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00:00This is my kitchen table and also my filing system over much of the past three decades. I've been an investor, the highest quality of mankind. I've often thought as private equity. And then I started interviewing, Oh, I watch your interviews because I know how to do. I've learned in doing my interviews how leaders make it to the top. I asked him how much he wanted. He said 250. I said, fine, I didn't negotiate with him. I did no due diligence. I have something I'd like to sell and how they stay there. You don't feel inadequate now because the only the second wealthiest man. Was that right? One of the most important decision makers on economic policy in our country is the chairman of the Federal Reserve Board. I recently sat down with the chairman, Jay Powell, to talk about interest rates, inflation and the overall economy in 2023. So, Jay, thank you very much for being here. Why don't we start with an easy question. So you made a speech last week commenting on the FOMC decision to raise the Fed discount rate by a small amount, relatively speaking, 25 basis points. Some would people would say that was small, but at the time, it wasn't clear that the jobs report would be as strong as it turned out to be. Subsequently, had you known that the jobs report was going to be as strong? Would you have done 25 basis points or something different? David, thank you for that question. Thank you. Thank you for inviting me here today. It's great to be here. So we don't get to play it that way. Unfortunately, we have to. But also, I'll take it this way. So the message we were sending at the FOMC meeting last Wednesday was really that the disinflationary process, the process of getting inflation down has begun and it's begun in the goods sector, which is about a quarter of our economy. But it has a long way to go. These are the very early stages of disinflation. So the services sector really, except for housing services, pardon me, is not really showing any any disinflation yet. So our message really was this process is likely to take quite a bit of time. It's not going to be, we don't think, smooth. It's probably going to be bumpy. And so we think that we're going to need to do further rate increases, as we said. And we think that we'll need to hold policy at a restricted level for a period of time. If next month you had another five hundred nineteen thousand jobs created, net jobs, would that be good or bad from your point of view? Have having a lot of people working, but maybe producing more inflation. We don't. We do not have the luxury of thinking about good or bad. It just is what it is. So but I would say, again, we most most analysts, most economists would say that to get inflation down from high levels that we've had, if you look at history, there is some softening in labor market conditions that goes along with that. And that is still very possible and indeed likely here some softening in labor market conditions. However, this cycle is different from other cycles because of where it came from. And it's just confounded all all sorts of attempts to predict what it would do to the markets. After your speech last week, the markets assume that therefore there would probably be another 25 basis point increase in your next FOMC meeting. Was that a bad assumption by the markets? So again, what we said at the meeting was, was that we we believe that we anticipate as what we said, that ongoing rate increases will be appropriate. And the reason is we're trying to achieve a stance of policy that is sufficiently restrictive to bring inflation down to 2 percent over time. And we don't think we've achieved that yet. So we said that and I and, you know, now you see the labor market report. And I think, again, financial conditions are more well aligned with that than they were before. So the assumption you made your speech was that probably the Fed might even consider decreasing rates by the end of this year and the markets no longer assume that you think the markets are wrong. Well, so let me say, these are all of these numbers that we're throwing around here are conditional on incoming data and what happens. So we never say this is this is what we think will happen. You know, we make a tentative forecast and then we let the data come in. For example, if the data were to continue to come in stronger than we expect and we were to conclude that we needed to raise rates more than is priced into the markets, or then we wrote down at our last group of forecasts in December, then we would certainly do that. We would certainly raise rates more. So you've said their inflation rate target is 2 percent, but why 2 percent and not 3 percent? 3 percent could be tolerable. Really? I mean, most for most of organized history. Three percent is considered OK. Why do you want 2 percent to 2 percent is the global standard. And that is our objective 2 percent piece as measured by the PCI index. And that's just that's not something we're looking at changing. That isn't going to change it. That's not going to change. Not going to change. No, but. OK. So you need to get the 2 percent and your goal to get there is by what period of time would you like to get there? Well, we say we say that we're using our tools to get there over time. If you look at our forecasts, we expect 2023 to be a year of significant declines in inflation. And it's actually our job to make sure that that's the case. But I would tell you that, you know, with inflation headline, headline, PCI inflation is running about 5 percent. This is on a twelve month basis. Core is running it at four point four. My guess is it will take certainly into not just this year but next year to get down close to 2 percent. OK. So 2 percent is firm that you're not. Yes. And off that. Yes. OK. So the theory of raising interest rates is that it will decrease economic activity and increase unemployment. But you've been increasing interest rates for a while and unemployment is now at a record low. So what's wrong with the theory? Why is unemployment not going higher? Well, the labor market is strong because the economy is strong. And as I mentioned, it's a good thing that we've been able to see the beginnings of disinflation without seeing the labor market weaken. It's just that there's a lot of demand for workers. In fact, if you look at the supply of workers versus demand for workers. Demand for for U.S. workers is now more than 5 million greater than the available supply. And the available supply consists of people who are either working or actively looking for a job. So this this is this was not the case before the pandemic. The pandemic really had a significant left a list lasting mark so far on labor supply in the United States. Labor force participation rate came down and there now is a shortage of workers in it. It feels it almost feels more structural and cyclical. So that's it. That's a significant issue. Now, you've resisted, I think, saying what unemployment rate would be acceptable to you, I think. But is there an unemployment rate that you think would moderate inflation such that you would tolerate unemployment at 4 percent, 5 percent, 6 percent? I guess I think about it this way. We have two goals that Congress has assigned us maximum employment and price stability. Price stability, as we've agreed, is 2 percent inflation. Maximum employment means if you want a job, you can get one. So right now, the labor market is at least at maximum employment by many would say that that is out of balance with more demand than there is supply. So what we're trying to do is get inflation down. We're not we're not targeting, you know, a different unemployment rate, which we're trying. We're trying to use our tools to get inflation to come down over time. So if I wanted to go get a mortgage on a house, I was going to buy, for example, you would say, I'm not going to be any better off waiting to next year than now because rates are going to come down that much at the beginning of next year. So I might as well go to the house now. Mortgage. So I said, surprisingly enough, I get a lot of requests for advice on those kind of things. And you don't give any. And I but I really can't. OK. I can't I really can't respond. So. OK. So on the whole, to summarize where you are, you're basically saying that the jobs data was that came out was a little bit surprising. But in the end, you're taking you've taken into account and you're pretty comfortable with the guidance you gave last time and you're not prepared to give anything that's completely different guidance than you gave last week. Well, I mean, this is a world in which we've had the inflate sorry, the end of the labor market report, and I think that does I think it underscores the message that I was sending at the at the. Press conference and in the meeting that we have a significant road ahead to get inflation down to 2 percent, and I think there has been an expectation that it will all go away quickly and painlessly. And I don't think that's at all guaranteed. That's not the base case. The base case is it will to for me is that it will take some time and we'll have to do more rate increases and they'll want to look around and see whether we've done enough. In hindsight, would you say that when Covid hit the economy and we injected five trillion dollars of fiscal policy into the economy and the Fed did quantitative easing and other related things kept interest rates very low? Would you say in hindsight that was a mistake or was the right policy at the time? So I think you have to go back to the decisions that were made in real time, and it was something nobody had ever seen. Global economy came to a virtual standstill. People were talking about depression. People were talking and we didn't think we had no idea when we would get vaccines that worked. So Congress took very strong measures and we took very strong measures. And you see where the economy is. You've got a very, very strong labor market. But you have high inflation, as I mentioned, at the beginning of getting that down. If you look around the world, though, at other countries, they're also experiencing high inflation, including countries that didn't that didn't do as much as we did either from a fiscal or monetary standpoint. So that tells you, though, that a big part of this inflation is actually related to the pandemic itself. The shutdown and the reopening. That's a big part of it. So some people are worried about the federal debt limit and we might not be able to extend it on time. We have thirty one point four trillion dollars of debt. Are you a little worried about the debt limit not getting extended? So the debt limit is really something for the fiscal authorities to deal with the Fed. Our only role in this is that we're that we're the fiscal agent of the Treasury Department. We're not a policymaker on that. And I will just say this. This can this really can only end one way. And that is with Congress raising the debt ceiling in a timely fashion so that the U.S. can pay all of its bills. One and as do. That's what has to happen. And if that doesn't happen, no one should think that the Fed has the ability to shield the financial markets or the economy from the consequences of moving too slow. So you don't have any program in place ready to go if, in fact, the debt limit isn't passed in time. This is something that Congress has to deal with. And the so-called trillion dollar gold coin solution is not one you're in favor of. I guess I as I said, this ends in only one way. And that way is Congress voting to raise the debt ceiling so that the U.S. can pay all of our bills. And today, what about the debt? Total debt of the United States, which produces some inflation with thirty one point forty. Leaving aside the debt limit. Are you worried about the total indebtedness United States producing inflation or you don't think that's a big problem? Yeah, it's not the level of debt. I would say that the I'd say but the level of debt is really it's not for sale. It's not the Fed's job. But I would say that we we're on an unsustainable fiscal path, that the federal government level. That has been the case for some time and it's something we will have to deal with it better to deal with it sooner rather than later. Now, many of your predecessors were economists. You were trained as a lawyer. So they spoke in what I call Fed Speak, which is the same incomprehensible kind of economic language which was done intentionally. I think that sometimes they would say so you tend to speak in English. Is that have been a a a plus. You'd say when you're dealing with members of Congress, they can understand what you're saying. I like to think so. You know, I've made it a real priority to to engage a lot with Congress in our system of government. Unlike the parliamentary system, our accountability is to the legislature. It's too Senate and the House and particularly the two oversight committees, Senate Banking and House financial services. And I think it's very important that we respect that and explain what we're doing and listen to their concerns and share with them how we're thinking about things. And I think they appreciate that and what that is. You know, we have this precious independence. We can't be removed from office. We serve these long terms. The other side of that has to be accountability. And the way for us to get accountability is to be as transparent as possible and try to reach, you know, the people of the United States through their elected representatives. So this is a very high priority and we're going to keep doing it. So when you testify in front of Congress, how much time does it take to prepare for that? Is that a one hour preparation session or is it a one day session or a one week session? These are supposed to be monetary policy hearings under the Humphrey Hawkins Act. And they're actually on any anything that's any political issue. So, yes, it's quite extensive. You have to prepare for everything that the Fed is involved in and many things that the Fed is not involved in. So it's it's a lot of preparation. So when you get questions from some members, you have to bite your tongue and say, why are you ask a question like that? Or you never have that problem. That never happens. Never happens. Okay. In terms of consultation, do you consult regularly with the treasury secretary or the head of the National Economic Council where the president decides how do you kind of relate to the administration for a long, long time? You know, 60 or 70 years? I think there's been a weekly breakfast or lunch with the treasury secretary and the Fed chair. And that's what I've had with with Treasury secretaries that I've had as Fed chair. I've also had a regular. Call it call it irregular lunches with the head of the NSC. We also have regulars regularly scheduled lunches with the Council of Economic Advisers, and that's that's really the that's the that's the institutional structure of our our contacts with the administration. There's a prison. United States. Ever call you with any advice or you don't? The president Trump never call you or president by name or call you or. Well, I think it's a matter of public record that President Trump did used to call me from time to time. What did he call you? No, I haven't had that kind of. I haven't gotten any calls from from President Biden. When you're dealing with this, but your colleagues on the Fed board and you say, look, I'm the chairman of the Fed, I am the person who has to make the final decision, and this is what we should do. We are blessed with a diversity of perspectives on the FOMC with 19 people. Of course we are. But you have one thing that unites all of us, and that is a very strong commitment to getting inflation down. For people who aren't familiar with the FOMC, who is actually is on the FOMC, the US Central Bank consists of a board of governors here in Washington, their seven governors, those governors are nominated by the president and confirmed by the Senate. And we serve terms that are that are not sync up with the election cycle. So we're independent. There are also 12 reserve banks around the country which have a degree of independence. And so so each. Each Reserve Bank is led by a president who works there full time. All 12 of them sit on the FOMC. So that's 19 people sit on the FOMC. So that's quite a large committee of which twelve vote in any given year. The Reserve Bank presidents vote on a rotating basis except New York, which votes every year. So when you vote, do you vote at the beginning of an FOMC meeting and then just kind of have discussions afterwards or do you wait to the very end and then you vote? Now we vote at the end. I mean, the FOMC meeting process takes no more than a full week. I'm talking to all of the participants all night of 18 other ones and staff has sent around memos. And there's something called the Teal Book, which is the staff's assessment of the you know, of the economy and international economy and monetary policy and all that. Then we have an extensive discussion on the morning of the first day about the economy. Everybody talks about that. On the second day, we talk about monetary policy and then we vote on monetary policy at or around noon on the second day. So does the chairman of the Federal Reserve Board speak first and say, here's what I think. And does he wait until the end and say, well, thanks for what you think. But let me tell you what I think. What do you do first if different shares have done it different ways? And so I tend I've tended to do what my predecessor, immediate predecessor did. I think, well, this is what I do. I speak last on the sort of the economic go round. So everyone else talks about what they think about the economy and in their district, for example, if the Reserve Bank president and I listen to all that and then I give my comments at the end and I kind of sum up what people have said, and then I speak first on monetary policy. So do you consult regularly with some of your predecessors? I mean, obviously, one is secretary of the treasury now. But Ben Bernanke, for example, or I do. I talked to former Chairman Bernanke. I talked to Secretary Yellen. I still talk to Alan Greenspan now and again when you're dealing with this. But your colleagues on the Fed board and you disagree with them, do you say, look, I'm the chairman of the Fed, I am the person who has to make the final decision and this is what we should do or you don't quite do it that way? It's a it's a process of reaching agreement. And I hear what people have to say. I tell them what I think, and then I'm the one who has to bring a proposal in front of the full committee, not just the board and for the full committee on monetary policy. And it works. You know, we have to reach an agreement and, you know, we get to a place. I think you can tell today we are blessed with a diversity of perspectives on the FOMC with 19 people. Of course we are. But you have one thing that unites all of us, and that is a very strong commitment to getting inflation down. And when you want to talk to members of the board of the Federal Reserve Board, you go to their office or they come to your office. I like to do both. I mean, I really don't like to sit in my office all day and have just had people come to see me. I like to go bargain on people. And, you know, I think it's much better to get up and walk around and see people. The Fed has been pretty good at avoiding leaks of its decisions. How do you do that? Because most people in Washington not so good at that. How do you avoid leaks? We do have you know, we've got very strict rules around confidentiality, particularly around the written materials that we have. You know, we publish these things internally for the FOMC meeting, the memos and the teal book and all that. But the other thing to remember, though, is, you know, we're not trying to hide our decisions from the public. We actually in the modern in modern monetary policy, we want the public to understand how we think, how we're thinking. And and, you know, if markets really understand how you're thinking in a new a new piece of data comes in, the markets will go where they're going to do this. And it sort of happens organically. And that happened all last year as we were talking about raising rates, the market priced in rate increases long before we actually enacted them. So it's we want to be transparent. We're not looking to surprise markets with these decisions. So you get data from all the various government agencies. But do you ever use anecdotal things like you go to the supermarket, you see prices are high and say this price is higher. How do you get. You ever get anecdotal things or people ever call you up her friends and say, by the way, you should do this or that? I mostly get data, but I will say the. I do believe that anecdotal information is very useful. And one of the things the reserve banks are great at is all 12 of them have big operations where they talk to businesses and nonprofits, universities, every sector of the of the country in the economy. And they bring that back to the FOMC meetings and they talk about what they're seeing. So there has been discussion recently about the Fed. Some Fed members, Fred, board presidents selling their securities and maybe not doing everything they were supposed to do in terms of disclosing it. What have you done to fix that process? We've put a new system in a new set of rules in place, which I think are best in class for a public institution like the Fed. And, you know, the innovations were that that if someone wants to sell something that they own or buy something, they have to clear that in advance with with staff at the board of governors. And then you've got to wait 45 days for that to execute. Also, you can't own individual stocks and you can only do these. You can only authorize these transactions or execute them during specific times. And, you know, it's it's a. And we just call of course, all of these are disclosed. If you're if your idea is to go to trade things, buy and sell them, because you think you know, you think this stock is cheap and that kind of thing, that's just not something that will work. What is the salary of the chairman of the Federal Reserve Board? It's it's around one hundred and ninety thousand dollars, I believe. So you live on one hundred ninety thousand dollars if you need to sell something. What do you do? You have to clear it for forty five days. That's right. We have to have family expenses that if we have them that exceed my salary, then we have to sell. And I think that's a fair salary for the job. Or I do. Yes. OK. So today. How did you coordinate with central banks? Let's say in England or Japan or or China? Do you have regular conversations with them about what they're doing? We do. And I meet six times a year in Switzerland with the heads of all the many, many central banks. You know, even that even the small and medium sized ones. But in Basel, at the Bank for International Settlements. In addition, among the major central banks, I have regular dialogues going with with most of them. And so we we're talking know about is really what's happening in the economy and how are you thinking about policy in that kind of thing? It's very important that that we keep those discussions going because particularly in a crisis, you're going to need to know each other and you're going need to know you're going to be able to trust each other. OK, so the biggest challenge you have now is being able to keep a straight face, not telling people what you're going to do in the future and look at the data and then come up with the right solution. Right. That's mostly it. I think the biggest challenge we face at the Fed is completing the process of getting inflation down to 2 percent. And what what I want to point out is that we're seeing disinflation in the goods sector where we're going. We expect to see it in the housing services sector. And that's that's. These are the three parts of the of the core PCC inflation index that we look at. There is 56 percent of the economy, which is the rest of the services sector. It's the biggest part, obviously, and we're not seeing disinflation there yet. And that's going to take some time. And I just we we need to be patient and we think we're going to need to keep rates at a restrictive level for, you know, for a period of time before that comes down the.

The David Rubenstein Show: Jerome Powell

Federal Reserve Chairman Jerome Powell discusses the state of the economy, inflation and the inner workings of the Federal Reserve on "The David Rubenstein Show: Peer-to-Peer Conversations". This was recorded February 7 in Washington. (Source: Bloomberg)

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