Source: Zhibao Investment Research

summary

• At this meeting, the Federal Reserve cut interest rates by 25 basis points to 4.5%-4.75%, in line with expectations.

• There was little change in the wording of the conference statement. The statements about “greater confidence” and “further progress” in the inflation target were removed, reflecting hidden concerns about inflation. This made the September 50 bp action seem too hasty, and also cast a shadow over the risk balance framework that had just switched to employment risk.

• When answering questions, Powell mentioned that he didn't want to provide too much forward-looking guidance, showing hidden concerns about future policy uncertainty.

• Powell emphasized that when considering Trump's New Deal, the Federal Reserve must be modeled step by step and incorporated into the framework of a dual mission.

• At this stage, he is not worried about the impact of rising US bond yields.

Press conference highlights

The decision to cut interest rates by 50 basis points reflects our growing confidence that by properly recalibrating (recalibrating) our policy positions, we can maintain a strong labor market against a backdrop of moderate growth and a continued decline in inflation to 2%. We have also decided to continue reducing our securities holdings.

As inflation falls and the labor market cools down, the risk of upward inflation has abated, and the downside risk of employment has increased. We now think the risks of meeting employment and inflation targets are roughly balanced (balanced), and we pay close attention to the risks at both ends of our dual mission.

We don't have a pre-defined path and will continue to make decisions meeting by meeting (meeting).

Q & A session

Question 1: Given that people expect the election results to have a significant impact on the US economy next year, how will you factor them into the upcoming decisions (including the next one likely to be made in December)? Can you tell us how actively or passively the Federal Reserve is prepared to respond to changes in economic policy in the next administration?

A: In the short term, elections will have no impact on our policy decisions. Many factors influence the economy, and anyone who works in forecasting will tell you that the economy is difficult to predict, except for very short periods of time. We don't know the timing and substance of any policy changes. As a result, we don't know what impact this will have on the economy, and in particular whether and to what extent these policies will have an impact on our achievement of full employment and price stability goals. We don't speculate, don't speculate, and make assumptions. In principle, any government policy or policy enacted by Congress can have an economic impact, and over time, these effects can have an impact on our pursuit of dual goals. Thus, like countless other factors, predictions of these economic impacts will be incorporated into our economic models and taken into account through this channel.

Q2: About a year ago, when 10-year Treasury yields were close to 5% and mortgage rates were close to 8%, you pointed out that if borrowing costs remained high, it could put pressure on economic activity. Given that you've said that you think policies are restrictive, and the Federal Reserve is now gradually reducing such restrictions, how are the growth risks associated with rising US Treasury yields today different from those you indicated a year ago when inflation was still far above your target?

A: We've been watching the rise in bond yields, which are far below the level of a year ago. Bond yields are far below what they were at the time. We're watching this. Situations are changing all the time, and we'll wait to see what level they finally stabilize at. I think it's too early to say what level they'll stabilize at. Ultimately, I'm sure we've all read these breakdowns of... — I certainly read them, but it's not our job to provide our specific breakdown. What I want to say, however, is that these changes seem to be mainly not due to rising inflation expectations, but rather because people feel that growth is stronger and downside risks may be less. That's why they are. If there are ongoing and significant changes in financial conditions, we will of course consider them in our policies. But I don't think we're at that stage yet; we're just watching. Again, these things are mostly unrelated to the Federal Reserve's policies, but to other factors in the economy.

Q3: Are the interest rate forecasts in the September Economic Forecast Summary (SEP) still valid and relevant in the current circumstances?

Answer: You're halfway through the cycle. Let's talk about data. Overall, economic activity data is better than expected. The results of the National Income and Production Account (NIPA) revisions were stronger. Of course, the September jobs report was stronger. The October report was no stronger. Retail sales are stronger. So, in general, I think you'll feel that the downside risks of some economic activities have abated with the revision of the NIPA. The overall feeling is that economic activity is good. I think we'll take that into account. At the same time, we got an inflation report, which wasn't bad, but was slightly higher than expected. So I think the real question is, by December, we'll have more data. I think there's also an employment report, two inflation reports, and many other data reports, and we'll make a decision in December.

Q4: Regarding the December meeting, what specific aspects will you focus on when making decisions? According to the Federal Reserve's economic forecast for September, you wrote down four 25 basis point interest rate cuts in 2025. Do you think this is possible? Is this the current baseline outlook? Or has that changed? If that changed, could you elaborate on why?

Answer: We (at this meeting) didn't fill out the SEP, and I can't say exactly what the committee's position is. I'd say for December, we'll once again be watching the upcoming data and its impact on the outlook like every conference. As you know, we are reorienting our policy positions from a fairly restrictive level of 5.33%, and after today's move, we are down 75 basis points. We're asking ourselves, is this the level we need? You know, we're trying to balance the risk of moving too fast, which could disrupt our progress on inflation, and moving too slowly, causing the labor market to weaken too much. We are trying to follow a middle path that will both keep the labor market strong and enable further progress on inflation. We think this is where we are right now, but it's a question we'll be asking in September, as well as at other meetings. Once again, I can't really update you on the Commission's thoughts because we didn't fill out the SEP at this meeting.

Q5: Regarding your own idea, do you think cutting interest rates (4 times) for the whole of 2025 is a reasonable prospect?

Answer: We'll wait until December to see how things go. We are moving towards a more neutral position. This hasn't changed at all since September. We'll have to see where the data leads us. We have six full weeks of data to make a decision in December. Obviously, I'm not ruling it out or affirming it, but I just wanted to say, once again, we didn't update SEP at this meeting, so I won't describe the committee's position.

Q6: Can you elaborate on the two changes in the wording of the first paragraph of the statement? You said inflation has progressed and removed the words “further progress.” In the second paragraph, the phrase “the Commission is more confident that inflation is moving towards its 2% target” was removed. Is there any policy substance behind these changes in wording? Is it to open the door to the suspension of interest rate cuts in December? Is it to convey the stickiness of core inflation over the past three months?

Answer: Not really, no. Let me tell you what we think. The test of “more confidence in making further progress” is our first test of cutting interest rates, right? We passed this test in September, so we accepted it. If you keep it, then it's a new forward-looking guide, a brand new forward-looking guide. What do you mean? Are you asking that at every meeting we have to say yes or no, and whether we have made further progress. The point is, we have gained confidence that we are on a sustainable path and that inflation will fall to 2%. So that's all I wanted to tell you. It's not meant to send a signal. Neither of these are meant to send further signals. Seeing further progress, it became a test. We don't think this is a good time for lots of forward-looking guidance, and there's quite a bit of uncertainty about what I'm saying. On the path we are on, we know where our destination is, but we don't know the right pace, and we don't know the exact destination. So the key is to find it as you go, find the right pace, and the right destination. I think there's quite a bit of uncertainty about this, and you know you don't want to bind yourself to guidance. You want to make smart decisions as you move forward.

Q7: You talked about the impact of high interest rates on growth. You didn't talk about its impact on higher deficits. Do you think this might be the reason behind the recent rise in interest rates? Are you concerned about this?

Answer: I don't have much to say about what drives bond yields. However, as far as policy changes are concerned, let me show you how this works in general. Assuming Congress is considering revising the tax code, it doesn't matter what it is about. So we'll keep an eye on that. At some point, we thought we had seen a rough outline, so we started modeling it. Then we'll wait, we'll wait, and then at some point, the staff willFederal Open Market Committee (FOMC) gave a briefing and said, “You know, these are possible effects. There is plenty of literature on the impact of changes in tax policies on various parts of the economy. Then it starts to pass, and you might want to do a simulation to try to make people understand it. Then, when it passes, it enters the model along with countless other things. We have a very large economy, and many things are affecting it at any given time. You know, some kind of legal change will go in there, but it will, but it's a process that takes time. Obviously, the legislative process takes a long time. Of course, the real issue is not the impact of that law, but the impact of all the policy changes that are taking place. What is the net effect on the economy at a given time, and what is the overall effect. I think this is a process that will take a long time, and we have been going through this process over and over again with every administration. I'm just-- this won't be any different. But you know, now—we have nothing to model right now. We're still in the early stages, we don't know what the policies are, and once we know what they are, we don't know, you know, when they'll be implemented, or all of these things. I think I'm just saying that we're not doing this right now, and when we do, all of this will take time, and it's going to be a very regular procedure.

Q8: If I could keep asking. Do you feel the current interest rates on treasury bonds need to be curbed because they go against the direction of policy and place additional restrictions on the economy, or are you simply viewing them as established facts, perhaps a sign that you should do less?

Answer: The first question is how long they will last. If you remember the 5% 10-year Treasury yield, people came to an extremely important conclusion, but the results showed that after three weeks, the 10-year Treasury yield fell by 50 basis points. So, you know, ongoing major changes in financial conditions are what really matter. And we don't know anything about these situations. What we've seen so far, you know, we're watching it, breaking it down, and reading other people's analysis. But now it's not the main factor in our thinking.

Q9: You mentioned the positive economic data we've seen since the September meeting, including revisions to savings, higher GDP growth, etc. The stock market rose yesterday. This has once again raised some questions. Why should interest rates be cut so many times in this context?

Answer: You're right, as I mentioned and you mentioned, the latest economic data has always been strong, which is a great thing, and very welcome. But our mission is full employment and price stability, and we believe that even after today's interest rate cuts, the policy will still be restrictive. We understand it's impossible to say exactly how restrictive it is, but we think it's still restrictive. If you look at our target variables, the labor market has cooled down drastically from overheating and is now essentially in balance. It's continuing to cool down, albeit at a moderate rate, and we don't think further cooling is needed to meet our inflation targets. This is the situation in the labor market. Inflation has dropped significantly from its high of two years ago, and we judge that, as I mentioned, it is on a sustainable path back to 2%. The work on inflation is not done. If you look at these two things, we judged in September that it was appropriate to begin reorienting our policy positions to reflect this progress. Today's decision is another step in this process. Overall, as I mentioned, we believe that by properly reorienting our policy positions, we can keep the labor market strong, even if our policy positions enable us to make further progress on our inflation targets.

QUESTION 10: Great. Just wanted to keep asking, what might have caused you to suspend interest rate cuts in December? What kind of economic data will lead you down this path? Thank you.

Answer: We didn't make that decision at all. As a result, as mentioned, we are gradually reducing our policy positions to a more neutral level over time. Overall, as we move forward, we are prepared to adjust our assessment of the appropriate pace and goals as the outlook changes. So, for example, if we see the labor market deteriorate, we'll be prepared to act more quickly. Or, as we approach neutral or near neutral levels, it might be appropriate to slow down the pace at which we reduce our restrictions. We haven't made any decisions on this yet, but this is certainly a possibility. You can think of it as our approach to asset reduction (quantitative austerity). As a result, we reached a point where we slowed down, just as a plane would slow down when it arrived at the airport. So it—that's what we thought, but it's something we're only just starting to think about.

Q11: Thank you, Chairman Powell. There's noise in the employment report we're seeing. Look at the Federal Reserve's favorite inflation indicator, personal consumption expenditure (PCE) inflation, which is 2.1% overall, which is very close to the Fed's target, but core inflation is 2.7%, which has been the case since July. So why doesn't this data provide a basis for suspending interest rate cuts at this meeting?

Answer: I think if you look at 3 months and 6 months — you're quoting 12 months of data. We looked at all the data, and what it told us was that we've really made significant progress and we expect fluctuations. For example, you know that in the last three months of last year, core PCE readings were very, very low, and probably abnormally low. So that's why you see it — and that's why forecasts generally assume there will be an increase by the end of the year. On the other hand, the January reading looked like last year's seasonal factor. When it breaks away from the 12-month calculation in February, it actually fluctuates up and down. We understand that. Overall, you've seen progress in inflation, and you've also looked at the economy. Would you say, what is the current inflation situation? Where did it come from? So I'd like to point out a few things. First, non-housing services and goods, which together account for 80% of the core PCE index, have returned to the level when we last continued to have 2% inflation, which happened to be five, six, or seven years in the early 21st century. They're back to that level. What hasn't returned to that level is housing services. Let's talk about housing services. Housing services are more expensive. What's happening there is, you know, market rents, newly signed leases are experiencing very low inflation. What's happening is that the old one, you know, leases that are expiring take years to catch up with the market—the level of market leases. The level of rent in the market. So this is just a catch-up issue; it doesn't really reflect current inflationary pressure, but past inflationary pressure. It's a thing. Another thing, I want to say, look at the labor market, it's not a source of inflationary pressure. Where did it come from? What's the story about inflation? You've seen this kind of catch-up inflation in insurance and several other fields. So we didn't declare victory, but we think this story is very consistent with inflation continuing to fall along a bumpy path and stabilizing at around 2% over the next few years. The story is complete; one or two really good data months or bad data months won't change the pattern, because we've now reached this stage in the process.

Q12: So are you rapidly trying to reach the neutral interest rate you saw or anticipated?

Answer: There is no economic data to suggest that the Commission needs to rush to reach that interest rate. We are seeing strong economic activity, we are seeing a continued strong labor market, and we are watching closely. But we did see the strength that stayed there. Therefore, we believe that finding the right way to be neutral, if you want to say that, is to be careful and patient. Again, this doesn't mean anything special, just — if the economy remains strong, we are able to take advantage of this because we're trying to find a middle ground between these two risks.

Q13: Some advisers to the president-elect have suggested that you should resign. If he asks you to leave, will you leave?

Answer: No.

Q14: Do you think you are legally not required to leave?

Answer: Not required.

Q15: You've talked a lot about what data tells you and how you can rely on it. But as far as forward-looking assessments of the economy are concerned, what have you heard from the CEO or other officials around the country? What did you hear from the Regional Federal Reserve Chairman today about how companies and consumers think the economy is headed from now on, rather than looking back in time? Does this match your predictions and what you think is an appropriate policy path?

Answer: So it's hard to describe; you know, we had a series of really interesting discussions, and of course you'll see them in the minutes of the meeting three weeks from now. But what I'm trying to say is. I think our Reserve Bank colleagues and the CEOs they spoke to have had quite constructive comments about the current state of the economy. Quite constructive. It feels like the labor market — you know, it's back to normal, to the point where it's not a topic of discussion in their world anymore. And two years ago, it was something they had been talking about. So they feel that the labor market is in balance. People feel good about the current state of the economy, and demand is clearly quite strong. Yes, you see, the estimated increase in the third quarter was 2.8%, and maybe 2.5% for the whole year. It's a strong economy. Considering, you know, strong growth, a strong labor market, and falling inflation, the US economy is doing so well. I think that's reflected in what you've heard from -- I've heard people from CEOs. I haven't had the chance to talk to many CEOs in my work, but I've heard others summarize this content, and of course I've heard Reserve Bank chairmen do a lot of work on this. Overall, this is pretty constructive. That's not to say there aren't any areas to look out for, etc. But at the end of the day, it was pretty positive overall.

Q16: Okay, keep asking, the areas to look out for, if you identified dark clouds on the horizon as something you're focusing on, what would they be?

Answer: I think this is the case. Obviously, geopolitical risks are rising around the world, and it is also clear that their impact on the US economy is relatively small. Now, that could change through oil prices or some other means. But people keep talking about this, you know, as something that's always been on the horizon. But you know, at the end of the day, if you look at the US economy, it's -- it's always been doing really well, that's what we hear from business people. And the expectation that this will continue. If it's any different, people think next year — I've heard from a few people — next year might even be stronger than this year.

Q17: I just wanted to continue with the previous question about fiscal policy. Your predecessors, Greenspan and Walker, spoke out when they thought budget deficits jeopardized economic or financial stability. Would you do the same? We are now in a period of full employment, our budget deficit is huge, and our debt is historically high and rising. Is this something you would loudly object to?

Answer: So, you know, I've said it many times, no more than the predecessors you mentioned, and no less than they said. That is, the US treasury — the federal government's fiscal policy is on an unsustainable path. Our level of debt is not unsustainable in relation to the economy. The road is unsustainable. We see this from, you know, in the case of full employment, you have a very large deficit, and this is expected to continue. So, you know, it's important to fix this. It is ultimately a threat to the economy. Now I can say that I have no supervisory authority; we have no supervisory authority over fiscal policy. I've said it on many occasions, but I'm just saying it again.

Q18: Thank you. I think another question is, continuing with the previous question, do you believe the president has the power to fire or demote you, and does the Federal Reserve determine the legality of the president arbitrarily demoting other directors who hold leadership positions?

Answer: The law does not allow it.

Q19: You say now is not the ideal time to give forward-looking guidance because of economic uncertainty. Can you list what some of these uncertainties are, and if you include some suggestions made by the president-elect during the election campaign? Tariffs, for example.

Answer: I didn't mention the new government's policies at all, and I won't mention them today. I'm just saying, looking ahead, we know that because I mentioned this in my statement, the risk goes both ways. I think I should start by saying that we think the economy and our policies are in a very good position, a very good position. Also, but when you look to the future, what would you say is the risk? One risk is that we're moving too fast, we find ourselves moving too fast, inflation is back, and we—we've lost the chance to get inflation back to 2%. So we must avoid this risk. And — to avoid this risk, that means you have to be careful. Another risk is that we are moving too slowly. In that case, we will make the labor market excessively weak, causing unnecessary damage to the labor market and people's work life. That means don't lag behind the situation. So these two -- these are risks we must manage. So we're in the middle. We're trying to be in the middle, dealing with these two — managing these two risks. Our idea is to maintain strong support for the labor market and economy, but at the same time make further progress towards the 2% inflation target with less restrictive but still restrictive policies. So, you know, it's a thing we'll evaluate at every meeting what's the right path. You know, the exact timing of these things isn't as important as their overall trajectory. Their trajectory is moving from where we are now to neutrality. A more neutral policy. We don't know the exact location; we only know it through what it does. We're pretty sure it's below where we are right now, but as we go further, there will be more uncertainty about where it will be, we'll be careful so, you know, we can increase our chances of getting it right.

Question 20: Regarding US Treasury yields. Thank you, Chairman Powell. I know you don't want to share your breakdown of bond yields. But if you look at the break-even inflation rate, it's clear that long-term inflation expectations seem to have risen to about 2.5%, for example, over a five-year period. That's up half a percentage point from when you cut interest rates in September. Are you concerned that long-term inflation expectations are unanchored, or in other words, are they anchored at a slightly higher level? Thank you.

Answer: If we see — if we think we see long-term inflation expectations anchored at a higher level, we're worried. That's not what we saw. We're still seeing that between surveys and market readings, and, you know, I looked at the five-year five-year forward inflation forecast earlier today, and it may have moved. But it just didn't — it's where it always was. And it's very close to 2% PCE inflation. It's a traditional metric we've been watching. Overall, expectations have remained in line with 2% inflation throughout the process. But you're right, we're watching this very carefully; we're not going to allow inflation expectations to drift upward. But that's why we reacted so violently in 2022 to avoid that.

Q21: We've just talked about what we've heard from business leaders about the economy. But many ordinary Americans still don't feel the strength of the economy in their wallets. So what's your message to them about when they might expect relief?

Answer: So you're right, you know, we said the economy is doing well, and that's true. But we also know that, for example, people are still feeling the impact of high prices. We have experienced it — the world experienced a shock of global inflation. Inflation is rising everywhere. You know it will stay with you because the price level won't fall back. So what is needed is a few years of real wage growth to make people feel better. This is us — this is what we're trying to create. I think we're on this path of creation. Inflation has dropped drastically, the economy here is still strong, and wages are rising but at a sustainable level. So I think what needs to happen is happening, and most of it has already happened. But people, you know, it's going to be a while before you regain your confidence and feel that. We're not going to tell people how they think about the economy. We respect — fully respect their feelings. These feelings are real and accurate. We don't question them; we respect them.

Q22: One more quick question. President-elect Trump has always criticized your performance. Are you concerned about his influence on the independence of the Federal Reserve?

Answer: I'm not going to talk about any political issues today. But thank you.

Q23: Hello, Chairman Powell. What are your plans if we start seeing stagflation?

Answer: The whole plan is to stop stagflation so we don't have to deal with it. This is actually our plan. You know, this is of course a very difficult thing because, you know, anything you do about interest rates will hurt one party or the other. It's either an inflation target or an employment target. I just want to say, you know, we've been able to see a sharp drop in inflation, you know, closer to our target without the sharp rise in unemployment that usually accompanies anti-inflation programs. So, thankfully, we've come this far without seeing a real weakness in the labor market. We believe we can keep the labor market strong while fulfilling the task of inflation. Of course, that's exactly what we're trying to do.

Q24: Can you rule out the possibility of interest rate hikes next year?

Answer: I wouldn't rule out any possibility that long from now. But of course that wasn't our plan. Our baseline expectations are that we will continue to gradually move towards neutrality, the economy will continue to grow at a healthy rate, and the labor market will remain strong. If you take a look at us — this is no change from September's SEP. This is our baseline forecast and will continue to be our prediction for the foreseeable future, unless some exogenous event occurs. But at the end of the day, we're not in one — we're not in a place where we can rule out all possibilities a year ago. There's so much uncertainty about what we're doing.

Q25: Hello, Chairman Powell. I want to go back to the question of rising price levels over the past few years, even though inflation is back on track to 2%. Under the average inflation targeting system, is it appropriate for the Federal Reserve to fall below its inflation target for a period of time to have a chance to catch up?

Answer: No, that's not how our framework works. Our target is 2% inflation. We don't think it's appropriate to deliberately fall short of the target. You know, part of the problem is that low inflation could also be an issue. To some extent, but it's not part of our framework, nor is it something we'll consider in it. Thank you very much.