Below are Jerome Powell’s comments I found most notable in the order they appear in the transcript. (Please note that in general I don’t necessarily agree with his comments, and in many cases disagree with them):
PELLEY: We have seen big swings in the stock markets in the United States. And I wonder, do you think the markets today are overvalued?
POWELL: We don’t comment on the valuation of the stock market particularly. And we do though, we monitor financial conditions carefully. Our interest rate policy works through financial conditions. So we look at a very broad range of financial conditions. That includes interest rates, the level of the dollar, the availability of credit and also the stock market. So we look at a range of things. And I think we feel that conditions are generally healthy today.
PELLEY: Generally healthy? One of your predecessors back in the ’90s famously said that the market in those days was irrationally exuberant. You don’t see that today?
POWELL: We don’t see much evidence of that today. There, as always, in our very highly developed and large capital markets, there are places you can point which are, let’s say hotter than others. But, generally speaking, credit spreads, which is the compensation you get above risk-free rates for taking credit risk, are at relatively normal levels. By some measures the stock market valuation is closer to its sort of normal levels over long periods of time. There are pockets though. There are things, for example, the leverage lending corporates. We’ve seen high growth in leverage lending to non-financial corporates. And that’s something we’re watching carefully.
PELLEY: Where do you see weakness in the U.S. economy?
POWELL: Generally speaking, the U.S. economy is coming off a very strong year last year. We had growth just a touch higher than 3%. And that strength was pretty widespread. You know we have high levels of employment, low levels of unemployment, wages are moving up. Consumer confidence is high, business confidence is high. We’ve seen a bit of a slowing, but still to healthy levels in the U.S. economy this year. So the U.S. economy does seem to be favorable. The outlook for the U.S. economy is favorable. I would say the principal risks to our economy now seem to be coming from slower growth in China and Europe and also risk events such as Brexit.
PELLEY: Retail sales declined in December, the fastest pace since 2009. Are these things taken together suggesting that the system is blinking red?
POWELL: Well, we look at a wide range of data. We never focus too much on one month’s report, on one series. And I think generally, the outlook for the U.S. economy remains a favorable one. You point to the retail sales number. And it was surprisingly weak. And we’re, of course, watching that. We’ll be watching the next month retail sales. The reason it’s a surprise is that we had lots of other reports of relatively healthy levels of spending over the holidays. And that comes from a number of different channels. And so we’ll be looking to see, there’s also evidence, by the way, that spending has popped back up in January. But that’s a surprisingly weak reading. And we’ll be watching the next month’s reading shortly.
PELLEY: But the overarching question is are we headed to a recession?
POWELL: The outlook for our economy, in my view, is a favorable one. It’s a positive one. I think growth this year will be slower than last year. Last year was the highest growth that we’ve experienced since the financial crisis, really in more than ten years. This year, I expect that growth will continue to be positive and continue to be at a healthy rate.
PELLEY: Where are you taking us? What is an ideal economy in your view?
POWELL: Well, I think of the direction I’d like to see us keep going. And that is right now, unemployment is at a 50-year-low. And we’re at a pretty good – we’re pretty close to price stability as well. But we have longer run issues. And it would be important for us as a nation to address these issues. In particular, you’re not counted as unemployed if you haven’t looked for a job in the last four weeks. And we have an unusually large number of people in their prime working years who are not in the labor force. The United States has a lower labor force participation rate than almost every other advanced country. That is not our self-image as a country. It’s very important that we bring people back into the labor force so that they can contribute to our shared prosperity and reap the benefits of doing so. The economy will be stronger and the country will be stronger if we can do that. Not all of the tools to accomplish that are the Fed’s. Many of them are in the hands of Congress.
PELLEY: What went wrong was that American banks let the country down. Are American banks safe today?
POWELL: American banking system is much, much stronger and more resilient than it was before the financial crisis. Particularly the largest banks have double or more the amount of capital, which is to say resources to absorb losses. They’re far more liquid. It’s often a lack of liquidity that causes a financial institution to fail. So they have far higher levels of liquidity. Because of stress testing they also have a much more forward looking sense of what the risks are that they’re actually running and the ability to manage them is much higher. In addition, we’ve required them to undergo resolution planning in case they do fail. There’s a plan for what to do, which doesn’t involve a taxpayer bailout. So overall, there’s no question that, not just the banks, but various aspects of the financial system, are in a much stronger place. We never declare victory on this. We are still working on it and we will continue to be vigilant because people’s lives can be permanently damaged by that kind of event. And we really want to avoid that.
PELLEY: But in 2007 the Fed missed the reckless criminal banking that was happening throughout our banking system. How do you know today that the banks are safe?
POWELL: Well, as I said, we spent ten years analyzing, understanding what went wrong and trying to correct it. And we’ve done a great deal. As I say, we don’t declare victory on this. We never will. We are going to keep our vigilance high on this. But overall, there’s no question in my mind that the financial system is much stronger and better able to perform its critical function in good times and bad.
PELLEY: A collapse of the financial system like we saw in 2008 cannot happen again?
POWELL: Cannot is a strong statement. You know, I would say that our system is vastly more resilient and strong than it was before the financial crisis.
The Special Note summarizes my overall thoughts about our economic situation