Richmond Federal Reserve Chair Powell pointed out that after the highest interest rates and supply chain issues in 20 years in the USA were alleviated, the slower pace of price growth provided the basis for the Fed to lower interest rates, but the inflation issue has not been completely resolved. Powell stated on Wednesday that the significant rate cut by the Fed in September was an adjustment to the current economic situation, not a signal of panic about economic slowdown.

In a prepared speech at the 2024 North Carolina University Wilmington Economic Outlook Conference in Wilmington, North Carolina, Powell said, "The withdrawal of this restrictive policy only eased some pressure."

The Federal Open Market Committee (FOMC) of the Federal Reserve voted on September 18 to lower the federal funds rate target by half a percentage point, to between 4.75% and 5.0%. Powell has been serving as the Richmond Federal Reserve Chair since 2018, and is a voting member of the FOMC this year.

Powell stated, "I believe our decision in September was a recalibration of a slightly more accommodative stance. After maintaining the federal funds rate at a high of 5.3% for over a year, the overall inflation rate is close to target, while the unemployment rate is nearing its natural level. What currently looks inconsistent is the federal funds rate, which, given the progress made, no longer needs to be so restrictive."

The dual mandate of the Federal Reserve is to pursue maximum employment and ensure price stability. After struggling with inflation for two years, many Fed officials have recently focused more on signs of a slowdown in the US labor market. However, Powell is not yet ready to declare victory in consumer price growth.

He said, "There is still a lot of work to be done on the inflation issue. Although the inflation rate has fallen from its highs, it still remains above our 2% target. I expect core inflation to not decrease significantly by 2025, as we are still comparing with low inflation data from the end of last year."

Powell also analyzed various opposing factors affecting inflation this year and in the coming quarters. Factors suppressing price growth include increased immigration and a higher labor force participation rate promoting labor supply, as well as the impact of China's export deflation. On the other hand, lower interest rates may stimulate demand for housing, autos, and other commodities typically purchased through financing, thereby driving up the prices of these commodities.

He believes that the current US labor market performance is solid but the trend is not optimistic. Unemployment has been rising since last year, and the monthly pace of hiring has slowed. However, there are still relatively few layoffs, as employers seem to be more cautious about layoffs after experiencing labor shortages during the pandemic.

Baljkin pointed out that the labor market is facing dual risks, as low interest rates may stimulate demand and increase recruitment, or negative trends may further exacerbate.

He summed up, "Although we strive to contribute to the USA economy, we will almost certainly not achieve perfection. We operate in an environment full of uncertainties, requiring us to make trade-offs, and the main tool - the federal fund rate - has a long and uncertain lag effect, with no clear endpoint. Therefore, as we decide on the speed and magnitude of our moves during this rate-cutting cycle, we need to remain vigilant and learn as we go."

Editor/Lambor