Source: Wall Street News

The Federal Reserve announced a 25 basis point rate cut on Wednesday, as the market had expected, but officials significantly raised the median target range for future policy rates and also raised inflation expectations for next year and the year after. It is expected that there will only be two rate cuts next year.

Powell stated that the decision to cut rates at this meeting was "relatively difficult" and that the risks the Federal Reserve faces in achieving the dual goals of controlling inflation and promoting employment are roughly balanced. Significant progress has been made in controlling inflation. Although rates have been cut by 100 basis points, they are still "significantly" suppressing economic activity, and the Federal Reserve is "on track to continue cutting rates." However, before further rate cuts, officials need to see more progress on inflation. In addition, Powell mentioned that the new U.S. government's policies have not yet been formally rolled out, but the Federal Reserve has already done quite a bit of preparatory work, and when specific policies are observed, a more careful and thoughtful assessment can be made, along with appropriate policy responses.

In his opening remarks, Powell stated that the overall performance of the U.S. economy appears strong, and significant progress has been made towards the targets set by the Federal Reserve over the past two years. The labor market has cooled from a previous overheated state but remains robust. Inflation levels are now closer to the Federal Reserve's long-term target of 2%.

He stated that in order to better fulfill the Federal Reserve's dual goals of supporting employment and controlling inflation, and to maintain economic stability,the Federal Open Market Committeeit has been decided to take further measures to reduce the policy constraints by lowering the policy rate by 25 basis points. In addition, the Federal Reserve decided to continue reducing its securities holdings.

Powell noted that recent indicators show that economic activity continues to expand at a steady pace. The annualized GDP growth rate for the U.S. in the third quarter was 2.8%, roughly the same as the growth rate in the second quarter. Growth in consumer spending remains strong, and investment in equipment and tangible assets has increased. However, activity in the housing sector has been weak.

Overall, improved supply conditions have supported the strong performance of the U.S. economy over the past year. In the Federal Reserve's Summary of Economic Projections (SEP), committee members broadly expect GDP growth to remain stable over the next few years, with median forecasts of around 2%.

Regarding the labor market, Powell stated that it remains robust. In the past three months, the average number of new non-farm jobs added has been 173,000 per month, lower than the beginning of the year. Despite the unemployment rate being higher than last year, the unemployment rate in November was 4.2%, still at a relatively low level. Nominal wage growth has slowed over the past year, and the gap between job openings and the labor force has also narrowed.

Overall, a series of extensive Indicators show that the current tension in the labor market is lower than in 2019. The labor market is no longer a significant source of inflationary pressure. The median forecast for the unemployment rate at the end of this year in the SEP is 4.2%, with an expectation of 4.3% for the next few years.

Regarding inflation, Powell stated that inflation has significantly eased over the past two years but remains slightly above the Fed's long-term target of 2%. Based on estimates from the Consumer Price Index (CPI) and other data, the total PCE price increased by 2.5% year-on-year for the twelve months ending in November, while the core PCE price, excluding food and Energy, rose by 2.8%.

Long-term inflation expectations appear to remain solid, as reflected in surveys of households, businesses, and forecasters, as well as financial market measures. The median forecast for total PCE inflation this year in the SEP is 2.4%, rising to 2.5% next year, slightly higher than the forecasts in September. Subsequently, the median forecast declines to our target of 2%.

In conclusion, Powell believes that the risks of achieving employment and inflation goals are roughly balanced, focusing on risks within the dual mandate of inflation and employment. He stated that the Fed has been adjusting policy to a more neutral stance to maintain a strong labor market and economy while laying the groundwork for further progress.

Through today's further rate cut, the Fed has reduced the policy rate by 100 basis points from its peak, and our policy stance is now clearly less restrictive. Therefore, we can be more cautious when considering further adjustments to the policy rate.

We know that reducing policy restrictions too quickly or too much may hinder the improvement of inflation. Meanwhile, reducing policy restrictions too slowly or too little may unnecessarily weaken economic activity and employment. When considering the magnitude and timing of additional adjustments to the federal funds rate target range, the committee will assess the latest data, changes in the economic outlook, and the balance of risks. We have not set a fixed policy path.

He introduced that in the SEP, participants recorded their personal assessments of the appropriate path for the federal funds rate based on what they deemed the most likely scenario for the future. The median forecast indicates that the appropriate level for the federal funds rate by the end of next year is 3.9%, and 3.4% by the end of 2026. These median forecasts are slightly higher than those in September, consistent with higher inflation forecasts.

Powell said that if the economy remains strong and inflation does not continue to approach the 2% target, the Fed may slow down policy adjustments. If the labor market unexpectedly weakens or inflation declines more rapidly than expected, the Fed can also relax policy more quickly. The Fed is prepared to respond to the risks and uncertainties faced in achieving the dual objectives.

In addition, regarding technical adjustments, the Federal Reserve has lowered the overnight reverse repurchase agreement (RRP) rate to the lower limit of the target range, consistent with its typical configuration. Powell stated that these technical adjustments will not affect the stance of monetary policy.

During the subsequent Q&A session, Powell indicated that the decision to cut interest rates this month was a difficult choice. He said that although current policy is not as restrictive as before, the current interest rates still "significantly" suppress economic activity, and the Federal Reserve is "continuing on the path of rate cuts." However, he also mentioned that before taking additional rate-cut measures, officials need to see more progress on inflation.

Powell also addressed questions regarding the potential impact of the Trump administration's tariff policies on the Federal Reserve. He stated that some policymakers have begun to consider the potential effects of higher tariffs that may be implemented if Trump is elected president. However, he emphasized that the impacts of these policy proposals remain uncertain at this time. The Federal Reserve is modeling and assessing Trump's proposals, but has not yet incorporated them into its decision-making as it is currently unclear what specific forms these policies will take.

"We know very little about the actual policies," he said. "Therefore, it is too early to draw any conclusions now."

Below is the full text of the Q&A session from Powell's press conference:

Q1: Can you discuss why, despite the expectation that inflation will remain strong in 2025, officials still believe a rate cut is appropriate? Additionally, what do you currently anticipate the timeline for rate cuts will be? Is there a possibility of a rate cut in January? Or is it more likely that a pause will happen next month? What conditions would trigger further rate cuts?

Powell: Let me start by explaining why we are cutting rates today, and then I'll address the 2025 issue. I want to say that today’s decision was a difficult choice, but we ultimately believe it is the right decision because we think it is the best decision to achieve our dual mandate. We see the risks as two-sided: acting too slowly would unnecessarily weaken activity in the labor market; acting too quickly would unnecessarily impact our progress in reducing inflation. We decided to proceed with further rate cuts after weighing these considerations.

Firstly, while the downside risks facing the economy seem to have weakened, the labor market is more slack than before the pandemic, and it is clearly cooling further. However, so far, this cooling has been gradual and orderly. We believe that lowering inflation to 2% can be achieved without further cooling of the labor market. The current number of new jobs is significantly lower than the level required to maintain the unemployment rate. The job finding rate is very low and is declining. Additionally, several indicators (such as labor and business surveys) broadly show that the labor market is cooler than it was in 2019, although the current cooling remains gradual. We will continue to monitor this.

Regarding inflation, the trend is basically in line with expectations. Significant progress has been made; as of November, the 12-month core inflation rate is estimated at 2.8%, a significant decline from the peak of 5.6%. However, the 12-month inflation rate has remained relatively stable recently, as the impact of last year’s low base is gradually diminishing. Housing costs are now steadily decreasing, although at a slower pace than expected. We have also recently seen higher volatility in non-market services and Commodity prices. Therefore, I want to emphasize that our decision today is consistent with the wording of "adjustment magnitude and timing" in the post-meeting statement, indicating that we are close to or nearing a suitable time to slow down further adjustments.

I believe that the slowing pace of interest rate cuts next year mainly reflects this year's higher inflation readings and our adjustment of inflation expectations. You can see in the Summary of Economic Projections (SEP) that we believe risks and uncertainties surrounding inflation have increased. However, we still believe we are on track to continue cutting rates. I think our rate cuts next year will not be influenced by today’s content, but will respond based on actual data. This is the committee's general view on appropriate actions.

Regarding the conditions for further rate cuts, we have lowered the policy rate by 100 basis points, now significantly approaching the neutral rate. At around 4.3%, we believe the policy remains significantly restrictive. As for whether to further cut rates, we will focus on further improvements in inflation and the continued strong performance of the labor market. As long as the economy and labor market remain robust, we can be more cautious when considering further rate cuts. The economic forecast summary for December shows a median prediction of two rate cuts next year, a decrease from the four cuts predicted in September.

Q2: The current situation seems similar to the transition period of the Trump administration in 2016, when the FOMC adopted a slightly tightening policy partly based on expectations of changes in fiscal policy stance. Part of this was due to dynamic adjustments based on data, and another part was due to expectations about fiscal policy. How does this situation compare this time? How much is based on recently released data, and how much is considering the potential inflationary fiscal policy that may arise next year? Did the results of the US elections increase the upward inflation risk?

Powell: First of all, we believe the current economic situation is very good, and the policy stance is also very favorable. Let's remember that the economy has grown by 2.5% this year, inflation has fallen from 5.6% to 2.6%, and overall inflation is at 2.5% on a 12-month basis. Therefore, we actually started from a decent position.

However, what is driving the slowing path of rate cuts? First and foremost, growth is stronger, right? So far, economic growth in the second half of 2024 is expected to be faster than we anticipated. Growth next year is also expected to be higher than our expectations from September. The unemployment rate is lower, and in the SEP, you will see that participants perceive lower downside risks and uncertainties compared to September. This represents a stronger economic performance.

Secondly, inflation is higher, as previously mentioned. This year’s inflation is higher than expected, and next year's inflation forecast is also elevated. I must point out that we are now closer to the neutral rate, which is another reason for caution.

Currently, there is uncertainty surrounding inflation, and this uncertainty has actually increased. Specifically, some committee members have begun to incorporate the economic effects of certain policies into their forecasts in a very preliminary manner and have pointed this out in the meeting. Some members indicated that they had not done this, while others did not clarify whether they considered policy factors. Therefore, there are various perspectives within the committee.

However, some committee members do regard policy uncertainty as one of the reasons for their increased predictions of inflation uncertainty. Regarding this point of uncertainty, it is quite a commonsensical logic: when the path is unclear, one tends to slow down. This is similar to driving on a foggy night or walking into a dark room cluttered with furniture; one would reduce speed. This may have influenced the judgments of some committee members. But as I mentioned, there is a wide range of viewpoints within the committee.

The presidential election is not the only factor pushing inflation expectations higher. This year's inflation predictions are about 0.5 percentage points higher than in September. Both the September and October inflation data exceeded expectations. As I mentioned, the November inflation data returned to a normal trajectory, but overall, our inflation predictions as we approach the end of the year have been disrupted.

This is clearly an important factor influencing people's thoughts. I can tell you that the election may be the single largest factor, as the inflation data has once again failed to meet expectations. Although inflation will still remain between 2% and 3%, far below previous levels, we do hope to see greater progress.

In considering further interest rate cuts, we will closely monitor the progress of inflation. The inflation data over the past 12 months has remained flat, partly due to the very low inflation estimates for the fourth quarter of 2023. Nevertheless, as we move forward, we hope to see further declines in inflation while maintaining a robust labor market.

Q3: In September 2018, the Federal Reserve discussed a policy where the impact of new tariffs is ignored as long as the tariffs are one-time. Could you comment on whether this analysis is still valid and share your other thoughts on tariffs? In the recent fluctuations of inflation, consumers have seen prices rise, and businesses have also found that they can raise prices for a period. Does this make ignoring tariff risks more significant?

Powell: I think the alternative scenario analysis in the Teal Book (policy memo) from September 2018 is a good starting point. I would say that although this analysis is six years old, it still raises the right questions that we need to consider.

In this analysis, there are two scenario simulations, one that ignores the impact of tariffs and another that does not. Some expressions in the "ignore tariffs" section consider situations where it may be appropriate to ignore inflation, as well as listing some situations where it would not be appropriate.

In any case, this is not an issue we need to face currently. We do not know when we will encounter this problem. Currently, the committee is discussing the policy path and reevaluating how tariff-driven inflation may impact the economy and how to think about these issues.

We have done quite a bit of preparation work, which allows us to conduct a more careful and thoughtful assessment when we finally see the specific policies and to formulate appropriate policy responses.

Most importantly, this is also a key point mentioned in the alternative scenarios, as there are many factors that influence how tariffs pass through to consumer inflation. How significant will this impact be? How long will it last? We currently know almost nothing about the actual policies, making it difficult to draw any conclusions.

We do not know which Commodities will be subject to tariffs, which countries will be affected, how long the tariffs will last, or their scale. We also do not know whether there will be retaliatory tariffs, nor how these factors will transmit to consumer prices.

I would not say that the previous round of inflation can serve as a reference model. We have just experienced a period of high inflation and have just passed through this phase. This is a difference from before. We need to take our time and not rush to conclusions. Before we see the actual policies and how they are implemented, we need to carefully analyze step by step. The current phase we are in is similar to other forecasting institutions, thinking about these issues without attempting to derive a clear answer in the short term.

Q4: Today's participants have revised the core PCE inflation expectations for 2025 upwards to a Range of 2.5% to 2.7%. Most committee members believe that the inflation risk in the coming months is tilted to the upside. If inflation only falls from 2.8% to 2.5%-2.7%, what would motivate the committee to continue cutting interest rates under such circumstances? Given the wording of this statement and the data, some might speculate that this will be the last interest rate cut for a considerable period. Is this a misjudgment?

Powell: Our forecast is that core inflation will drop to 2.5% next year. This would be a significant progress. The pace of inflation decline is slowing, which I think reflects our stance of wanting to see substantial progress. But reducing inflation to this level is a meaningful progress in itself. Although it has not yet reached the 2% target, it will be better compared to this year. The inflation level this year may be around 2.8% or 2.9%. Therefore, this would be a meaningful improvement.

At the same time, we also need to consider the labor market. Although our forecasts show that the labor market is in good shape, we also note that it is gradually cooling down. So far, this cooling has been gradual and orderly, but it is also something we need to monitor closely.

As for whether this is the last interest rate cut, this is absolutely not any decision we have made. The meaning of the phrase "adjustment magnitude and timing" is meant to clarify that if the economy indeed develops as expected, then we are currently in a position where it is appropriate to slow down the pace of interest rate cuts.

"Adjustment scope" refers to the extent to which we can further lower the policy interest rate while ensuring a neutral stance. Clearly, the policy interest rate has already been lowered by 100 basis points, so the room for further adjustment is significantly reduced, which is the "adjustment scope" issue.

Meanwhile, we will continue to observe the further progress of inflation and the strong performance of the labor market to determine further rate cuts.

"Timing" indicates that if the economy develops as expected, we have already reached or are close to an appropriate pace for slowing adjustments. Therefore, this is what we mean. We are not attempting to make long-term policy decisions but trying to remain rational while forming policy.

I would also like to emphasize that the current policy uncertainty is only due to our expectation of significant policy changes. This is not particularly unusual. I think we need to see what these changes are and observe their impacts. Once the policy changes are clear, we will have a clearer determination.

Q5: Even though interest rates have been cut by 100 basis points this year, we have not seen much change in mortgage rates, auto loan rates, or credit card rates. You mentioned that current policy remains quite restrictive, yet the market seems to be "countering" you. Is there a higher possibility that the risk of economic slowdown is greater than you expect? You mentioned that one of the conditions for rate cuts is "confidence in the downward trend of inflation." Are you confident about the downward trend of inflation? Or is there still uncertainty?

Powell: The rates you mentioned are mainly long-term rates, which are indeed influenced by Fed policy to some extent, but are also affected by many other factors. As you know, since September, long-term rates have actually risen quite a bit, and these rates impact mortgage rates more directly than short-term rates.

We will pay attention to these situations, but focus more on the overall financial environment and the actual developments in the economy. Currently, what we see is that most forecasters have been predicting an economic slowdown for a long time, but this situation has not occurred. We have now entered a new year, and the economic growth rate seems likely to be around 2.5%. The growth levels in the second and third quarters are fairly consistent. The USA economy is performing very well, significantly better than other major economies globally. And there is no reason to believe that the likelihood of an economic recession is higher than usual.

Overall, our economic outlook is quite optimistic. However, we must continue to maintain a restrictive policy to ensure that the inflation rate drops to 2%. At the same time, we will pay attention to the labor market. We need to keep the labor market close to its current state. The unemployment rate is currently very close to the natural unemployment rate. Although job growth is slightly below the level needed to keep the unemployment rate steady, it is still close to the target. This is the goal our policy aims to achieve.

"Confidence" is the test standard we set when raising interest rates. We have made significant progress. Core inflation has dropped significantly to just over 2%, and overall inflation is even lower, currently at 2.5% or below. Therefore, I can say that I am very confident about the significant drop in inflation and the logic behind it. The reason I say this is that some key inflation indicators are developing as expected.

First, there is the inflation of housing services, which is an area we are very concerned about. Housing service inflation is indeed gradually decreasing, although it is somewhat slower than our expectations from two years ago, the downward trend is very stable. This is mainly because new leases are gradually balancing out the past rental growth, and the rental levels for new tenants are gradually aligning with the market. This process is proceeding as expected.

Commodity inflation is another important aspect, and it has now returned to the range seen before the pandemic. This year, there have been a few months where commodity inflation fluctuated due to factors like used cars, but overall, it should stabilize at pre-pandemic levels.

The remaining part is non-housing service inflation, especially market-based non-housing service inflation, which is also performing well. Non-market service inflation is mainly estimated rather than directly measured, so it does not actually reflect the tensions in the economy. For example, financial service inflation is more related to asset prices, which does not directly reflect the tension in economic activity.

Overall, the logic behind the declining inflation remains solid. Especially in the labor market, various indicators now show that the labor market has cooled compared to 2019, when the inflation rate was below 2%. This indicates that the labor market is not a major source of current inflationary pressure. Of course, in certain regions or specific occupational fields, there may still be tension in the labor market, but overall, the labor market has not significantly impacted inflation.

Thus, the main logic behind inflation is that we are gradually digesting the huge economic shocks from 2021 and 2022. For example, the price increases in housing services and the insurance sector, these cost increases are now gradually being reflected. This is real inflation.

Therefore, we and most forecasters still believe that we are moving towards the 2% target. This may take another one to two years, but there is confidence that we are on the right path, and our policies will do everything possible to ensure this target is achieved.

Q6: The current unemployment rate is close to the level when interest rates were cut by 50 basis points in September. Job growth is concentrated in a few industries. And now the committee seems inclined not to cut rates further at the next meeting. Does this mean there has been a change in the committee's assessment of labor market risks? Is it because concerns about the labor market have lessened? Or is it because there is now a need to consider potential upward risks more? If the current view is that there is no need to further weaken the labor market, then what can prevent this from happening?

Powell: The current unemployment rate remains the same as in July, at 4.2%. Although there have been fluctuations during this period, it has now returned to the July level. Employment growth has decreased compared to before, but it remains stable and does not show a downward trend. The current level of employment growth is below the level needed to maintain the unemployment rate, but the gap is not significant. If our judgment about the "equilibrium point" is accurate and employment growth continues at the current level, then the unemployment rate may decrease by about 0.1 percentage points every two months. However, we cannot be entirely certain of the accuracy of this prediction.

We do believe that the labor market is gradually cooling based on many indicators. We are closely monitoring this trend. The pace of cooling is neither fast nor showing worrying signs. I would like to point out that FOMC participants believe that the risks and uncertainties in the labor market have improved compared to before, due to the existence of factors such as the unemployment rate leveling off. Nevertheless, we will still closely monitor changes in the labor market.

We do not believe there is a need to weaken the labor market further to achieve the 2% inflation target, rather than saying that weakening is entirely undesirable. We just think there is no need for that under the current circumstances. If inflation fluctuates by 0.1 percentage points every few months, we will have to weigh this phenomenon against the fact that the 12-month inflation rate has been fluctuating horizontally in recent months. Currently, we have entered a stage where we believe the risks of employment and inflation are roughly balanced.

Previously, we focused mainly on inflation issues, but now we have reached a stage where we need to weigh both sets of risks simultaneously. This reflects our current way of thinking.

Q7: I noticed that you didn't use the term "recalibration" today. I would like to ask whether the recalibration phase has ended? How do you define this new phase? Are the criteria for adjusting interest rates different or higher compared to before? To what extent would you or the FOMC overlook some of the higher numbers in recent inflation data? For example, auto prices may rise due to hurricanes, egg prices may rise due to Bird Flu, etc. What is your view on the trend of decreasing housing inflation in the future, as mentioned in recent reports?

Powell: We have not yet renamed this phase, but perhaps we will do so in the future. However, I can say that we have indeed entered a new stage. As I mentioned, this is primarily because we have lowered the policy interest rate by 100 basis points, and we are now closer to the neutral interest rate. Nonetheless, we still believe that the current level of interest rates is largely restrictive. From now on, we need to be more cautious and observe the progress of inflation.

By lowering interest rates by 100 basis points, we have provided significant support for economic activity. This is a good thing, and I support this decision, believing it is the right one. From now on, we are in a phase where risks are basically balanced, and we need to see progress in inflation. This reflects our current way of thinking. It can be said that this is indeed a new phase. We acted quickly before to reach the current level, and going forward, our actions will be slower, which is also consistent with the contents of the Summary of Economic Projections (SEP).

We have been cautious not to exclude certain data simply because we dislike them. But we also need to ask ourselves, what about the lower monthly data? For instance, the core PCE in November could be a very low month, with many estimates showing it might be in the middle single-digit percentage range. Therefore, we try not to just look at two or three months of data. Our position should not change because of good or bad data over two or three months.

We have seen a long trend of gradually decreasing inflation. As mentioned, the total inflation rate for 12 months is 2.5%, and the core inflation rate is 2.8%. Compared to before, this is a significant improvement, but we still have work to do. This is our current view. We believe that the policy still needs to remain restrictive to complete this task.

Q8: Financial markets have performed strongly this year. Is the FOMC satisfied with the current financial conditions? Or does it believe this may pose a risk to achieving inflation targets? Considering the strong performance of certain assets, do you think the USA government should establish a Bitcoin reserve?

Powell: We will closely monitor financial market conditions, which is part of our job. But we mainly focus on the performance of our target variables and the impact of our policy on the economy. Over the past year, and even in recent years, we have seen a significant decrease in inflation. The labor market has also cooled significantly. This indicates that our policy is restrictive. In addition, we will directly observe those economic sectors sensitive to interest rates, such as the housing market. Housing activity is very sluggish, largely due to our policy. Therefore, we believe our policy is working and having the desired effects on our target variables.

As you know, many factors can influence changes in financial conditions, and these are not entirely under our control. But we have seen the impact of policy on our target variables and the areas we wish to see changes, which indicates that policy is functioning.

The Federal Reserve cannot hold Bitcoin. The Federal Reserve Act stipulates the types of assets we can hold, and we are not currently seeking to amend this law. Such matters should be discussed by Congress, and we do not intend to seek a legal amendment.

Q9: I would like to know if you are satisfied with 2024? Are you confident that we have avoided the economic recession that was once thought to be inevitable a few years ago? You mentioned that the unemployment rate is still very low. However, the employment rate has dropped quite rapidly. The core employment rate recently decreased by 0.5 percentage points. Do you think the downward momentum in the labor market may be stronger than what the unemployment rate alone reflects?

Powell: I think it is clear that we have avoided an economic recession. I believe economic growth this year has been robust, indeed. We believe private demand (PDF) is the best indicator, and it looks like growth is around 3% this year. This is a very good number. The USA economy is performing exceptionally well. In the international conferences I attended, this has been an important topic, highlighting how well the USA economy is performing. If you look globally, you will find that many areas are experiencing slow economic growth and are still struggling with inflation.

Therefore, I am very pleased with the current economic situation and performance, and I hope to maintain this momentum.

I do not believe that the downward momentum in the labor market is getting stronger. Overall, the labor participation rate is still very high. The current state of the labor market shows a low hiring rate. If you have a job, then you are doing well. Layoffs are very few, and people are not losing their jobs at an unusually high rate. However, if you are looking for a job, the hiring rate is low. This indicates a decrease in demand. The hiring rate has indeed declined. Therefore, we will pay attention to such signs, and this is clearly a signal of further slowdown in the labor market.

What I did not mention earlier is that I believe we can see the labor market gradually slowing down continuously. However, this is not the situation we need to see in order to achieve the 2% inflation target. This is also part of the reason why we decided to take action today to further lower interest rates.

Stepping back, the unemployment rate is still very low. Moreover, the labor participation rate is high. Wages are at a healthy and increasingly sustainable level. Therefore, the condition of the labor market is good, and we hope to maintain this state.

Q10: Do you think it is possible to keep the labor market in the strong state you described without further lowering interest rates? In other words, do you still believe that the labor market needs support to prevent further cooling?

Powell: We cannot have absolute certainty about this. What I want to say is that we believe the current policy balances the risks. We think the risks are roughly balanced between our dual objectives. We also believe the condition of the labor market is robust. When I say the labor market is slowing or cooling, it is a very gradual process.

For example, new job additions are still significantly positive. If there is anything special about wages, it is that they remain slightly above the sustainable level when productivity returns to long-term trends. If we take into account the recent high productivity data, wage levels have actually reached a sustainable level relative to the 2% inflation target.

Therefore, I do not want to overemphasize the downside risks in the labor market because the downside risks have obviously diminished. Nevertheless, the labor market is an important part of our dual objectives, and we will closely monitor it.

It is worth noting that the labor market is indeed gradually cooling down. This cooling is gradual and orderly. This is our current view on the labor market, and that is also why we will keep a close watch on it.

Q11: As you pointed out, the Fed predicts that inflation will be higher next year, and high prices are still a burden for many households. Why do you think inflation is more difficult to alleviate than expected? What do you think will be the biggest economic challenge for the next government?

Powell: This question can have a lengthy answer. But simply put, inflation is indeed more stubborn than we anticipated. I think if we go back two or three years, many believed that reaching our current situation would require experiencing a deep recession and high unemployment. But that has not been the case. The path of declining inflation is actually much better than many predicted. We have successfully kept the unemployment rate basically at its long-term natural level, while core PCE inflation has dropped from 5.6% a year ago to 2.8%. This is already a pretty good result.

So why hasn't inflation decreased further? One reason is a technical issue concerning the calculation of housing service prices. This process is slower to reflect market rents and is far below our expectations from two years ago. This is part of the reason.

Of course, there are other factors. But I think what people are really feeling now is the impact of high prices, rather than high inflation. We are very aware that prices have risen sharply over the past period, and people have indeed felt this pressure, especially in areas such as food, transportation, and home heating. This outbreak of inflation has brought tremendous pain, and this phenomenon has occurred almost synchronously around the globe, with all developed economies experiencing the same situation.

Now, although inflation itself has significantly decreased, people still feel the influence of high prices, and this is their direct experience. The best thing we can do for them is to stabilize inflation back to target levels and keep it there. This way, the public can achieve real wage growth, meaning their wages and income growth outpace inflation year after year. This will restore people's confidence in the economy. This is our goal and what we are striving to achieve.

I am very satisfied with the current state of the economy. I am very optimistic about the economic outlook. We are now in a very good position, and our policies are also in a very good position. I expect next year to be another good year.

Q12: You mentioned we are now closer to the neutral interest rate. So, what do you and the FOMC believe the specific percentage of this neutral interest rate is? I've heard estimated values ranging from 2.9% to 4%. The market hopes to have a clearer idea of the target range in a year or 18 months, as it currently seems very broad.

Powell: Let me say a few words first. First, what we write in the Economic Projections Summary (SEP) refers to the longer-run neutral rate. This means the neutral interest rate when supply and demand are balanced, the entire economy is in equilibrium, and there are no external shocks affecting it. And that is not currently the case. Therefore, when we at the Fed set monetary policy, this is not a concern of ours. So, we cannot simply equate the numbers we write in our long-term projections with the level that current policy should achieve.

At any given point in time, the economy is affected by various shocks. Therefore, when analyzing in real time, the actual effects of policies are observed, especially how they push the economy closer to the goals of maximum employment and price stability. It should be distinguished here that some factors have persistent but non-permanent effects on the economy, while permanent effects will only be reflected in the long-term neutral interest rate. Those factors that are persistent but will diminish over time may affect the appropriate neutral policy stance in the short term. Therefore, we have been evaluating these effects and trying to find the right direction.

Honestly, we do not know exactly where the neutral interest rate lies. But as I like to say, we determine it by its "effects". What is clear is that we are now much closer to this neutral point—about 100 basis points closer than before. There are many estimates of the specific value of the neutral interest rate, and we know we are closer to the target. I think we are in a good position currently, but from this point forward, we are entering a new phase and will be more cautious in further rate cuts.

Regarding estimates of the neutral interest rate, there are countless models, including empirical models, theoretical models, etc., which yield various answers without real certainty. In fact, it is good to be clear that we do not know its exact position because it prevents us from blindly believing that any particular model or estimate is completely correct. We need to remain open to continually changing empirical data and adjust according to its impact on the economic outlook.

The complexity of this task lies in the fact that Federal Reserve policies typically have long and uncertain lags. Nevertheless, that is our duty. Therefore, I believe it is appropriate to proceed cautiously given that we are already 100 basis points closer to the neutral interest rate.

At the same time, the current economic situation seems good, and these rate cuts will certainly support economic activity and the labor market. Meanwhile, as our policies still have considerable restrictions, we are still able to make progress in curbing inflation.

Q13: Are you saying that even if overall inflation rises, the progress in core PCE is still seen as a sign of inflation improvement? Since predictions show that this will occur, what causes this phenomenon? Why do you believe core PCE will decline while overall inflation might rise? Will geopolitical risks have an effect on this?

Powell: I think you know that our overall goal is overall inflation (headline inflation), as this is what people actually feel. What people experience is inflation, including food and energy costs, rather than core inflation. Thus, the overall target is overall inflation.

But as we know, overall inflation includes the price fluctuations of energy and food, which may fluctuate for reasons unrelated to the tightness of the economy, and therefore is not a good predictor of future inflation. In fact, core inflation is better at predicting future inflation than overall inflation. Therefore, we focus on core inflation as it better reflects possible future inflation and provides a better indicator of inflationary pressures. This is indeed somewhat complex, but ultimately our goal is overall inflation, not core inflation.

Overall inflation may be influenced by Energy prices and food prices, thus overall inflation forecasts may be related to forecasts of Energy prices. Core inflation—if you observe the one-year trend of core inflation—will be more driven by factors such as the degree of economic tension. Therefore, the two may develop in different directions. As you know, for most of this year, overall inflation has been lower than core inflation, which is because Energy prices have been declining, which is good news for the public. However, Energy prices may fall or rise, and this won’t tell us anything about the degree of economic tension.

We are closely monitoring geopolitical risks. But so far, these risks have not had a truly significant impact on the USA economy. One major factor to watch is oil prices, as we are discussing the situations in the Middle East and Ukraine. Oil prices are an important Statistical Indicator for measuring the problems that global turmoil may bring, but because of Global supply conditions, oil prices have been declining. Therefore, the USA is currently not feeling the effects of geopolitical turmoil. However, of course, we are in a time of heightened geopolitical risk, which remains a notable concern.

Q14: Wage growth has currently outpaced inflation, which hasn’t been the case for some time. Of course, this is also part of why Americans haven't felt much economic relief from prices. But as inflation rises again, how concerned are you that progress in closing this gap might disappear? You previously predicted achieving the 2% inflation target by 2026, but this has now been postponed to 2027. Are you confident that this target won't be delayed further?

Powell: Yes, so regarding inflation, we won't overreact to a few months of high readings or low readings. We previously had four months of good data, but the data for September and October was higher, while November's data was much lower. Therefore, I don't think the public will see this as a signal that inflation has an unexpected risk of rising. I believe inflation has significantly decreased. What the public feels is that price levels have risen due to past inflation, which is true. Their feeling is correct. To restore real wages, it takes some time. This requires a process that is achieved over a few years, where your real income continues to grow—in other words, your wage growth outpaces inflation significantly. This is precisely the economic model we have now. We hope to maintain this model. This process may take years, but that is the current situation. I don’t believe that a few months of high inflation data really indicates the kind of risk you mentioned.

When we talk about predicting the economy, whether it’s a three-year forecast or a two-year forecast, it involves a high degree of uncertainty, very high uncertainty. In that case, we cannot confidently predict how the economy will develop three years from now. So what we are doing is focusing on what is currently happening and making predictions based on similar situations. We maintain a strong labor market, housing services inflation is gradually decreasing, Commodity inflation is stabilizing, and non-market services are returning to previous levels. All these things should gradually be realized over time. The combination of these factors is foreseeable, and there is ample reason to believe they will be realized. But the specific timing is very uncertain.

Although we have made some progress in combating inflation, the progress has been slower than we expected, which is indeed a bit frustrating. However, we are still on the right track. I think if someone had told you two years ago that we would be at a 4.2% unemployment rate and a 2.8% inflation level, most people would have said, 'I can accept this.' This is quite a reasonable mid-term state. Although the task is not yet complete, we are satisfied with the stage we are currently in and the direction we are heading.

Q15: You have repeatedly mentioned that the inflation level has been oscillating sideways, seemingly stabilizing around 2.5%. Do you think the Federal Reserve must accept this and acknowledge that it cannot achieve the 2% goal? Can you rule out the possibility of interest rate hikes next year?

Powell: No. We will not settle for this. I believe we absolutely intend and expect to sustainably restore inflation to the 2% target. I am confident of this. It has taken longer, but we are indeed making progress. We have made significant progress and will continue to work until inflation returns to 2%. This is our commitment to the public, and we are also firmly dedicated to achieving this goal.

In this field, it is not possible to completely exclude or affirm anything. However, an interest rate hike next year does not seem to be a likely outcome. The current interest rate level of 4.3% represents a meaningful tightening policy. This is a well-calibrated interest rate level that allows us to continue making progress on inflation issues while maintaining a strong labor market.

Open Futubull > Market > US Stocks >Selected macroeconomic datato capture the latest trends!

编辑/jayden