On Wednesday, September 18th, after the Federal Reserve cut interest rates by 50 basis points, in line with market expectations but also exceeding the traditional pace, Federal Reserve Chairman Powell held a highly anticipated press conference.

Due to his statement that the Federal Reserve is not eager to cut interest rates and warning against treating significant rate cuts as a routine rhythm in the future, the hawkish tone in his speech caused the three major U.S. stock indices to change from rising to falling, and U.S. bond yields erased their declines after the Federal Reserve's decision and rebounded, while gold rose and then fell again.

How to interpret the significant rate cut? It does not mean it will be the new routine rhythm in the future. The fact that the Federal Reserve is not in a hurry to cut rates does not indicate high recession risks.

One of the most frequently asked questions to Powell during the press conference was why the Federal Reserve made a significant rate cut, whether it is an admission that it should have cut rates in July but is now behind the curve, and whether it is emphasizing the high risk of U.S. economic downturn.

Powell admitted, "It is true that it could have cut rates in July, but it did not." However, he denied that the Federal Reserve waited too long to cut rates, and he does not believe that this action is lagging behind the rate curve. This rate cut is precisely the embodiment of the Federal Reserve's commitment to not lag behind the economic situation.

His reason is that considering the outlook, despite other major central banks in the world cutting rates before, the Federal Reserve has been "very patient and waiting", and ultimately this waiting has paid off, making the Federal Reserve believe that inflation will continue to fall to 2%.

"This allows us to take this strong move today. I don't think anyone should see this and then say, 'Oh, this is a new speed.'"

In other words, Powell means that investors cannot assume that a 50 basis point rate cut is a new pace for the future, and the Fed will not continue to cut rates at this speed to cool down some rather enthusiastic and radical market expectations.

Some analysts also point out that Powell refers to rate cuts in his speech as a "recalibration" of Fed policy, which means there is no commitment to take similar aggressive measures at every future meeting.

And Powell specifically states that there is nothing in the Fed's Summary of Economic Projections (SEP) that suggests a hurry to complete the rate cut, the "central bank's forecasts do not point to an emergency action," and the rate cut process will evolve over time. The Fed is not in any predetermined mode and will continue to make decisions on a meeting-by-meeting basis:

"Data will drive monetary policy choices, and rate cuts will accelerate, slow down, or pause as needed."

Powell says that the Fed's current goal is to achieve inflation cooling while ensuring that the unemployment rate does not rise, and investors should see a significant 50 basis point rate cut as a "firm commitment" from the Fed to achieve the above goals:

"We are trying to achieve a situation where we restore price stability without experiencing the painful rise in unemployment that sometimes accompanies deflation."

When talking about the economy, Powell repeatedly emphasized that the US economic situation is generally good and there are no signs of increasing risks of economic downturn.

"You see the economy maintaining stability, inflation rate declining, the labor market still at a very stable level, so I really don't see (the possibility of increasing economic downturn) this situation."

Prior to Powell's press conference, due to the Fed's decision to greatly cut interest rates to start this round of the cycle, traders increased their bets on the degree of easing, which pushed short-term declines in US bond yields and the US dollar. Traders were betting that the Fed would cut interest rates by about 123 basis points by the end of 2024, higher than the approximately 112 basis points before the decision was announced.

Powell assesses the US economy: the downside risk to employment is increasing, the upside risk to inflation is receding, and the fight against inflation has not yet been won

Powell stated that the US economy is overall strong, the labor market is stable, and the Fed hopes to maintain this state, adhering to the commitment to maintain economic strength while fulfilling its dual mandate. He also mentioned that "when the labor market is strong, it is the time to support employment."

He also admitted that the current US labor market has clearly cooled down from its previous overheated state and continue to cool down, although the unemployment rate has risen but still remains low, inflation has clearly eased but is still above the target. "The downside risk to employment has intensified, and the upside risk to inflation has receded."

In line with tradition, he praised the progress in cooling inflation, stating that long-term inflation expectations seem to be well anchored. It is expected that the PCE personal consumption expenditure price index for August will further decrease from the previous value of 2.5% to 2.2%, although this data will not be released until the end of September.

"The Fed's patient approach over the past year has been effective. Inflation is now closer to our target, and our confidence in inflation steadily moving towards 2% has also increased."

During the Q&A session, he emphasized that he would not say that the inflation issue has been completely resolved, but the Fed is encouraged by the progress made, after all, "inflation pressure has clearly weakened." Housing inflation is one of the drag factors, and the Fed cannot solve the real problem of the housing market's insufficient supply.

When evaluating the labor market, Powell stated that the labor market conditions are close to full employment and emphasized that the slowdown in employment growth in the past few months is "worth noting", and the Federal Reserve has noticed relevant signs. The Quarterly Census of Employment and Wages (QCEW) report implies that employment figures may be revised downward. The impact of Federal Reserve policy actions on economic conditions has a lag effect.

However, he also stated that he has not seen an increase in unemployment claims or layoffs, and has not heard of such things from various companies. There is no need to overly loosen the labor market in order to suppress inflation. Many indicators indicate that the labor market is still solid, with the unemployment rate at the lower end of the 4%-5% range, indicating a good employment situation. The immigration issue has also pushed up the unemployment rate in the United States.

"Before the next FOMC monetary policy meeting, we can still observe two (non-farm) employment reports. If the job market unexpectedly slows down, (the Federal Reserve) can react in kind.

We will not wait for this (unexpected slowdown in the job market) because the time to support the labor market is when the labor market is still strong.

Overall, Powell believes that "the recalibration of our policy stance will help maintain a strong economy and labor market, and will continue to push inflation further down as we move towards a more neutral stance."

What else did he say? He will not return to the era of ultra-low interest rates, neutral interest rates may be raised, and central bank independence helps contain inflation.

Powell said that the Federal Reserve is not considering stopping or slowing down the pace of balance sheet reduction, and today's significant interest rate cut decision received "broad support from Fed officials" after repeated discussions, "there are different viewpoints, but there is actually a lot of consensus."

He believes that the "dot plot" of interest rate expectations for 2024 shows that there has been a significant change in the stance of Federal Reserve officials since June, and there is still a large range of uncertainty regarding the assessment of neutral interest rates. However, "we will not go back to the era of ultra-low interest rates."

"Intuitively, most people or many people would admit that we may not return to the era of trading tens of billions of dollars in sovereign bonds at negative interest rates, or the era of trading long-term bonds at negative interest rates. The future neutral interest rate may be much higher than it was at that time."

The November U.S. presidential election is looming, with Republican candidate Trump previously claiming that he should have a say in the Fed's monetary decisions. In response, Powell has repeatedly emphasized the importance of the central bank's independence, stating that it can better support the economy and curb inflation.

Some analysts point out that the next Fed interest rate decision will come after the election day, and the impact of the current Fed rate cut action on the election is currently unknown. However, the rate cut has sparked a common response from both parties in the United States and will continue to be a focus of discussion in the near future.

Earlier, prominent Democratic Senator Warren stated that the FOMC's significant rate cut action means that Fed Chairman Powell has waited too long on the issue of easing, and the Fed needs to continue cutting rates.

In addition, Powell also mentioned today that it is difficult to determine how much further mortgage rates will fall, which will depend on the economic situation. The housing supply issue needs to be jointly addressed by the market and the government. The Fed's idea is that all U.S. financial regulatory agencies will propose relevant proposals for public comment as a whole, and will strive to reach a consensus in the first half of next year. The change in the banking capital system is the result of negotiations among various parties, and he supports the existing reform plan, and is trying to finalize the reform plan by 2025.

The Fed will hold its next monetary policy meeting on November 6-7, and the last meeting of the year will be on December 17-18. The "dot plot" reflecting the rate views of Fed officials shows that 19 FOMC members (including voters and non-voting members) expect the federal funds rate to reach 4.4% by the end of this year, equivalent to the target range of 4.25% to 4.5%, indicating a further 50 basis points of rate cut space.

The dot plot also shows that by 2025, the Fed expects the rate to drop to 3.4%, which means a further 100 basis points cut next year. By 2026, the rate is expected to drop to 2.9%, equal to a further 50 basis points cut that year.

Editor/Rocky