Author: Ye Zhen, Ge Jiaming, Wall Street News
On February 1, 2024, Federal Reserve Chairman Powell was interviewed by Scott Pelley, a reporter from the CBS 60 Minutes program, after the FOMC meeting. The interview was broadcast on Sunday, February 4, 2024.
Here are the key points summarized by Wall Street News:
The danger of being too hasty is that the work is not yet fully completed, or the good data from the past six months is not truly indicative of the direction of inflation to some extent. We don't think that's the case. But the cautious approach is to give it some time and see if the data continues to confirm that inflation is sustainably declining to 2%.
We are committed to gradually restoring inflation to 2% over time. We will not wait for the inflation rate to reach 2% before cutting interest rates. In fact, we are actively considering future interest rate cuts. Based on a 12-month basis, inflation is not at 2%, but between 2-3%.
We hope to have greater confidence in inflation falling to 2%. I think the committee is unlikely to reach that level of confidence in a timely manner at the March meeting, which is 7 weeks away.
In the quarterly report last December, the Fed predicted that interest rates would fall to around 4.6% this year. We will update them at the March meeting. However, I want to say that nothing has happened during this period to make me think people will significantly change their forecasts.
Our decisions do not consider political factors. Fortunately, historical records do support this. This is my fourth presidential election at the Fed, and political factors are not within our consideration.
In hindsight, it would have been better to tighten policy earlier. By the fourth quarter of 2021, it was clear that inflation was not the temporary kind I mentioned. So we turned and started tightening. As I said, it was crucial for us to do so, and it was one of the reasons for the decline in the inflation rate.
In the long run, the U.S. federal government is on an unsustainable fiscal path, which means that the growth rate of debt is faster than the growth rate of the economy. So, this is unsustainable.
We are actually borrowing money from future generations. Each generation should pay for what they need, rather than passing the bill on to our descendants.
There will definitely be some banks closing or merging and no longer existing, but I don't think the crisis of 2008 will be repeated. I also think we need to be cautious in our announcements—especially about the future. But on this issue, I do think it is a manageable problem.
After listening to the program, Nick Timiraos, a reporter from The Wall Street Journal, known as the "New Fed News Agency," wrote that the Fed's focus has now shifted to when to start cutting interest rates, and robust economic growth means they don't need to make hasty decisions.
Nick Timiraos pointed out that Powell's views on inflation can help the market judge the timing of the Fed's interest rate cuts. Powell emphasized two points: 1) We will not wait for the inflation rate to reach 2% before cutting interest rates; 2) We hope to have greater confidence in inflation falling to 2%.
Attached is the Chinese interview transcript:
PELLEY: Let me start with this. Is inflation dead?
Federal Reserve Chairman Powell: I wouldn't say that. What I can say is that inflation has indeed declined over the past year, and it has declined quite rapidly over the past six months. We are making good progress. The work is not yet completed, and we are very committed to ensuring full recovery of price stability for the benefit of the public.
PELLEY: But the inflation rate has been steadily declining for 11 months.
Powell: Yes.
PELLEY: You have avoided an economic recession. Why not lower interest rates now?
Powell: Well, our economy is very strong. The economy is growing steadily. The labor market is strong, with an unemployment rate of 3.7%. The inflation rate is also declining. In such a strong economy, we believe we can cautiously address the issue of when to start lowering interest rates.
And we hope to see more evidence that inflation is continuing to decline to 2%. We have some confidence in this. Our confidence is growing. We just want to have more confidence before taking this important step of lowering interest rates.
PELLEY: What are you looking at?
Powell: Basically, we want to see more good data. It's not that the data is not good enough. It's just that there are six months of data. We just want to see more good data in this regard. It doesn't need to be better than what we've seen, or even as good. It just needs to be good. So, we do expect to see this. That's why almost everyone on the Federal Open Market Committee believes that lowering interest rates this year is appropriate.
PELLEY: When?
Powell: It depends on the data. The best thing we can do is to weigh the risks of acting too early and acting too late, and make judgments in real time. So, I would say, based on our expectations, the time is coming. If we see weakness in the labor market, or if we see convincing evidence of inflation declining, then we would want to act more quickly. For example, if inflation becomes more sustained, we would want to act later.
PELLEY: What are the dangers of acting too quickly?
Powell: The danger of being too hasty is that the work is not yet fully completed, or the good data from the past six months is not truly indicative of the direction of inflation. We don't think that's the case. But the cautious approach is to give it some time and see if the data continues to confirm that inflation is sustainably declining to 2%.
PELLEY: Acting too quickly could reignite inflation.
Powell: Yes. I think it's more likely that if you act too quickly, you will see inflation stabilize at a level far above our 2% target. Therefore, we believe that we can make this decision cautiously because we see strong momentum in the economy.
PELLEY: What are the dangers of acting too late?
Powell: If you act too late, then the policy will be too tight. This can easily put pressure on economic activity and the labor market.
PELLEY: Leading to an economic recession.
Powell: Yes, we must balance these two risks. There is no simple and clear path. We must balance the risks of acting too early or acting too late. And there are different risks. We believe the economic situation is good. We believe inflation is declining. We just want to gain a little more confidence that it is declining to our 2% target in a sustainable way.
PELLEY: You disappointed a lot of people on Wednesday.
Powell: We are very focused on our work. We are focused on the real economy, doing the right things for the economy and the American people in the medium to long term. The importance of restoring price stability cannot be overstated. Price stability means a low and predictable inflation rate, something people don't have to worry about in their daily lives. In their daily economic lives, inflation is not something that can be discussed at all. We had 20 years like that. We want to return to that era, and I think we are heading in that direction. We just want to make sure of that.
PELLEY: Why is your target interest rate 2%?
Powell: In the past few decades, central banks around the world, as well as central banks in developed economies, have adopted a 2% target. The question is why it's not zero. The reason is that 2% is because the interest rate always includes an estimate of future inflation.
If this estimate is 2%, it means that the interest rate can be cut by more than 2%. If the interest rate is slightly higher, the central bank will have more ammunition and greater power to deal with economic downturns. In any case, this has become the global norm. It's a fairly stable balance that seems to serve the public well.
PELLEY: Have you promised to start lowering interest rates only after reaching 2%?
Powell: No, we didn't say that at all. We are committed to gradually restoring inflation to 2% over time. We will not wait for the inflation rate to reach 2% before cutting interest rates. In fact, we are actively considering future interest rate cuts. Based on a 12-month basis, inflation is not at 2%, but between 2-3%. But it is declining in some way, which gives us some comfort.
PELLEY: So what is your best prediction for inflation at the moment?
Powell: I think the basic situation is that my main expectation is that we expect the inflation rate to continue to decline in the first six months of this year. So, we look at inflation on a 12-month basis. That's our target. The first five months of last year were quite high readings. Those data will drop out of the 12-month window and be replaced by lower data. So, I do expect that you will see a decline in the 12-month inflation data this year. We see that inflation pressure is indeed declining, and there are several reasons for this.
One is the reversal, the unusual distortions related to the epidemic that have affected both supply and demand are easing. Another is our policy tightening, which is absolutely necessary and one of the reasons for the decline in inflation. So far, it's not all.
PELLEY: Inflation is one thing. Prices are another. I wonder if there is reason to believe that people will see prices of things go down?
Powell: So, the prices of some things will go down. The prices of other things will go up. But we expect that the overall price level will not decline. This situation often does not occur in an economy unless it is in a very negative situation. However, what you will see is that inflation is declining.
People are experiencing high prices. If you think about basic necessities like bread, milk, eggs, and various meats, if you look back, the prices are much higher than before the epidemic. So, we believe this is an important reason for people's relative dissatisfaction with what was originally a fairly good economic situation.
PELLEY: But those prices won't soften unless there's an economic recession.
Powell: Some will. Especially things affected by commodity prices, such as gasoline prices, have already dropped a lot. The prices of food containing commodities, grains, and so on will drop.
But the overall price level will not decline. It will fluctuate. Some goods, commodities, and services will rise, and some will fall. But overall, the price level will not decline unless in quite extreme circumstances.
PELLEY: Many financial industry professionals expect you to lower interest rates at the March meeting.
Powell: We are very focused on doing the right things for the economy in the medium to long term. Of course, we pay attention to the market, and we understand what is happening in the global financial markets. This is part of our work.
But I want to say that our focus is on the goals given to us by Congress, which are maximum employment and price stability. So, the overall situation we see now is that we have strong economic growth. We have a healthy labor market, with the unemployment rate at historically low levels, and our inflation rate has declined.
This is a very positive combination. It's a good economy. We have every reason to believe that it will continue to get better, provided that nothing happens around the world to disrupt this situation. In addition, we are focused on using our tools to ensure that this is happening.
Part of this is choosing the time to start withdrawing restrictive policies. We want to handle this issue cautiously. This is a very important decision. I said yesterday after the FOMC meeting ended that we will handle this issue cautiously.
PELLEY: The next meeting that will decide the direction of interest rates will be held in March this year. Based on what you know now, is the likelihood of a rate cut at that time high or low?
Powell: The overall situation is that the economy is strong, the labor market is strong, and inflation is declining. My colleagues and I are working hard to choose the right point to adjust our restrictive policy stance.
That moment is coming. We have said that we want to have greater confidence in inflation falling to 2%. I would say that I did say yesterday that I think the committee is unlikely to reach that level of confidence in a timely manner at the March meeting, which is 7 weeks away.
So, I would say that this is not the most likely situation or the basic situation. However, except for a few participants, all of us believe that it is appropriate to start adjusting our restrictive stance through interest rate cuts this year. So, we will definitely do that, and that's the basic situation. We are just trying to choose the right time in the overall context.
PELLEY: In the quarterly report last December, the Fed predicted that this year's rate cut would fall to around 4.6%. Is that still possible?
Powell: These forecasts were made in December last year. These are individual forecasts made by participants. It's not a committee plan. We won't update these plans at every meeting. We will update them at the March meeting. However, what I want to say is that nothing has happened during this period to make me think people will significantly change their forecasts.
PELLEY: So, the interest rate may be around 4.6%?
Powell: I would say that it really depends on the data. The data will drive these decisions. And our best way is to look at this data and then ask ourselves, "How does this affect the outlook and the balance of risks?" That's what we're going to do. So, the actual actions we take will depend on the development of the economy.
PELLEY: What is the consensus among the participants on the issue of interest rate cuts? Is everyone in agreement? Most people?
Powell: Almost everyone. Almost all 19 participants sitting around this table believe that, in their most likely scenarios, it is appropriate for us to lower the federal funds rate this year. So, the consensus among everyone when we discuss this issue at the meeting table is that what we really need to do will depend on the development of the economy.
So, if the economy weakens, then we can cut interest rates earlier, or perhaps faster. If the economy can prove—if inflation can prove to be more sustained, then the time for us to cut interest rates may be later, or perhaps slower. So, this really depends on new data, as this data will affect the outlook.
PELLEY: Your decisions will inevitably have an impact on this year's elections. I wonder to what extent politics determines your timing?
Powell: Our decisions do not consider political factors. We never consider politics. And we never will. I think the record—fortunately, historical records do support this. People have looked back. This is my fourth presidential election at the Fed, and political factors are not within our consideration, and I'll tell you why.
Two reasons. First, we are a non-political organization serving all Americans. It would be wrong for us to start considering politics. Second, it's not easy to get the economics of this aspect clear from the start. These are all complex, you know, risk-balancing decisions.
If we try to integrate another set of political factors into these decisions, it will only lead to worse economic outcomes. So, we won't do that, and we won't do that. We haven't done it in the past, and we won't do it now.
PELLEY: Some people are watching this interview, and they are skeptical about it.
Powell: Integrity is priceless. In the end, that's all you have. We plan to maintain ours.
Pelley: When you consider adjusting interest rates, what specific factors in the economy will guide you in making this decision?
Powell: So, we look at the overall economic activity, and I want to point out two things in particular. One is the process of inflation, what is happening with inflation. What is the story behind these numbers we see?
Are we seeing progress in continuing to decline to 2%? Is it giving us more confidence that we are sustainably on the path to 2%? This is very critical. The second thing is, you know, we are a dual-mandate central bank. We have a maximum employment mandate, which is equivalent to our price stability mandate.
So, we will study a lot of labor market data to make judgments about the continued strength of the labor market. So now, what we see in the labor market is a very strong labor market. But this is a return to a better balance.
If you go back a few years, there was an extreme labor shortage, an overheated labor market. Companies couldn't find workers. After the pandemic, we lost millions of people without jobs. We are in a better place now. People have returned to the labor market. The workforce has increased. The labor market is on the path to returning to a better balance. We will closely monitor these things.
PELLEY: You said you are looking at the story behind the numbers. What do you mean by that?
Powell: Sometimes what happens will tell you a lot about the true direction of things. Sometimes they seem special or temporary. This means they will quickly disappear without us taking any action. So, we have to make judgments about this.
When you see any set of economic data, you have to ask yourself, "Well, how much does this tell me about the future?" What is the past. That's the rearview mirror. What we have always been trying to determine is what will happen in the future. And that's not easy.
But you must distinguish between those that will have a lasting impact and those that won't. So, the story is indeed important. For example, regarding inflation, we divide it into commodity inflation, housing service inflation, and non-housing service inflation.
Behind these three buckets, a lot of things are happening. We don't care what the proportions are, but they must all point to inflation falling to 2%. By the way, we believe this is the case. We believe we are making progress. We just want to have more confidence in this regard. We believe that before taking this important step, we should have more confidence so that we can better serve the public.
PELLEY: I'm curious. Chairman, do you have a favorite measure to gauge the pulse of the economy?
Powell: A single measure?
PELLEY: Just something where you see it and think, "This really tells me something."
Powell: I might limit myself to 20 measures. I can't determine a single measure. I would say, you know, there's so much in the labor market. The labor market is where we have a lot of data, and the quality of the data is better than in many places. So, all of us are focused on a lot of things.
We tend to target inflation. Overall inflation, total inflation, including energy and food prices, that's our target. But we focus on core inflation, which excludes energy and food prices, as it often better indicates the direction of things.
PELLEY: Why is the inflation rate soaring in 2021?
Powell: You know, it's a complex economic story. So, there are many factors. One important factor I want to mention is the impact of the pandemic. We have indeed seen inflation outbreaks around the world. In fact, this is a unique event in modern history, with the economy temporarily shutting down and then reopening.
This has had a significant impact on the available labor force in many countries, including the United States. But when the economy reopens, there is a lot of pent-up demand. Additionally, the things people spent money on during the pandemic were not spent on face-to-face services.
So, no restaurants and such. So, they bought a lot of things. So, all of these impacts are significant. Fiscal policy certainly plays a role, supporting people. These are also the effects of monetary policy, which has supported the economy. There are many, many factors. Conversely, now inflation is declining, and this is also a story with many factors at play.
PELLEY: The government's spending amount is astonishing. To support economic development.
Powell: Well, yes. You know, we've had situations where the CARES Act passed both the House and the Senate unanimously. I wonder when this will happen again. Very unusual. This is because the pandemic is truly so unique, and the range of possible outcomes is wide and not in a good way.
For example, we don't know how quickly a vaccine will appear. It could take years. We don't know how deadly the pandemic will be. So, people are very concerned about the economy.
Congress has really stepped up, and we have really stepped up, you know, inflation arrived in March 2021. So, this is what's really happening. But this is caused by many different factors, some of which are just due to the economy shutting down and reopening.
PELLEY: Is the Fed too slow to realize the inflation in 2021?
Powell: So, in hindsight, it would have been better to tighten policy earlier. I'm glad to say that. Really, it is. What we see is what we thought was inflation, which seems to be mainly a story of the goods sector and the supply chain. We originally thought that the economy was so vibrant that it would self-correct quite quickly. We originally thought that inflation would disappear quite quickly without our intervention.
It would be temporary. This view was widely accepted. Economists around the world did not hold this view uniformly and very widely. The data were friendly to this assessment and assumption until it turned out not to be the case.
So in the fourth quarter of '21, it was clear that inflation was not the temporary kind I mentioned. So, we turned and started tightening. As I said, it's crucial that we do this, and this is also one of the reasons for the decline in the inflation rate.
PELLEY: The key is that you did it.
Powell: Yes, it's crucial that we did it. We had to do it. We did it, and I'm glad we did. I don't think we would have come to this point now. Also, we are not the only reason for the decline in inflation. But part of the reason is that we have intensified and raised rates.
Indeed—tightening monetary policy is now working, and the supply side is recovering. Everyone knows that the distortions caused by the pandemic are being eliminated, and these distortions initially fueled inflation.
PELLEY: In your view, were these sharp and repeated rate hikes absolutely necessary?
Powell: In my view, yes.
PELLEY: Even though they caused pain?
Powell: Well, interestingly, you know, we are honest, and I am honest in saying that we thought there would be pain. We thought that, as in many past cycles, pain would likely come in the form of a higher unemployment rate. But that situation did not happen.
It really didn't happen. The economy continued to grow strongly. The job opportunities created were also high. You know, the unemployment rate is still bouncing near its lowest level in 50 years. The labor market is still very, very strong. So, the kind of pain we were worried about, we haven't experienced it yet. This is a very good thing. And, you know, we hope this situation continues.
PELLEY: It's a very good thing, and also a very strange thing. Most economists will tell you that only an economic recession can lower interest rates. But that didn't happen. I wonder why?
Powell: Yes, this is unusual in history. I think that when we look back many years later, we will be able to say more clearly what this is and why it is like this. But I want to tell you why I think this is the case. That is the distortions in demand and supply related to the pandemic.
So, on the demand side, people spent a lot of money on goods, but not much on services. As for supply, if you look at cars—cars are a good example. Now you need a lot of semiconductors to make cars. I have to admit, I didn't realize this at the time.
But there is a shortage of semiconductors because many people are buying goods involving a large number of semiconductors. So, when there was a surge in demand for cars because people didn't want to use public transportation, they moved to the suburbs, when this happened, you couldn't get semiconductors, you couldn't make cars.
So, there was a shortage of cars. So, what happened was that inflation soared. But with the recovery of semiconductor supply, prices and inflation have eased a lot. So, in fact, these unique features of the pandemic have indeed reversed inflation to some extent and reduced inflation.
PELLEY: So, this doesn't prove that there has been a fundamental and lasting change in the U.S. economy.
Powell: The result of the pandemic? I think we don't know. I've thought about a few things. One is working from home. This is a change. We do see that this seems to be a lasting thing. As for how frequent or widespread this situation will be, there is currently no consensus.
But this is a new thing, and I think it's different. The pandemic will bring other things. We are now communicating better at home and elsewhere. Remote communication suddenly appeared, including video. Suddenly, all of our calls can be video calls. This is a new thing.
PELLEY: I've recently talked to many young couples, and they say they can't imagine how they can afford a mortgage today. What would you say to them?
Powell: Well, Congress has given us the task of maximum employment and price stability. This means that when inflation arrives, when high inflation really has a sustained danger, we will use our tools to lower inflation. This is very important for young couples, especially for those who are just starting out but are not in good economic conditions, our efforts will be successful.
We will be successful. We will definitely do this. But this means that spending sensitive to interest rates, such as mortgages and purchasing durable goods, will be expensive for a period of time. This will slow down economic growth. But all of this is to return to a state of price stability, where interest rates can be low again on a sustainable basis.
PELLEY: Are you asking the American people to be patient?
Powell: Yes. I think people have been very patient and have gone through a quite difficult period. I think now we are getting through that time, and the feeling about things is starting to get better. Mortgage rates have dropped as expected, dropping a bit in the expectation of low rates.
However, you know, when we need to, we will do as required. That is, to make efforts to slow down the economy a bit. In the interest rate-sensitive areas, especially in the real estate sector, lowering inflation rates is a good example of slowing down inflation when interest rates rise.
PELLEY: The real estate market is declining. Hiring is also slowing down. I wonder if these yellow lights indicate an economic recession?
Powell: We are closely monitoring. I would say that there is always a possibility of an economic recession at any time. But I wouldn't say the likelihood of a recession has not increased completely now, and I'll tell you why.
We have just ended a year of 3.1% economic growth. This is a very healthy growth rate. The growth rate in the fourth quarter is actually a bit better than this number. So, the growth is still good. You're right, the net hiring of businesses and non-profits is declining.
But it's declining from a very, very high, unsustainable level. It has been gradually declining. It is still at a very, very healthy level. I think we added 165,000 jobs per month last quarter. That's a good number for an economy of our size.
So, the labor market is still very healthy. We are highly focused on any evidence of weakness in the labor market. Overall, you have to say that what we are seeing, what we hope to see, is the labor market returning from the overheating of a few years ago to more normal data, returning to a better balance. So, the level of resignations, the level of job vacancies, the level of job creation, the level of wage growth, all of these are gradually returning to the typical, truly healthy pre-pandemic economy.
PELLEY: How do you assess the national debt?
Powell: We work very hard not to comment on fiscal policy, not to guide Congress on how to do their job, even though they have oversight over us. So, national debt does not play a big role in our thinking. In fact, it doesn't play any role in our thinking. When Congress engages in deficit spending, it can be stimulative, and that enters our models. But we do not in any way judge fiscal policy; it's simply not our responsibility.
PELLEY: But in your view, does the national debt pose a threat to the economy? You are the central banker of this country.
Powell: In the long term, the U.S. federal government is on an unsustainable fiscal path. This simply means that the growth rate of debt is faster than the growth rate of the economy. So, it's unsustainable. I think there's no dispute about this. I think we need to get back on a sustainable fiscal path. You're starting to hear from elected officials that they can do this. Now is the time for us to get back to this focus.
I think the pandemic is a very special event that has led the government to really spend money to counter what looks like a very serious downside risk. It may be time to get back to adult conversations between elected officials and get the federal government back on a sustainable fiscal path.
PELLEY: I sense that this worries you.
Powell: In the long run, yes, it does. We are actually borrowing from future generations. Each generation should pay for what they need. It can lead to the federal government buying what it needs, but it really should pay for these things, not pass the bill on to our descendants.
I think there's no dispute about this. But politically, it's very difficult. It's not our business, really. But I do think that people generally feel that now is the time for us to make fiscal sustainability a priority again. And the sooner, the better.
PELLEY: Urgent?
Powell: Yes, you could say it's urgent.
PELLEY: With people working from home, the value of commercial office buildings across the country is declining. These buildings underpin the balance sheets of banks nationwide. How likely is another banking crisis triggered by real estate?
Powell: I think it's unlikely. As you pointed out, the situation now is that we have a work-from-home model, and you have weaknesses in office real estate as well as retail, downtown retail. You have some of these weaknesses. There will be losses.
We have looked at the balance sheets of the large banks, and this seems to be a manageable issue. There are some smaller regional banks that are challenged by the risk exposure in these areas.
And, you know, we are working with them. This is something we have been aware of for a long time, and we are working with them to ensure they have the resources and plans to work through the expected losses. Expected losses will occur.
This seems to be a problem that we will be studying for many years. It's a fairly big issue. I don't think—it doesn't seem to have the conditions for a crisis that we have sometimes seen in the past, such as the global financial crisis.
PELLEY: Do you think this is a manageable issue?
Powell: It looks like it.
PELLEY: We won't see banks collapsing nationwide as we did in 2008?
Powell: I don't think the crisis of 2008 will be repeated. I also think we need to be cautious in making statements—especially about the future. Things have surprised us greatly. But on this issue, I do think it's a manageable issue. I think we are doing a lot to manage it.
Certainly, there will be some banks that will close or merge as a result, no longer exist. I guess most of them will be smaller banks. You know, these are losses. This is a long-term change in the use of downtown real estate. The result will be losses for property owners and lenders, but it should be manageable.
PELLEY: How big is the threat of cyber attacks to the U.S. banking system?
Powell: The U.S. banks, the government, and everyone who supports the banking system are very focused on cyber attacks. This is another kind of risk. The traditional risks are more— you make bad loans, or depositors decide to take their money out of the bank, things like that.
This is very different. And a lot of attention, a lot of spending, and work are being done to protect financial institutions, not just banks, but also financial market utilities, various financial companies—trying to ensure that this situation does not occur. You fight this battle every day. It never ends. So I think we are really committed to that.
PELLEY: Is the Fed doing enough to help these banks?
Powell: I think we have our role, we are not the biggest player, but we have a role to ensure that the banks we supervise and regulate have good cyber defenses. Many parts of the government are involved in this. The banks themselves are also investing a lot of money in cyber protection.
PELLEY: How confident are you?
Powell: It's a dynamic process. I mean, we are certainly very aware of this risk. And it tends to evolve. And, you know, attackers are always raising their game, and defenders also have to keep raising their game.
You have to keep investing, keep up or stay ahead. It never stops. So I think it's a constant race to keep up and protect these institutions. So, that's what we're doing. That's what we've been doing for many years. We will continue to do so.
PELLEY: From a big picture perspective, what do you think is the biggest threat facing the world economy today?
Powell: In the short term, I would point to geopolitical risks. So, the global economy is now broadly recovering from the pandemic. You can see inflation is declining around the world. But people are concerned about the Russia-Ukraine conflict. There's also a war in the Middle East. There are potential troubles in Asia as well.
So, all of these represent risks. Currently, the impact on the U.S. is relatively small. I think Europe feels the Russia-Ukraine conflict much more directly than we do, for example, the impact on shipping rerouting around the Horn of Africa has a much greater impact on Europe than on us.
But I think these things are happening in the short term. But overall, people have been writing articles recently, raising expectations for global growth. This year looks like it's starting to be a better year, but these are some short-term risks.
PELLEY: Are you more optimistic than pessimistic?
Powell: About the global economy? Overall, yes, but considering these risks. The question will be, "Will these risks evolve into a real major economic problem?" That hasn't happened yet. It could be oil prices. It could just be the spread of conflict and a hit to public confidence. But we haven't seen that yet. There is risk. It's a real risk, and we are aware of that.
PELLEY: What do you think is the most important factor for future prosperity in the United States?
Powell: What is the most important factor? Well, if you'll allow me, I'll mention two things. One is that I think we need to remember that we have this vibrant, innovative, flexible, and adaptable economy. More so than other countries. This is also a key reason why our economy has been so successful.
In fact, the credit for all of this goes to the American economy, and the families and businesses that have gone through all of this. When the pandemic hit, what did people do? The number of businesses they started hit a record high. Over time, this will lead to higher productivity, and in turn, a higher standard of living. So, I think we need to remember that this is a great thing we have and celebrate it.
Another thing I want to point out is that for the United States, you know, in this position, I have spent quite a bit of time on the international stage, basically with other central bank governors and other economic officials. People really do crave American leadership.
In fact, since World War II, the United States has been an indispensable country in supporting and defending democracy, security arrangements, and economic arrangements. We have always been the leading voice in this regard. It's very clear that the world wants this. I hope America knows, the American people know, that this has greatly benefited our country. Serving in this role is very beneficial to our economy. I just—I hope this situation can continue.
PELLEY: Engaging with the world?
Powell: Yes. Engaging with the world is very beneficial to our country. As supporters and defenders of democracy, in security arrangements and economic arrangements, we have always been a key voice. I hope this will continue for the benefit of the people we serve.
PELLEY: This is your second term as chairman. I wonder what you hope your legacy will be.
Powell: I am very focused every day on doing this job until I'm no longer doing this job. That's all you can really do. There are many things that are beyond your control. So, I hope that when I look back, I can say that I did my best, and I made the right decisions for the right reasons.
Some things won't succeed. Some things will. But ultimately, if you made the right decisions for the right reasons at the time and did your best, that will make me feel that I did my best when I look back.
PELLEY: I mean, most people thought a soft landing for the economy was impossible. Yet, you seem to have achieved it.
Powell: Well, I would say we haven't yet. I'm not ready to say that. We still have work to do in that regard. But it is indeed an historically unusual outcome. I think there are many factors behind it. But I haven't factored those in.
PELLEY: Mr. Chairman, following up on the issue of our banking problems. You seem to have confidence in the banks, but Silicon Valley Bank, the second-largest failed bank in American history. Did the Fed overlook this?
Powell: Yes. You know, things happened, and we candidly see that we need to do better. So, we have spent a lot of time studying how to make regulation more effective and make regulation more adaptable to the modern environment, where bank runs happen much faster than 20 years ago. So, we have acknowledged and immediately accepted this.
PELLEY: Bank runs happen faster than 20 years ago due to the communication available today?
Powell: Yes.
PELLEY: It catches fire.
Powell: Yes, with social media, and banks have a high proportion of uninsured depositors who actually feel they have reason to run. So, this is very unusual—it's a characteristic shared by only a very small number of banks, very few banks.
It's not the entire system. It's just these—but I think as we review it, we would say, "Regulation should be more effective, and we also need to find regulations that have been consistently effective." Considering the sources of bank funding, they need to better ensure that banks have proper liquidity and adequate liquidity. In this case, uninsured deposits make up over 90% of their total deposits.
PELLEY: Have you made any changes since then? If so, what changes?
Powell: Yes. So, we are steadily changing regulation to make it more effective. In fact, we are now developing proposals for regulation. We want to get this right. We want to learn the right lessons and get things right.
So, we are studying these proposals in terms of regulation. I think we will come up with something to consider this year. When we make a rule, we put it out for comment. Then we look at those comments, and we try to get a good outcome.
PELLEY: Mr. Chairman, the next question is about the stable labor market we discussed earlier. What are the important factors leading to the stabilization of the labor market?
Powell: One is the return of workers. As I mentioned, millions of people left the labor market for various reasons. Many of them don't want to return to their previous jobs, because of COVID, or because they just don't want to. They have moved on with their lives.
So, there is a severe shortage of workers. What has happened is that we expected people to return to the labor market in 2022. But most of them didn't. Then we thought, "Well, maybe this won't happen."
Then, it happened in 2023. We saw an increase in labor force participation among prime-age workers, and at the same time, we also saw a recovery in immigration. During the pandemic, there was really no net immigration, or very little.
But in 2023, we saw immigration return to pre-pandemic levels. These two things together have had a real impact on labor supply. So, it's really a supply story that I want to point out.
PELLEY: Why is immigration so important?
Powell: Because, when immigrants come in, their pace of work often exceeds that of non-immigrants. Immigrants coming to the U.S. often have slightly higher labor force participation than Native Americans. But this is largely due to age differences. They are often younger.
PELLEY: Why is immigration so crucial to the economy?
Powell: First of all, immigration policy is not the Fed's job. Immigration policy in the United States is really important, and there is a lot of discussion about it now, but it's not our business. We don't make immigration policy. We don't comment on it.
But I would say that over time, the U.S. economy has benefited from immigration. Frankly, a big part of the story of the labor market returning to a better balance last year is the return of immigration to more typical pre-pandemic levels.
PELLEY: This country needs workers.
Powell: Yes. So, that's what's happening.
PELLEY: When can we look back and fully understand what has happened to the economy in the past few years?
Powell: We are obviously making progress on addressing this issue. I would say that this is the first time that inflation is declining. The labor market is normalizing. Economic growth is recovering. The composition of demand is returning to previous levels.
So, we are achieving this goal. But I think the final normalization may take a few years. It's not a big deal. It's just the continued normalization of the labor market and the economy. It may take a few more years.
Then, we will look back, and I think I have been reluctant to try to draw big lessons until (things stabilize), because they will change. What we thought we learned two years ago, we would now say something completely different.
Two years ago, three years ago, we hadn't seen inflation. The last time we were together was in April 2021, that was before the big surge in inflation. So, I think we need to let things continue to develop, and I think we will better draw these lessons a few years from now.
PELLEY: You seem to be saying that brighter days are ahead.
Powell: Well, I would say so. The economy is strong. The labor market is strong. The inflation rate is declining. There's no reason why it can't continue. We will try to use our tools to allow the economy to continue to improve as inflation declines. We will give it every chance to do so. That's our plan. We don't have a perfect crystal ball about the future, things may happen. But I do think the economy is in a good position, and there are ample reasons to believe it can get even better.
PELLEY: Thank you again, Mr. Chairman.
Powell: Thank you.
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