0:00 S0 Colby. Thank you. 0:08 S1 Colby Smith of The New York Times. 0:10 S1 There's been some debate about whether the Fed should look through the inflation that will come from higher oil prices 0:15 S1 sending from the Middle East conflict. 0:17 S1 Is that the right approach at this juncture? 0:20 S1 And to what extent does the fact that inflation has been above target for roughly five years now influence the 0:26 S1 committee's thinking around this? 0:28 S0 So, uh, 0:30 S0 first let me say we're well-aware of, um, 0:34 S0 uh, the performance of inflation over the last few years and how a series of shocks have, 0:39 S0 uh, have interrupted progress that we've made over time, and, uh, 0:42 S0 that happened most recently with tariffs and then, and now it will be some effects on inflation coming forward. 0:48 S0 Um, the, the thing that's really important that we see this year is progress, uh, 0:55 S0 on inflation through a reduction in goods inflation as 1:01 S0 the one-time effects on prices of tariffs go through the system, go through the economy. 1:05 S0 That's the main thing we're looking for going into this exercise, 1:09 S0 and we need to be seeing that, uh, to, you know, 1:12 S0 to sort of understand it, we actually are making progress because on net we didn't make progress. 1:17 S0 And if you look at total inflation, sorry, total core inflation, it's about 3%, 1:22 S0 and some big chunk of that, between a half and three-quarters is actually tariff, 1:26 S0 so we're looking for progress on that. 1:28 S0 The question of whether we look through, uh, the energy inflation doesn't really arise until we have kind of checked 1:35 S0 that box. 1:36 S0 It, of course, is kind of standard learning that you look through energy shocks, 1:40 S0 but that's always been dependent on, on, uh, inflation expectations remaining well-anchored, 1:45 S0 and I think now it's also dependent on, on what you mentioned, 1:48 S0 which is that broader context of, of five years now of inflation above target. 1:53 S0 We have to keep all of those things in mind and the question of looking through when it does arise 1:57 S0 will be one to approach not lightly, but, you know, in, in the context that you mentioned. 2:04 S1 A- and just on the SEP, can you help us make sense of why there is still a bias to 2:08 S1 cut for most officials this year despite the upward revision to headline and core inflation and the essentially unchanged forecast 2:15 S1 for growth and unemployment? 2:17 S1 Just curious kind of what, what's the genesis behind the need, what's the need for the cut? 2:22 S0 Yeah, so, you know, there are 19 people and so 19 reasons, 19 individual submissions. 2:27 S0 You know, but, but, it, and if you notice, um, the median didn't change, 2:32 S0 but there was actually some movement toward, a meaningful amount of movement toward, 2:36 S0 toward fewer cuts by, by people, so four or five people went from 2:41 S0 two to one, let's say, two cuts to one cut. 2:44 S0 Um, and e- each person has individual, uh, 2:49 S0 you know, 2:50 S0 stories behind, behind what they wanna do, but essentially it is that, you know, the, 2:53 S0 the, the, the forecast is that we'll be making progress on inflation, 2:57 S0 not as much as we had hoped, but some progress on inflation. 3:00 S0 It should come as we start to see in the middle of the year, uh, 3:04 S0 progress on, on tariffs, uh, you know, going through once and then tariff inflation coming down. 3:08 S0 That's, we should be seeing that. 3:10 S0 And, you know, the, the rate forecast is conditional on the performance of the economy, 3:15 S0 so if we don't see that progress, then you won't see the rate cut. Uh, Howard. 3:27 S2 Uh, thank you. Uh, Howard Schneider with Reuters. 3:28 S2 I, just to follow up a little bit and to be clear, um, 3:32 S2 is the higher inflations penciled in here for 2026 3:36 S2 solely the result of the oil shock or, or, or something else? 3:42 S0 So that's gonna be part of it, uh, but, you know, that wouldn't be most of core, right? 3:46 S0 So the oil shock for sure shows up here. 3:49 S0 Some of that will be in core as well, yes. 3:51 S0 But no, there, there's also just, just the, the, the feeling that we haven't seen, 3:55 S0 um, you know, the progress that we had hoped for on, uh, on core goods, 3:59 S0 uh, and on, on tariffs and on the rest of it. 4:01 S0 You know, we've, we've, so for whatever reason, people did write up their 4:06 S0 inflation forecasts that will certainly be tied to, uh, 4:09 S0 events in the Middle East and the price of oil, but it's also, I think, 4:12 S0 a reflection of, of, um, the slow progress we've seen on, on tariffs, which we believe we will see. 4:18 S0 It's just a question of how long it takes for them to get all the way through the economy and 4:22 S0 it takes, it just takes some time. 4:24 S2 Right. And is the, is the lack of change in the steps, again, 4:27 S2 just to explicate this a little bit, 4:30 S2 more due to the expectation that the oil portion of this will pass through 4:36 S2 or more out of concern that there is a potential blow, uh, 4:40 S2 to consumption and growth coming in the form of wealth effects with the stock market down in the form of 4:46 S2 gas prices, you know, uh, uh, diverting spending from other parts of the economy? Um... 4:52 S0 So, so I, I, on the, I didn't get the second part of your question. 4:54 S2 Well, the, well, the, the consumer's gonna be potentially diverting money to gasoline- 4:58 S0 Yeah. ... 4:59 S2 from other parts of the economy. 5:00 S2 There could be a growth shock, uh, or a redistribution of spending there that can hit consumption, wealth effects as 5:06 S2 well. Um, I guess I'm wondering are you not... 5:08 S2 is the rate forecast not changing because you think the oil shock is gonna be temporary or because you wanna 5:13 S2 be sure of your position in case growth starts to slow? 5:15 S0 So when, the thing I really wanna emphasize is that nobody knows. 5:19 S0 You know, the economics effect could be bigger, they could be smaller, they could be much smaller or much bigger. 5:23 S0 We just don't know. 5:24 S0 So people are writing down something that seems to make sense to them but have no conviction that, that, you 5:29 S0 know... To your point, if we have high, uh, you know, 5:33 S0 if we have a long period of much higher gas prices, 5:36 S0 that's gonna weigh on consumption, that'll weigh on disposable personal income and it'll weigh on consumption. 5:41 S0 But we don't know if that's gonna happen. 5:43 S0 It, it, something quite different than that. 5:45 S0 We might have much lower than expected pass through. 5:47 S0 So people write down, uh, you know, this is one of those SEPs where a number of people mentioned 5:53 S0 if we were ever gonna skip a, an SEP, this would be a good one because we just don't know. 5:58 S0 So I, I wouldn't say there's a, a conviction that this is gonna go through quickly or not quickly. 6:04 S0 It's just you gotta write something down and this is something that is, uh-... 6:08 S0 eh, eh, eh, that people wrote down, uh, and so, w- and, you know, 6:12 S0 we don't debate how long, eh, how do you do that? 6:14 S0 We wouldn't be able to debate what the length of, or, uh, or size of these effects would be. 6:18 S0 We just have to kind of make an individual statement. 6:21 S0 And, and you, also, you know, you, what you've written down before will be, 6:24 S0 you'll be reluctant to move too far away from that, just because you don't know. 6:29 S0 It's so unclear what the direction from this particular end will be. 6:32 S0 Meanwhile, the economy has, the growth has been solid, um, and inflation, the, 6:37 S0 the overshoot is mainly from, from the, the goods and tariffs. 6:41 S0 And, you know, the labor market, uh, is, um, l- the unemployment rate, of course, is little changed since September. 6:48 S0 Um, you have v- very, very low breakeven rate apparently for new jobs, 6:52 S0 with m- little growth in either demand or supply. 6:55 S0 But the US economy is, is doing, you know, pretty well. 6:59 S0 It's just, we don't know what the effects of this will be, and really no one does. 7:04 S3 Steve. Uh, Mr. Chair, in the past, the staff has suggested that, um, 7:12 S4 higher oil prices, um, 7:14 S4 they have a hit to consumption, which Howard was talking about, but that's somewhat offset by increase to domestic production. 7:21 S4 I wonder if you could talk about that dynamic, 7:22 S4 especially to the extent that h- how much US production is, is happening right now. 7:28 S0 So, the first thing is, there is, eh, you know, the original thinking, the, the, 7:33 S0 the, the longstanding thinking, put it that way, is that you do look through energy shocks. 7:37 S0 But as I mentioned, that's conditioned on inflation expectations and that kinda thing. So, sorry, your question was? 7:43 S4 The, the, what the staff is saying about, and has said in the past- 7:46 S0 Ah, yeah. 7:46 S4 ... about offsets, yeah. 7:46 S0 So there'd be an offset. Yeah. So that's, that's true. 7:49 S0 Uh, you know, we have, um, we're a net exporter of energy, right? 7:53 S0 So any, any effects on employment and economic activity and spending would be offset to some extent by the fact 8:00 S0 that our, our oil companies will be more profitable and they may even do more drilling. 8:04 S0 If you ask oil companies about doing more drilling though, they're gonna wanna see, 8:08 S0 you know, an, a, a consistent ri- rise in oil prices from where they were before the buildup for the 8:17 S0 war, uh, and they're gon- and they're gonna wanna believe that that's gonna be persistent for a fairly lo- fairly 8:22 S0 long time. 8:23 S0 So they're, they're not sitting there waiting for oil to go over $70 a, 8:27 S0 you know, a barrel and then they're gonna start drilling or whatever. 8:29 S0 They're gonna, they're gonna make a, a, a s- 8:31 S0 a reasoned careful judgment that we're gonna have higher oil prices for an extended period, meaningfully higher. 8:37 S0 So you don't, I wouldn't say there's much of that happening no- no- 8:40 S0 not much of it will be happening now, but some of that could happen over time if you see that. 8:44 S0 But, um, so there, you know, the net of, the net of it would, 8:47 S0 the net of, uh, of the oil shock will still be some downward pressure on spending 8:52 S0 and employment and u- and upward pressure on inflation, of course. 8:56 S4 And if I could just follow up on Colby's question, the, 8:58 S4 how much do you worry that having looked through tariff inflation and tar- 9:01 S4 and inflation running above target and looking through the oil price shock would undermine the credibility of your commitment to 9:08 S4 the 2% target? 9:09 S0 You know, we, we have to do our analysis a- and, and, and, you know, think these things through carefully. 9:15 S0 But of course, that's on everyone's mind. 9:16 S0 You know, we're, we're well aware of, of the history and, uh, 9:20 S0 but you don't wanna overreact to that, you know? 9:22 S0 You wanna make the best judgment you can based on, on the facts. 9:25 S0 We're not, I don't think we are gonna let it color our decision-making more than is appropriate. 9:30 S0 It's, it's more the thought that it's been five years and we've actually had, 9:33 S0 you know, we had the tariff shock, we had the pandemic, uh, and, 9:37 S0 and now we have an, an energy shock of some size and duration. 9:40 S0 We don't know what that's gonna be actually. 9:42 S0 And, you know, it's one of those things where it's, it's, 9:44 S0 it's a repeated set of things and you, you worry that that's the kind of thing that can, 9:50 S0 um, you know, can cause trouble for inflation expectations. 9:54 S0 And, and, and you, so we worry a lot about that, and we're, you know, 9:57 S0 we are very strongly committed to, uh, to doing what it takes to, to keep inflation expectations anchored at 2%. 10:04 S0 And, you know, w- I th- I think it's important that we, uh-