Notes | Powell (16 April 2025)

No one can tell you what the Chair of the Federal Reserve Board thinks better than Jerome Powell can himself. Why should you care? He sets the agenda for the Fed and steers monetary policy. What's more, he is actively trying to communicate what he and the Committee are thinking. Powell spoke at length at an Economic Club of Chicago event on April 16. A careful analysis of his responses would not only prepare you for the FOMC decision on May 7, it would provide insight into the Fed's policy perspective in the months ahead. An annotated transcript of his Q&A responses follows.

7 MAY 2025

EDWARD VON DER SCHMIDT

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Prepared Remarks

Nothing conveys more intentional signaling than the words officials deliberately choose to write and say. Without producing his speech in full, which you can read in just a few minutes, here is Chair Powell's policy assessment:

"As we gain a better understanding of the policy changes, we will have a better sense of the implications for the economy, and hence for monetary policy. Tariffs are highly likely to generate at least a temporary rise in inflation. The inflationary effects could also be more persistent. Avoiding that outcome will depend on the size of the effects, on how long it takes for them to pass through fully to prices, and, ultimately, on keeping longer-term inflation expectations well anchored."

"Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem..."

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"For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance."

https://www.federalreserve.gov/newsevents/speech/powell20250416a.htm

This is very likely to be the message conveyed at the May 6-7 FOMC. Uncertain policy begets uncertain economic outcomes - only time will tell how they are resolved. With potentially competing pressures from its dual mandate in the near future, a resilient labor market to date, and a recent experience with scarring inflation, the Fed will be inclined to hold policy rates at a moderately restrictive level for as long as they can. This will allow the central bank to attenuate any rise in inflation expectations before a possibly forceful pivot to easing as soon as price stability concerns are no longer paramount.

As much as they may want to support activity and labor markets in anticipation of a slowdown, the Fed can only exert a direct influence on inflation to foster a stable environment conducive to growth and full employment.

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Question & Answer

Unscripted dialogue has a way of eliciting information and richer context. Here are Powell's transcribed responses to Raghuram Rajan, an accomplished economist and central banker. Annotations are italicized.

Asked about an eventful seven years as chair:

"2024 was a year where the economy grew 2.4%. Unemployment remained in the low 4s, close to mainstream estimates of maximum employment. And inflation came down and was running at the end of the year around 2.5%. That's the economy that we had [...] that's where things were.

Where we are now [...] is the administration is - as I mentioned in my remarks - is implementing significant policy changes and particularly trade now is the focus and the effects of that are likely to move us away from our goals. Unemployment is likely to go up as the economy slows in all likelihood and inflation is likely to go up as tariffs find their way and some part of those tariffs come to be paid by the public.

So that's the strong likelihood. And, you know, my hope is that we'll get through this and get back - we're always going to be aiming for maximum employment and price stability, that's what we do. I do think we'll be moving away from those goals, probably for the balance of this year. Or at least not making any progress. And then we'll resume that progress as we can."

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A solid backdrop gave way to policy-driven uncertainty with as-yet unknown consequences for the economy and inflation. The Fed has satisfied its employment mandate at present but is likely to retreat from both of its policy goals this year before (hopefully) getting back on track.

What would make tariff effects on inflation more persistent? How might they affect growth?

"Kind of a simple starting point is one tariff comes in that gets passed along in prices and raises inflation - but it's just a one-time-thing. So the price level goes up and that's it. And that can happen in some circumstances.

But it depends on a number of things which we don't know yet, and I would point to a couple of them - or three of them actually. One is just the size of the effects. As I mentioned the tariffs are larger than forecasters had expected, certainly larger than we expected, even in our upside case - we looked at a range of cases. So that's one.

The second one is how long does it take for the tariffs to have their effects on inflation. To the extent it takes longer and longer, that raises the risks that the public will begin to experience higher inflation. They'll come to expect it and companies will come to expect it, so that risks higher inflation.

And the third is just what I mentioned in my speech - my remarks - which is gotta keep inflation expectations well anchored.

So if we have those three things under control, that's what it will take. And indeed our role is to make sure this will be a one-time increase in prices and not something that turns into an ongoing inflation process. That's a big part of our job."

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Tariffs' effects on inflation are more likely to be temporary if they are a one-time measure and do not entail an escalating, protracted trade war. Already tariffs are larger than the Fed's own staff had anticipated in its previous scenario analysis. It's not yet clear when the tariff impact will be felt more broadly in prices and for how long, both of which will influence inflation expectations. This process is the Fed's current focal point and will take months to bring clarity.

How might the Fed response be different to a tariff-driven supply shock?

"I actually had dinner at the Chicago Fed last night with a number of directors of various parts of the Chicago Fed. And many of them are CEOs of significant companies and they - this uncertainty that they're feeling and the issue with imported components to their products is just a huge issue.

But with - if you look back at the pandemic. If you remember there was a shortage of semiconductors and that led to a shortage of cars at a time of extremely high car demand, and it was a prolonged shortage because production couldn't keep up. And that led to - one of the things that led to an extended period of inflation. So when you think about supply disruptions, that is the kind of thing that can be - that can take time to resolve and it can lead what would have been a one-time inflation shock to be extended perhaps more persistent and we would worry about that.

In this case, you can look at the car companies. Their supply chains are likely - seem to be on track to be disrupted significantly. And you would worry that that process will take some years and that the inflationary process might be extended.

All of this is highly uncertain. We're thinking now really before the tariffs have their effects, how they might affect the economy. And that's why we're waiting really to see what the policies ultimately are, and then we can make a better assessment of what the economic effects will be."

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Tariffs on inputs (as opposed to finished products only) can compound inflationary effects, as can extended supply chain disruptions. The Fed needs to know what policies will actually be in order to inform the economic projections that will guide monetary policy.

Immigration and labor markets

"Part of why growth was so strong in the last couple of years was just very high levels of immigration and those people went to work. The economy hired them. There was a lot of demand. We were still working off the labor shortage.

What's happened since the prior administration changed their policy as you mentioned immigration has fallen very sharply. And therefore the growth of workers has really stopped, it's really stagnant. But at the same time demand has also fallen - demand for workers. So payroll job creation has also fallen. And they've kind of fallen in tandem, which is why the unemployment rate has been pretty stable for about a year. So in a way demand and coincidentally perhaps to some extent demand and supply for workers has fallen.

In terms of the effect on the labor market, right now we're still at full employment. Labor force participation is still strong. Wages have moved back down to levels that are now pretty sustainable given an assumption about productivity. So the labor market's in a really good place.

Longer term, the effects of immigration are not thought to matter much for inflation. The effects on demand and supply will more or less cancel each other out so we wouldn't expect there to be a big impact on inflation."

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Declining immigration has masked declining demand for workers. Also, if productivity were to fall, wage growth may exert upward inflationary pressure.

Impact from government layoffs and spending freezes

"So it's too soon to say. But what I can say is - of course [for] the people being laid off in government this is highly significant to them. We don't know how big that's going to be. Right now it's not big enough to affect a workforce of 170 million people, materially.

In terms of the cut backs in funding and for science and things like that, we do see in areas, particularly in cities that have a lot of universities and research hospitals and research institutions, we're really hearing significant layoffs and significant impacts on employment. I don't know how much that will total up to.

And of course, in addition, cutting back on scientific research may have implications for economic growth, for productivity, for health, for all kinds of things. But those are very difficult to estimate in real time."

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The second-order effects from government layoffs and spending cuts on local and federal-adjacent economies may be large but are difficult to forecast.

What to do about higher unemployment and higher inflation at the same time

"Most of the time when the economy is weak, inflation is low and unemployment is high. And both of those call for lower interest rates to support activity and vice versa. So most of the time the two goals are not in tension. And they're not really in tension now. The labor market is still strong.

But the shock that we're experiencing, the impulses we're feeling are for higher unemployment and higher inflation. And you know our tool only does one of those two things at the same time. So its a difficult place for central banks to be in in terms of what to do.

And so we - the best we can do is, we actually have a little provision in our consensus statement, which is the thing we vote on to embody how we approach these questions. What we say is we will look at how far each of the two - how far the economy is from each of those two goals. And then we'll ask might there be different paces at which they would approach those goals. We'll look at those things and think about them and we'll make what will no doubt be a very difficult judgment. Again we're not experiencing that now, but we could well be in that situation as I mentioned in my remarks."

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By way of example, if inflation and unemployment move higher but inflation is expected to return to target faster than labor markets will recover, the Fed may lean toward easing to support its employment mandate (which will require more help for longer).

How does the Fed factor in structural changes to the US economic philosophy and longer-term uncertainty into its policy decision-making?

"So let me just agree that we're - what comes back very strongly and everyone will understand this - these are very fundamental changes in long-held in some cases policies in the United States. And there's not any real experience - the Smoot-Hawley tariffs were actually not this large and they were 95 years ago - so there isn't a modern experience for how to think about this. And businesses and households are saying in surveys that they're experiencing incredibly high uncertainty.

There's a lot of research - some of it from the Fed - showing that that does lead to businesses and households stepping back from decisions, which of course makes common sense. And you know you hope that that's something that you go through a phase and then you know what the - things become more certain. And therefore you know people can resume normal economic activities given their understanding of what is the new normal.

And your question really is, what if the uncertainty remains high? I think that's a difficult environment. I think people's expected rates of return would have to be higher. I think people - that would weigh on to investment just in general. If the United States were to become a jurisdiction where risks are just structurally higher going forward, that would make us less attractive as a jurisdiction. We don't know that at this point but I think that would be the effect."

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Elevated and sustained uncertainty about US policies will stifle economic decision-making and may reduce the attractiveness of American and dollar-denominated assets.

Is there a Fed put? [i.e., would the Fed step in to support markets if risk assets perform poorly enough?]

"I'm going to say no, with an explanation. So what I think is going on in markets is markets are processing what's going on. And you know it's really the policies - particularly the trade policy. And really the question is where is that going to come in? Where is that going to land? And we don't know that yet. And until we know that, you can't really make informed assessments that would still be highly uncertain. Once you know what the policies are it will still be highly uncertain what the economic effects will be. So markets are struggling with a lot of uncertainty, and that means volatility.

But having said that, markets are functioning. Conditional on being in such a challenging situation, markets are doing what they're supposed to do. They're orderly, and they're functioning just about as you would expect them to function."

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The Fed isn't fixing markets that aren't broken. Powell makes a salient point about residual economic uncertainty even after policy is clarified. The latter will be necessary for the Fed to make informed decisions.

What's causing US bond market volatility?

"So I would just say the same thing. I think it's very hard to know in real time. I've had a lot of experience with significant moves for example in the bond market. Where there's a narrative that people land on and then two months later you look back and go that was completely wrong.

So I think it's very premature to say exactly what's going on. Clearly there's some de-levering going on, among hedge funds in levered trades and things like that. It's also again the markets processing historically unique developments with great uncertainty. And I think you'll see - you'll probably see continued volatility.

I wouldn't try to be definitive about exactly what's causing that. I will just say markets are orderly and they're functioning kind of as you would expect them to in this time of high uncertainty."

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Trading narratives are catchy but may prove unfounded.

Reserves and the balance sheet, potential disruptions

"We think that reserves are still abundant. So we don't think we're close to the point - particularly close to the point where we would stop. But we were facing a situation in which, for other reasons, there were going to be big flows into and out of reserves. It had to do with the debt ceiling and the Treasury General Account. For those of you who are Treasury market people, that will make sense.

While those big flows are happening for over a period of six months, we would actually be shielded from being able to see evidence that we were or were not getting close to the level of less abundant reserves. And so we decided to slow the pace.

We thought about pausing. And instead we debated - it was one of these great debates we have at the FOMC - we decided to slow the pace instead. And people really came to see the merits of that because you know the slower we go the less - the smaller the balance sheet can get without disruptions. And we want that process to continue and now it's at quite a slow pace. So we think that's a really good thing. So that means it can go on for a longer amount of time and we'll be able to reach kind of - very carefully - what we think is the right level of reserves. Still plenty of reserves."

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Among other reasons, the Fed slowed balance sheet normalization as insurance against a sudden drop in reserves due to debt ceiling dynamics.

Does the Fed stand ready to supply dollars to central banks if needed as they have in the past?

"Sure, absolutely we do. Just for everyone's knowledge, we have standing dollar swap lines with five large central banks. And they go to the jurisdictions where there are big overseas dollar funding markets. In effect, those are overseas markets where for example a European or Asian institution is buying an asset backed security that is backed by loans to American consumers. So in effect these are loans to American consumers. And we support that. We want to make sure dollars are available. They need dollar funding to hold those dollar assets.

So the way it works is, when needed, we lend to the central bank in dollars and they pay us back in dollars. They then pay in their currency, they lend on in dollars. And so we take no credit risk or anything like that. And it supports dollar funding markets. Dollar funding markets are very sensitive during times of crisis and its very helpful. The reason we do it is it's really good for US consumers. And so we'll continue to do that, just as part of the dollar being a reserve currency - the reserve currency, most important. And we will do that."

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The Fed cares about keeping dollar funding available.

The US fiscal situation and sustainability

"So the US is on - the US federal debt is on an unsustainable path. It's not at an unsustainable level. And no one really knows how much further we can go. Other countries over time have gone much farther. But we're now you know we're running very large deficits at full employment. And this is a situation that we very much need to address. Sooner or later we'll have to, and sooner is better than later.

In terms of, if I can say from my time working on these issues - it's not the Fed's issue - if you look at a pie chart of federal spending, the biggest parts and the parts that are growing are Medicare, Medicaid, Social Security, and now interest payments. And so that's really where the work has to be - has to be done. And those are issues that can only be touched on a bipartisan basis. Neither party can figure out what to do without both parties being at the table. So that's critical.

All of domestic discretionary spending, which is essentially where 100% of the conversation is, is small as a percentage of federal spending. And is declining - it's already declining as a percentage of federal spending. When people are focusing on cutting domestic spending, they're not actually working on the problem. Domestic discretionary spending is already going down. I like to make that point because so much of the dialogue that the politicians offer is about domestic discretionary spending, which is not the issue."

Stability and regulation

"So I think our banking system is well-capitalized with liquidity and is quite resilient right now to the kinds of shocks that it may face - I do believe that. In terms of the commercial real estate, there are - and this has been the case really we've been working on this for four or five years now - there are some banks - it's mostly medium and small-sized banks who have elevated concentrations of commercial real estate, some of it troubled. And we've been working to make sure that those banks have a plan, have capital, and can absorb the losses that they're doing. So that's been going on for some time.

The very largest banks don't tend to have high concentrations. So this is a problem that we have known would take years to work through but we're really well into the process of working through it.

In terms of the non-bank financial sector, it's grown enormously. The provision of credit by non-banks has grown just really fast. Most of it has been funded though with a private equity-like structure, where it's limited partners who are signed up for ten years to a general partner to invest that money. They're not depositors who can run. You know, your money is committed. So that funding model is kind of run-proof. That isn't some law of nature though. So and you do start to see shorter-term funding creeping in.

To your point though, Raghu, this very fast-growing and now quite large private credit part of the economy has not really been through a significant credit event or significant - it's really grown since the pandemic. And so just for that reason and for how fast it's growing we have a close eye on it. It doesn't have the same kind of prudential regulation though that the banking system has. So we're watching it carefully and as I mentioned it's a more stable funding source to the extent it's institutional investors signed up for a long period. But we're watching carefully."

Basel III endgame

"The Fed view, and my view, is that we should proceed to complete the Basel III accord. And we would have to do that and would look forward to doing that in conjunction with the FDIC and the OCC. But our view is - and I think the banks' view as well - is we should complete that. You need international minimum standards. That's kind of a common good. And you know we're not bound by them really, nothing. The United States has plenty of input into what those accords contain. Our view is strongly that we should complete those and we can do it relatively quickly. We're not so very far away from what would be a good I think outcome."

Crypto

"So we went through a wave of failures and fraud and things like that were the headlines for a couple of years. And I think what you see now is - and during that period by the way we were trying to work - we worked with Congress to try to get a legal framework for stablecoins, which would have been a nice place to start. We were not successful.

I think that the climate is changing. And you're moving into sort of more mainstreaming of that whole sector. So Congress is again looking at - both the Senate and the House - are looking at a framework, a legal framework for stablecoins. You know, depending on what's in it, that's a good idea - we need that. There isn't one now. And stablecoins are a product, a digital product that could actually have fairly wide appeal and should contain consumer protections of the typical sorts and transparency and that's what the Senate and the House are working on. So that's a positive thing.

I also think some of the - you know we took a pretty conservative and other bank regulators took an even more conservative perspective on the guidance and rules we imposed on banks. I think there will be some loosening of that. And I think we'll try to do it in a way that preserves safety and soundness but that you know permits and fosters appropriate innovation. But that does so in a way that again doesn't put consumers at risk in ways they don't understand or make banks less safe and sound."

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Stablecoin legislation is up for a vote to advance in the Senate on Thursday.

Price increases vs. the rate at which prices increase (i.e., inflation)

"First of all, I think you're right and I think the public is right. You know when we say inflation is back down to 2%, 2.5%, and we think that's a good thing, it is a good thing. But if you're paying 20% more than you were paying in 2021, that doesn't help you much. You're still paying a lot more than you used to be paying for the necessities of life. So it's just another way of saying people hate inflation and it's easy to understand why.

You know what we - all we can really control is - a world in which - the world we're living in. Prices don't go down in the aggregate except in extreme times that we don't want to court. So I don't think - we couldn't have a framework where we're going to bring prices down by 10% or something. That's not something we'll be looking at.

You know we're essentially looking at the best way to foster 2% inflation over time. And you know the things we did back in uh - the changes we made in 2020 were really innovations around what to do when you're stuck near zero. Now we're well above zero. And you know it may be that we still need to have in our framework a way to deal with that. But perhaps the main case is not one where you're dealing with the effect of lower bound. And that would be a framework that looks a lot more like the one that we had before 2020."

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The policy review should yield a more balanced consensus statement that will guide the Fed's monetary policy. The 2020 statement came in a world with low unemployment, low inflation, and low rates.

Objective of Quantitative Easing (QE)

"So in the beginning, it almost - it's typically - we're using it for financial market function. That was the case with the Global Financial Crisis and with the pandemic. And you know we did try to explain ourselves through the pandemic. And our explanations did change. But I think it's fair to say we might have done a better job of being clear about why were doing it. That's something that we're aware of and looking at."

AI's impact on productivity and employment

"So like everyone who has been exposed to what it's capable of, it's just, it's beyond - I mean I started thinking about it as like a better version of Google. But it's not. It's like the better version of a person. I mean it can do amazing things.

And so the question is, all through the 250 years of technological innovation, technology evolves and people worry that it's going to replace human labor and people will be unemployed. And that hasn't been the case. Or it may be the case in the short run but in the long run what it's done is raise human productivity and therefore living standards. So is this going to be the case where it eliminates more jobs than it creates and we just don't know. I mean, you come back in twenty years, will it be the case that just people are much more productive in their work because of AI. Or will it be the case that AI has just replaced a lot of people. And I think it's very hard to say.

But it truly is remarkable in what it's capable of. And it's um - you know - we had a demonstration by a Wharton professor recently - and you speak to it like it's a person. And it kind of responds like a person. And the things that it can do are really amazing. By the way this is early days. They're talking about even the next couple of years will bring more dramatic breakthroughs. So I think it's one of the two or three things most likely to bring dramatic change to the economy all around the world in the next twenty years. And I'd say very hard to say how it shakes out."

Key indicators and sources of data

"I'd say start with labor. There's more labor market data and better reliable labor market data than probably anywhere else. It's just a lot of data. And you know it's new jobs, it's payrolls, it's wages, it's participation. You can break all of those down in different categories. It's a million different things. So there's a lot of labor market data. It's a great field if you're going into economics because there's just so much to do.

So then we look at the inflation data. Also you know I keep track of global developments pretty carefully and I talk to my global counterparts pretty regularly just to stay aware of what's going on. Financial markets are really important and lately something that's - that we're paying close attention to, as you would expect, what's going on around the world in currency markets, in fixed income markets, in equity markets, all of that.

For me though, my background was more in the private sector as an investor for a significant part of my career. And I have to talk to outsiders about what they're seeing and what they're dealing with for it to really kind of fit together for me. I can look at only so much data.

But to really get the story and the narrative, it's more talking to outsiders. And you know anecdotal data does help things kind of fit together for me I would say."

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The Beige Book offers just the sort of anecdotal data that influences the Fed.

Fed independence

"So our independence is a matter of law. Congress has in our statute, we're not removable except for cause. We serve very long terms - seemingly endless terms. So we're protected in the law. So you know Congress could change that law, but I don't think there's any danger of that. Fed independence has pretty broad support across both political parties and in both sides of the hill. So I think that's not a problem.

There's a Supreme Court case - people will have read, probably in today's Journal - at which the Supreme Court may decide whether independent agencies generally, whether their authorizing laws can contain a provision that prevents the president from firing members of a commission other than for cause. And that's a case that people are talking about a lot. I don't think that that decision will apply to the Fed but I don't know. It's a situation that we're monitoring carefully.

Generally speaking, Fed independence is very widely understood and supported in Washington, in Congress where it really matters. And the point is we can make our decisions and we will only make our decisions based on our best thinking, based on our best analysis of the data about what is the way to serve our - to achieve our dual mandate goals as we can to best serve the American people. That's the only thing we're ever going to do. We're never going to be influenced by any political pressure. People can say whatever they want - that's fine, that's not a problem. But we will do what we do, strictly without consideration of political or any other extraneous factors."

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The precedent referred to here by Powell, a lawyer, is Humphrey's Executor. The president's opinions and preferences are not going to sway the Fed - nor should they.