact has been with U.S. financial institutions that have operations in–in the UK and also in the continent and we’ve now had, you know, quite a long time to get ready for that. So and–and also they’ve had–these institutions have had supervision from U.S. authorities, UK authorities, and EU authorities. So they’re prepared for the full range of possible outcomes. That’s the main thing that we been working on. I think it’s–it’s very possible, there’s no precedent for this event so anyone should have humility trying to predict what the consequences would be, but I would say the base case is that there will be, you know, some effect on both the UK economy and the EU economy, but it doesn’t need to be very significant unless there are real financial disruptions, and we don’t expect that.

RUBENSTEIN:

Now in our economy, we are running an annual deficit of about $1 trillion or more with $21 or $22 trillion of total indebtedness internal and external. Are you worried at the Fed about the enormous amount of debt that the federal government has?

POWELL:

You know, so I am very worried about it. But from the Fed standpoint, you know, we’re really looking at a business cycle kind of length, that’s–that’s our frame of reference and the–the–the long run fiscal non-sustainability of the U.S. federal government isn’t really something that plays into the next, you know, the–the sort of medium-term that is relevant for our policy decisions. It’s a long run issue that we–we definitely need to face and ultimately will have no choice but to face.

RUBENSTEIN:

Now, as a result of quantitative easing, the Fed bought a lot of securities and now you’re letting them roll off. Is that the correct policy as opposed to selling them? You’re just letting them expire. Is that the correct policy in your view?

POWELL:

Yeah, so that–we–we wanted to–to have the balance sheet remote return to a more normal level, which is a level no larger than it needs to be for us to conduct monetary policy efficiently–

RUBENSTEIN:

–which–what level was that–

POWELL:

–and effectively. Sorry?

RUBENSTEIN:

What level would that be? $1 trillion?

POWELL:

I don’t know the exact level. That will depend on the, really the public’s appetite for our liabilities, specifically currency. To us that’s a liability and the public has a large appetite for currency and also reserves and other–other liabilities. So it’ll be substantially smaller than it is now, but–

RUBENSTEIN:

–What is it now? What is the balance sheet now?

POWELL:

It’s a little under $4 trillion. It was $1 trillion before the crisis. It will–it’s–it–it will be smaller than it is now but nowhere near what it is before. And the reason is currency has–currency was, you know, well less than a trillion before quantitative easing started and now is–is moving up toward $2 trillion.

RUBENSTEIN:

As you look back in the great recession and what the Fed did with its various policies with HARP and other things, would you say there’s anything that you learned in the Fed that if you had a similar problem in the future you would do something differently?

POWELL:

I would say, and I’m–I–I raised concerns in my early years at the Fed about quantitative easing and how effective it would be. I would say if you–if you look fairly back at the record and–and don’t expect perfection that the Fed did a good job, particularly in the–at the height of the crisis. The first quantitative easing program and the other things that the government did, not the Fed, were successful in ending what had all the makings of a collapse of the global financial system. That didn’t happen and it never happened, and I think that’s because of the efforts of the people who were in government including the Fed but also including the administration at that time.

RUBENSTEIN:

Now talking about the unemployment rate, where do you think that’s headed for this year?

POWELL:

So right now it’s 3.9 percent and we’ve been under 4 percent since, I think, for the last 9 months. Again, that hasn’t happened since the mid-60s. So it’s a 50-year low. If–if we get this world that–that is sort of our baseline case of growth in the range of 2 to 2.5 percent, then unemployment should move down in another couple of 10ths, something like that.

RUBENSTEIN:

So how do you relate to, let’s say, (INAUDIBLE) the administration, you don’t need the president, right? Fed shares don’t typically do that, but do you meet with the Treasury secretary regularly or other people in the White House, how do you commute it with them and vice versa?

POWELL:

So it’s–it’s–it’s important that we have relationships with–with all the other parts of the government, including the independent regulatory agencies, including Congress, and including the administration. So by long tradition, many decade tradition, the Fed share has regular meetings, which windup being breakfast and lunches, mostly breakfasts between the secretary of the Treasury and the Fed share. That can happen weekly unless he gets canceled, which sometimes it does for travel on that kind of thing.

RUBENSTEIN:

Where they have them? At the treasury or at the Fed?

POWELL:

Alternates. Alternates. We also have the Council of Economic Advisors.

RUBENSTEIN:

Where’s the food better?

(LAUGHTER)

POWELL:

Treasury–

(LAUGHTER)

–trust me there.

RUBENSTEIN:

All right.

POWELL:

Political Insider

About Pete Davis

Pete Davis

Pete Davis advises Wall Street money managers on Washington, DC policy developments that affect the financial markets. Visit his website here daviscapitalinvestmentideas.yolasite.com.

Articles by Pete Davis

Our Partners