After steering the U.S. central bank through an unprecedented series of challenges from the pandemic, Federal Reserve Chair Jerome Powell and the Federal Open Market Committee face another critical test: controlling the highest inflation in decades without tipping the economy into a recession. 

Last week, the Fed announced the biggest interest hike in 22 years and plans for reducing the Fed’s nearly $9 trillion balance sheet.

“What we can control is demand, we can’t really affect supply with our policies,” Powell told Marketplace host Kai Ryssdal in an interview Thursday. “And supply is a big part of the story here. But more than that, there are huge events, geopolitical events going on around the world, that are going to play a very important role in the economy in the next year or so. So the question whether we can execute a soft landing or not, it may actually depend on factors that we don’t control.”

The following is a full transcript of the interview.

Kai Ryssdal: Mr. Chairman, welcome to the program. Good to have you back on.

Jerome Powell: Thanks, Kai, it’s great to be here.

Ryssdal: Let me start with your most recent press conference. At the beginning, you went out of your way, I think it’s fair to say, to speak directly to the American people — you actually use those words. Do you think you’re getting through to the American people?

Powell: Well, I hope we are. So you know, most of the people who listen to the press conference and follow our communications very carefully are market participants or economists, Fed watchers of various kinds. And I thought it was important to try to speak directly to the public that we serve and tell them that we understand that inflation is very painful, that the Fed is accountable to get inflation down to 2%, and that we have the tools and we have the, you know, the strong desire to get inflation under control. And we’ll do that.

Ryssdal: I don’t doubt that they take you at your word that you want to get this under control, and that price stability, in Fed speak, is critical to this entire economy. I wonder what you say, though, to the person who — as you tighten up on interest rates and slow the economy down, right, which is the plan — what do you say to the person who’s going to lose his or her job, or maybe not see the pay raise that they ordinarily would get?

Powell: So you can see that inflation is just way too high here in the United States. And by the way, the same all over the world, really, the global economies all around the world have been hit by a series of inflationary shocks and, pretty much, I just came back from a set of meetings with central bankers from around the world, and we’re all facing the same kind of issues and the public are facing the same kinds of issues. 

Ryssdal: Worse here, though, worse here, to be clear, right? 

Powell: Some places worse, some places better. We’re facing different challenges, but then again our economy’s more fully recovered, they may be just behind us in time. But what would I say to that person? So I would say that we fully understand and appreciate how painful inflation is, and that we have the tools and the resolve to get it down to 2%, and that we’re going to do that. I will also say that the process of getting inflation down to 2% will also include some pain, but ultimately the most painful thing would be if we were to fail to deal with it and inflation were to get entrenched in the economy at high levels, and we know what that’s like. And that’s just people losing the value of their paycheck to high inflation and, ultimately, we’d have to go through a much deeper downturn. And so we really need to avoid that.

Ryssdal: What keeps you up more at night: the prospect of inflation sticking around? Or the idea that you’re going to cause a recession?

Powell: Well, look, I think it’s a very challenging environment to make monetary policy. And we certainly, our goal, of course, is to get inflation back down to 2% without having the economy go into recession, or, to put it this way, with the labor market remaining fairly strong. That’s what we’re trying to achieve. I think the one thing we really cannot do is to fail to restore price stability, though. Nothing in the economy works, the economy doesn’t work for anybody without price stability. We went through periods in our history where inflation was quite high. This was back in the ‘70s, and I was old enough to remember. I’m old enough to remember that very well. And we really, we can’t fail to restore price stability.

Ryssdal: How much do you think it matters, just on that idea of the 1970s, how much do you think it matters that there are generations of people in this economy who know nothing but 2% inflation or less for, like, 50 years now? And that’s why this is scary as hell, right?

Powell: Well, look, I would, I guess I would say it this way. You know, it’s a good thing that we haven’t had high inflation, really, in 40 years. It’s a great thing. You know, we … the ‘70s and the ‘80s, it’s a very unpleasant phenomenon. And people are now, for the first time — many people, as you point out, are young enough that they haven’t experienced that, and now they’re seeing what it is. And it’s unfortunate, I wish they weren’t, I wish that all of this hadn’t happened and we still had 2% inflation. And we need to get back to 2% inflation, that’s the main thing. The main lesson is we must do whatever, you know, what we need to do to get inflation back to 2%. And we have the tools to do that. And we will.

Ryssdal: You’ve said you’re going to do whatever you need to do. At that last meeting, you specifically took a 75-basis point increase in the federal funds rate — that is to say, three quarters of a percentage point — you took it off the table. Why?

Powell: Well, actually, what I what I said was that we were, that the committee had decided —

Ryssdal: “Not actively considering,” right? That’s —

Powell: I said we weren’t actively considering that. But I said what we were actively considering, and this is just a factual recitation of what happened at the meeting, was a 50-basis point increase, that’s a half a percentage point increase, the first one in more than 20 years. And that we thought that if the economy performs about as expected, that it would be appropriate for there to be additional 50-basis point increases at the next two meetings, so. But I would just say, we have a series of expectations about the economy. If things come in better than we expect, then we’re prepared to do less. If they come in worse than when we expect, then we’re prepared to do more.

Ryssdal: Let me be clear, 75-basis points is “prepared to do more?”

Powell: What you’ve seen is, you’ve seen this committee adapt to the incoming data and the evolving outlook. And that’s what we’ll continue to do.

Ryssdal: You also talked about a pathway. You said it’s going to be challenging, to get to this mythical soft landing. What does that pathway look like?

Powell: So a soft landing is, is really just getting back to 2% inflation while keeping the labor market strong. And it’s quite challenging to accomplish that right now, for a couple of reasons. One is just that unemployment is very, very low, the labor market’s extremely tight, and inflation is very high. So it will be challenging, it won’t be easy. No one here thinks that it will be easy. Nonetheless, we think there are pathways, as you mentioned, for us to get there. And really what that means is just as we raise rates, we — so the problem, what causes inflation, is that demand and supply are out of whack. There’s too much demand. For example, in the labor market, there’s more demand for workers than there are people to take the jobs, right now, by a substantial margin. And, because of that, wages are moving up at levels that are unsustainably high and not consistent with low inflation. And so what we need to do is we need to get demand down, give supply a chance to recover and get those to align. So how might we do that? Right now, in the labor market, there are two job openings for every unemployed person. It’s historically high-level. So in principle, and I’m not saying this will be easy to do, in principle, you could moderate demand, reduce demand to the point where job openings move down substantially, and the labor market gets much closer to being in balance. And that would affect … wages would still be moving up at healthy levels. They wouldn’t have to go down, but ultimately they would be at levels that would be consistent with 2% inflation.

Ryssdal: So here comes the poke-you-in-the-eye question. Did you blow it, in being late and failing to recognize that inflation was going to stick around?

Powell: So the way I’d put it was this: We were — if you go back to the economy of February of 2020, right before the pandemic, 3.5% unemployment, inflation right on target, a little below 2%, and the economy is growing at a couple of percent. It’s a really nice place. Since then, we’ve been hit with, you know, the first pandemic in 100 years, global pandemic. And then a very, very strong response, both from fiscal authorities and from us, followed by the outbreak of inflation, followed by the war in Ukraine, followed by, now, the big shutdowns all over China. So we’ve really been hit by a series of global, really, inflation, inflationary shocks. And so all around the world, you’re seeing economies that are struggling with high inflation. Many, many countries around the world are having the highest inflation they’ve had in 40 years, and struggling with the exact same things we are. So there’s a lot of commonality, there are some differences. But you know, Kai, I have said, and I will say again that, you know, if you had perfect hindsight you’d go back and it probably would have been better for us to have raised rates a little sooner. I’m not sure how much difference it would have made, but we have to make decisions in real time, based on what we know then, and we did the best we could. Now, we see the picture clearly and we’re determined to use our tools to get us back to price stability.

Ryssdal: You’ve said, not just in your last meeting, but many a time, that the Fed’s tools are blunt instruments trying to finesse a really difficult problem. Which gets me to this: One of the things we talked about the last time I was here — and it was in the context of President Trump and him piling on you, actually — and you said —  you know, you control the controllable, and you just, you do what you can do. I wonder, now, if you are left with really only being able to, through your blunt monetary policy tools, control the controllable? You can’t control supply in this economy. You can’t control fiscal policy, right? I wonder how frustrated you are.

Powell: I wouldn’t put it as frustrated. You know, I’m really honored to be able to play this role. And I just would, I guess I would say it this way: What we can control is demand, we can’t really affect supply with our policies. And supply is a big part of the story, here. But more than that, there are huge events, geopolitical events going on around the world, that are going to play a very important role in the economy in the next year or so. So the question whether we can execute a soft landing or not, it may actually depend on factors that we don’t control. But we should control the controllable. And what we control is there’s a job to do on demand, demand is out of whack with supply, as I mentioned, in the labor market, there’s more demand than there are people to satisfy that demand. And we can address that directly, and we will by trying to, you know, moderate demand in a way that lets the labor market get back in balance and help inflation get back to 2%.

Ryssdal: You said, maybe a meeting or two ago — and I apologize for them all running together, but I’m sure you can appreciate that — you said the labor market is “tight to an unhealthy level” in this economy. When you frame that in terms of people now being able to get jobs, if they want jobs, how is that unhealthy?

Powell: That part of it is healthy. No, certainly from the standpoint of a worker, you see people able to change jobs, the level of people quitting to go find jobs that they prefer that pay better, maybe they’re doing the same thing but for a competitor. The quit level’s at an all-time high and wage increases are very high. You know, of course, all of us think that’s great. When I said unhealthy, what I really meant was that there’s an imbalance between demand and supply, and companies can’t find workers. They just, there aren’t the workers. There’s more demand than there are people to supply their labor. So that’s not a healthy situation for an economy because it results in high inflation. That’s a significant part of the inflationary story. So what we want is wages that are consistent with 2% inflation. You know, workers now are seeing their paycheck eaten up by inflation, particularly people at the lower end of the income spectrum. And, you know, that’s not a good situation, that’s not a healthy situation. Healthy situation is when supply and demand are more close to being aligned, and inflation is back down to our goal.

Ryssdal: Almost whatever it takes?

Powell: You know, I just would say it this way: The committee and I are firmly committed to getting inflation back down to 2%. And the reason is that the economy doesn’t work for anyone unless you do that, if you think about it. High inflation is not consistent with a great labor market, it’s not consistent with a sustainable level of employment. It doesn’t work for anybody. So we really, price stability is the bedrock, in some sense, on which the economy has to rest, and we’ve had it for a long time. We suddenly are hit by all these shocks and, like others around the world, we’re struggling to restore it, but restore it we will.

Ryssdal: You talked a little bit about Paul Volcker at the last meeting, and you’ve talked about him before. You said you knew him a little bit, but the thing that really struck you about him was that he always did what he saw to be the right thing, in arguably more difficult economic times than you have right now. My question is: How sure are you that what you are doing now is the right thing? 

Powell: Yeah. So that’s a good point. I do admire Paul Volcker. I think everyone admires Paul Volcker now. So I’m not to be singled out in any way for admiring him, you know. He was a truly great public servant and person. And the point was that he did what he thought the right thing was, and he was prepared to be unpopular for that, because he was looking at the medium and longer term, well, for the country. And I don’t have any, you know, I think that’s a good thing to keep in mind as you do public service jobs, is don’t think about what’s popular, do what you think is right and let everything else take care of itself. I take it as a general principle. It doesn’t provide any, it doesn’t shed any light on the current situation. We have to make an assessment of what the right thing to do is in the current situation. We know that what Paul Volcker did was right in his situation, and it’s something like that might turn out to be right here. But I don’t think we know that. I think we have a lot to learn about what the path ahead looks like.

Ryssdal: I need you to roll with me on this last one. We’ve got a little game we play on the show. It’s called “What is Jay Powell thinking in five words or less?” And I ask our Friday afternoon panelists when we have a big monetary policy topic come up, I say, “OK, what is Jay Powell thinking in five words or less?” And I would not be able to forgive myself if, sitting across from Jay Powell, I don’t ask Jay Powell what Jay Powell is thinking in five words or less. I should tell you I did this with Obama and he blew it. He went on for like a minute. So, no pressure.

Powell: Five words or less. I’m gonna go with what I really am thinking is, “get inflation back under control.”

Ryssdal: Oh, man. Boom.