After the Republican Party secured both houses of Congress and Trump has greater power to implement policy plans next year, Federal Reserve Chairman Powell made his first statement, saying that the recent performance of the usa economy is "quite good," giving the Fed the space to cautiously lower interest rates, with no rush to do so. Moreover, the Fed has time to first understand and assess the future economic impact of Trump's policies before reacting.

On Thursday, November 14, local time, during a dialogue hosted by the Federal Reserve in Dallas with local business leaders, Powell stated that the current state of the usa economy does not suggest that the Fed needs to rush into lowering interest rates. Due to strong economic performance, the Fed can cautiously consider its decisions. The road to the Fed's inflation target of 2% can sometimes be bumpy.

"The economy has not sent any signals indicating that we need to rush into cutting rates. The strength we are currently seeing in the economy allows us to make decisions cautiously."

After showing no urgency to cut interest rates, the short-term U.S. two-year Treasury bond yield, which is sensitive to rate prospects, rose by 3 basis points, approaching 4.35%. The U.S. stock market turned slightly higher at midday, with spot gold falling by about $6 to around $2,570 and turning lower during the day. The US dollar index extended its gains.

Given the plans proposed by Trump during his campaign, the market expects that the Trump administration will impose tariffs on foreign goods, carry out large-scale deportations of illegal immigrants, and cut taxes, which could exacerbate the fiscal deficit. These measures are viewed as inflationary. Therefore, after Trump's victory, the possibility of the Federal Reserve slowing down interest rate cuts due to inflation risks has become a hot topic.

The October CPI growth data for the USA released this Wednesday met market expectations. Wall Street analysts believe that the CPI data almost guarantees that the Federal Reserve will continue to cut interest rates in December, but the market still needs to assess the impact of Trump's presidency on inflation, which may lead the Fed to slow down rate cuts next year.

On the same Wednesday, former US Treasury Secretary Summers warned that if Trump insists on fulfilling the promises made during his campaign, the USA will suffer from a more severe inflation shock than in 2021. This could mean double-digit inflation, indicating an 'inflation crisis not seen for decades.'

In 2021, Summers accurately predicted the last round of inflation in the USA, at that time he warned that the Biden administration's pandemic stimulus plan was inflationary, and the 1.9 trillion dollar rescue plan would create excess demand and lead to an overheating economy. However, the Biden administration ignored his warnings, believing inflation was merely 'temporary.' Summers expressed hope that Trump could learn from this and adjust his plans to avoid causing inflation. If inflation returns, the Federal Reserve will not tolerate it.

Labor market indicators have returned to more normal levels, while inflation will continue to decline toward the target. The path of interest rates depends on data and the economic outlook.

When evaluating the economy this Thursday, Powell stated that the USA's economic performance ranks among the best in the major economies of the world.

Specifically regarding employment, the non-farm payroll growth data for October released at the beginning of this month was disappointing. Powell attributed this mainly to hurricane damage in the Southeast and strikes by employees at large companies like boeing. He believes that the USA's labor market is still in a 'solid state.' Many indicators show that it has returned to a 'more normal' level consistent with the targets for full employment.

Powell pointed out that the unemployment rate has been rising, but it has stabilized in recent months and remains low by historical standards.

The improvement in supply conditions supports strong economic performance. In the past five years, the labor force has grown rapidly, and productivity growth has exceeded that of the two decades before the pandemic, allowing the economy to grow quickly without overheating.

At the same time, Powell indicated that as employment data approaches neutral levels, officials may consider slowing the pace of interest rate cuts. He said:

"If the data tell us to slow down a bit, then slowing down seems wise."

Regarding inflation, Powell noted that inflation has generally improved and pointed out that Federal Reserve officials expect inflation to continue to fall to the Fed's target of 2%. He said:

"The inflation rate is getting closer to our long-term target of 2%, but it has not yet been achieved. We are committed to fulfilling this mission, and under the conditions of a roughly balanced labor market and well-anchored inflation expectations, I expect the inflation rate to continue to fall towards the 2% target, although there may be bumps along the way."

Powell did not comment on the possibility of an interest rate cut at the Federal Reserve's monetary policy meeting next month. Pricing in the futures market on Thursday shows that traders expect about a 70% chance of a 25 basis point cut by the Fed in December.

Powell reiterated that the Fed's future decisions depend on data and there is no preset path. He said, "The path of policy interest rates will depend on upcoming data and the evolution of the economic outlook," further stating that the Fed "is gradually shifting policy towards a more neutral environment over time. However, the path to achieving this goal is not predetermined."

Congress generally considers the independence of the Fed to be very important, and it is too early to conclude on the policies of the Trump administration.

Regarding the impact of the election and other political aspects, Powell stated during the dialogue that he spent a lot of time in Congress, where members from both parties generally believe that an independent Federal Reserve is crucial for serving the public as best as possible. He said, "We are not perfect. Everyone makes mistakes, but if your people focus solely on this task and do not engage in politics, you will achieve the best results."

Last week, Powell downplayed the impact of the election on the Federal Reserve's monetary policy committee, the FOMC, stating that it is necessary to wait and see. In the dialogue this Thursday, the host asked Powell that if the Republican Party holds both houses of Congress and the White House simultaneously, and if it is found that the Federal Reserve's staff incorporates tax cuts as a reasonable assumption, will the Federal Reserve's decision-makers have greater confidence in the economic outlook and whether the election outcome has at least significantly reduced the growth downturn risks as assessed by the Federal Reserve?

Powell responded, "I think it is too early to draw conclusions now."

He explained that the work of the Federal Reserve staff is very flexible, constantly making real-time assessments, similar to capital markets. Federal Reserve decision-makers will wait longer to see the actual results, so it can be assured that at the December FOMC meeting, the staff will present what the Federal Reserve knows. However, the question is that the Federal Reserve does not actually know which policies the government will implement. The Federal Reserve is aware of some areas where policies will change but is unsure of the extent or timing of those changes.

Regarding fiscal policy, Powell mentioned that it takes Congress a long time to pass relevant legislation. He believes the election outcome may not have any economic effects this year, and the Federal Reserve has time to assess the net impact of policy changes on the economy before reacting. He stated, "I think we will cautiously change policy until we have much more certainty."

The impact of ai may come later and be greater than we expect.

When discussing some reasons for productivity being above trend levels, Powell mentioned that generative ai will definitely impact productivity. Generative ai is just getting started. Companies, like those interacting with the Federal Reserve, have not truly deployed it, and they are very aware of the associated risks. Some credible organizations estimate that over time, generative ai will create explosive growth in productivity within the next decade. There is expected significant growth in productivity. Of course, there are also skeptics who believe that is an exaggerated effect.

Then Powell noted that history always shows that with innovation comes technology. It will not appear in productivity statistics immediately, and when it does, it will be a long time later. Therefore, he believes the impact of ai may come later than expected and be greater than anticipated because ai truly represents a series of extraordinary developments, and it clearly has the potential to replace a large amount of work currently done by humans, including well-educated individuals.

Regarding monetary policy, Powell believes that AI will not impact monetary policy. He stated that in the short term, the Federal Reserve is closely monitoring the labor force. Monetary policy is trying to stimulate the economy, maintain full employment and price stability, and use the Fed's tools to achieve this. In two or three years, the tools at the Fed's disposal will not truly drive long-term productivity or affect long-term prospects. For technological advancements, the best the Fed can do is to create macroeconomic price stability, which means price stability and a good, strong, and stable labor market, so that people do not have to worry about inflation fluctuations or high levels.

The host mentioned that the financial institutions currently regulated by the Federal Reserve are also experimenting with new AI technologies, considering that certain systemic risks may have blind spots, and asked whether this would increase the difficulty of regulation. Because AI is like a black box, many times, software engineers or others using it cannot explain how it makes decisions.

Powell responded that this indeed raises various issues. From the perspective of regulators, the good news is that banks are very aware of this point. He believes that people are very cautious about AI, at least in banks regulated by the Federal Reserve. They are very careful and thoughtful about how to implement AI technologies, have done a lot of work, and have not deployed AI on a large scale in their businesses.

Powell said that everyone is striving to understand the direction of AI technology development, what capabilities it has, and what risks are involved. If one does not even know why AI makes these decisions, how to address discriminatory outcomes in lending will be a challenge. However, he stated that the Federal Reserve is very clear about this, and so are the banks.

Editor/Somer