During a speech at the annual meeting of the National Association for Business Economics (NABE) on Monday, September 30, Federal Reserve Chairman Powell stated that if the economic development meets expectations, the Fed's interest rates will gradually move towards a more neutral position over time. He emphasized that the Fed does not have a preset interest rate path, and the risks are two-sided, with decisions being made at each meeting.

Comments stated that Powell's prepared speech content was very consistent with his remarks at the September Fed rate cut announcement press conference, reaffirming much of what he said at the post-meeting press conference in September. This time, he mentioned that the U.S. economy is strong, as well as the labor market, but over the past year, the labor market has cooled.

In the speech, Powell reiterated his desire for the job market not to weaken at this time. Commentaries mentioned that since the inflation rate is expected to return to 2%, the Fed would not welcome further declines in job growth. Powell mentioned that the Fed plans to use rate cuts to maintain a 'strong' economy, citing the economic conditions as laying the foundation for further easing of price pressures and an expected cooling of inflation. Powell referred to a 4.2% unemployment rate in the speech as within the 'natural' range of estimated unemployment rates consistent with non-inflationary growth.

Powell mentioned in the speech the goal of achieving a 'soft landing' that reduces inflation without causing a significant increase in the unemployment rate, suggesting the Fed has not yet completed its mission but has made significant progress. Comments suggest that Powell is actually saying that maintaining high interest rates in the long term is correct, and pointing out that the inflation rate is close to returning to the Fed's 2% target.

Overall, compared to the remarks at the post-meeting press conference in September, Powell's speech content this time did not contain anything new. However, during the Q&A session after reading the speech, Powell hinted at a slightly hawkish tendency. He indicated that the Fed is not in a rush to cut rates, mentioning the encouraging revisions by the U.S. Department of Commerce last week in the GDI, personal expenditure, and savings rate, stating that these revisions have eliminated the downside risk to the economy.

When asked about the actions the Fed will take at the next November FOMC meeting, Powell pointed out that if the economic performance aligns with current forecasts, the Fed will cut rates twice this year, each time by 25 basis points. Comments note that although this statement reflects the latest dot plot released after the September meeting, Powell mentioning this may imply that he is telling the market that the total rate cut for the remainder of the year should be 50 basis points, rather than the market's current expectation of about 75 basis points.

Decisions are based on overall data - the Fed's baseline expectation is for two 25 basis point rate cuts remaining this year.

During the Q&A session, Powell stated that the majority of the data to be considered at the November FOMC meeting has not yet been released. Before making a decision in November, two upcoming employment reports and an undisclosed inflation report need to be taken into account. "We will consider all factors," he said, emphasizing that Fed policymakers will review all data to determine the next steps.

Powell explicitly stated:

"The (FOMC) committee is not in a hurry to quickly cut rates."

"From a fundamental perspective, we believe this is a process that will take some time to complete, rather than something that needs to be expedited. This depends on the data and the pace at which we actually progress."

Powell stated that if the economic performance meets expectations, it means that for the rest of this year, the Fed will cut rates by a total of 50 basis points. He reiterated the importance of looking at the overall data to understand if the required policy stance has been met, saying, "We will consider all factors." Consistent with the post-September meeting remarks, Powell also indicated this time that the FOMC's baseline expectation is for two more rate cuts this year of 25 basis points each if the economic performance meets expectations.

The labor market does not need to further cool from its current state.

Regarding the labor market, Powell assessed that based on many indicators, the labor market is still strong, although it has cooled. He once again mentioned the desire not to see further weakness in the labor market:

"We believe that the labor market conditions do not need to cool further from their current state."

Powell talked about the lessons of 2019, when the labor market was quite tight, but inflation did not occur. That indicates that a hot labor market will not trigger inflation.

Powell said that overall commodity and service inflation is returning to the levels before the COVID-19 pandemic. With the transformation of housing rentals, it is expected that housing inflation will slow down, cooling off slowly and will take a longer time for housing inflation to slow down, this process will last "several years". The direction of change in housing inflation is clear.

Last week's upward revision of personal income "very large" eliminates economic downside risks.

Powell mentioned the GDP and consumer personal income revisions announced by the US Department of Commerce last week. These data have been revised upwards. Powell described the income revision as "very large", which eliminates "economic downside risks". He also mentioned that the revised savings rate is not as low as previously thought. A higher savings rate "indicates that consumer spending can continue to remain at a healthy level".

Powell also pointed out that due to the revisions announced last week, productivity now seems to have improved. Commentators suggest that such revisions certainly help to suppress inflation. However, Powell expressed caution about the sustainability of the productivity rebound in the Q&A session. He said that it is "too early" to assert that productivity will continue to rise.

Powell pointed out that the labor market usually provides better real-time signals than GDP data. "There is more evidence supporting that the GDP data we obtain is reliable. This is helpful to some extent. However, this will not prevent us from closely monitoring the labor market. Many people believe that in some cases, the labor market may reflect real-time situations better than GDP data."

Powell cited previous recession cases, predicting that those recessions were not indicated by GDP data, but by labor data. He said that positive GDP data is helpful to some extent, but labor is the key focus.

Decisions will consider releasing data during the blackout period, making decisions only at the meeting.

Regarding the economic outlook (SEP) announced by the Federal Reserve after the September meeting, Powell emphasized that the SEP is only a summary of the predictions of 19 Federal Reserve decision-makers. Most Federal Reserve decision-makers may think that there is "significant uncertainty" in their current predictions. Sometimes the outside world pays excessive attention to the SEP. It is not an exaggeration to say that the love-hate relationship with the Federal Reserve decision-makers' policy rate forecasts.

Although Powell pointed out that the dot plot indicates that the Federal Reserve will not be in a hurry to cut interest rates, the pace of rate cuts will actually be determined by the data. He said:

"Ultimately, we will be guided by the data to be released soon. If the economic slowdown exceeds our expectations, we can accelerate the pace of rate cuts. If the economic slowdown is less than our expectations, we can slow down the pace of rate cuts. This is the real determining factor."

Powell also pointed out that the Federal Reserve will take into account important data released during the quiet period before the FOMC meeting, saying that the Federal Reserve decision-makers will definitely consider the economic data released during the quiet period. This usually refers to the period of ten days before the meeting when Federal Reserve officials are not allowed to make public statements. He said that the Federal Reserve did a "lot of work" during the quiet period, and "what happens during that time could be crucial to the meeting."

Powell stated that he will have discussions with all Federal Reserve decision-makers on Thursday and Friday before the meeting to understand their views and thoughts on the economy. However, decisions are usually made at the meeting.

"Decisions will only be made when the meeting convenes."

Comments stated that Powell did not make any statements to trigger market bets that the Federal Reserve will cut rates by 50 basis points again, but he clearly stated that the Federal Reserve will take action based on data.

Full text of the speech

Below is the full text of the speech made by Powell before the Q&A session, with annotations by Wall Street Knowledge in parentheses:

I have some brief comments on the economy and monetary policy, and I look forward to our discussion.

Our (USA) economy remains strong. Over the past two years, the Federal Reserve has made significant progress in achieving its dual mandate of full employment and stable prices. The labor market is robust, cooling off from its previous overheated state. Inflation has moderated, and I am confident, along with my colleagues at the Federal Open Market Committee (FOMC), that inflation will continue to reach 2%. At our meeting in early September, we lowered the federal funds rate target range by 0.5 percentage points to reduce the level of policy constraint. This decision reflects our increasing confidence that we can maintain the strength of the labor market in an environment of modest economic growth and inflation continuing to decline towards our target by recalibrating our policy stance.

Recent Economic Data

Labor Market

Many indicators show a robust labor market. Just to name a few, the unemployment rate remains well within the estimated natural range. Layoffs are few. Labor force participation rates for the 25 to 54 age group (the so-called prime-age group) are close to historical highs, with continued record highs for prime-age women. Real wages are steadily increasing, largely in line with productivity growth. The ratio of job openings to unemployed workers is steadily decreasing but still slightly above 1, indicating there are more job openings than job seekers. This was rare before 2019.

However, the labor market has cooled noticeably over the past year. Workers now perceive fewer job opportunities than in 2019. Slower job growth and increased labor supply have pushed the unemployment rate up to 4.2%, still historically low. We (Federal Reserve) believe that further cooling in the labor market is not needed for us (the Fed) to achieve the 2% inflation target.

In the last 12 months, the overall inflation rate and core inflation rate were 2.2% and 2.7% respectively. There has been a general trend of decreasing inflation, with recent data indicating a continued return towards 2%. Due to some easing of supply bottlenecks, core goods prices fell by 0.5% over the past year, approaching pre-COVID levels. Excluding housing, core services inflation is also nearing pre-pandemic rates. Housing services inflation continues to decline, though slowly. The growth rate of new tenant rents remains low. As long as this continues, housing services inflation will continue to decline.

The broader economic conditions have also laid the foundation for further downward inflation. The labor market is now roughly balanced. Long-term inflation expectations remain stable.

Monetary Policy

Over the past year, we have continued to see steady and healthy growth in labor and productivity. Our (Fed) longstanding goal has been to restore price stability while avoiding painful increases in the unemployment rate, which often come with efforts to reduce high inflation. This would be a very desirable outcome for the communities, families, and businesses we serve. While the task is not yet accomplished, we have made significant progress towards this goal.

For much of the past three years, the inflation rate has been well above our (Fed) target, and the labor market has been extremely tight. We appropriately focused on reducing inflation. By maintaining restrictive monetary policy, we have helped restore balance between overall economic supply and demand. This patient approach has paid off: inflation is now closer to our 2% target. Today, we see the risks of achieving employment and inflation targets as roughly balanced.

Since the July 2023 meeting, our policy rates have been at their highest level in twenty years. At that meeting, core inflation in the United States was above 4%, well above our target, and the unemployment rate was 3.5%, close to the lowest level in fifty years. In the following 14 months, inflation fell and unemployment rose significantly. It is time to recalibrate our policy stance to reflect progress towards our goals and changes in risk balance.

As I mentioned, we have decided to lower the policy rate by 50 basis points, reflecting our increasing confidence that, with appropriate recalibration of our policy stance, we can maintain a strong labor market in the context of moderate economic growth and continued decline in inflation rates to 2%.

Looking ahead, if economic developments align roughly with expectations, monetary policy will move toward a more neutral stance over time. However, we (Fed) have no preset path. Risks are two-sided, and we will continue to make decisions at each meeting. When considering further policy adjustments, we will carefully assess subsequent data, evolving outlooks, and risk balance. Overall, the economic conditions are good, and we intend to maintain this state using our own tools.

We remain firmly committed to achieving maximum employment and price stability. Everything we do is for our public mission.

Thank you. I look forward to our conversation.

Editor/ping