The labor market is cooling down, but this has not raised concerns for the Federal Reserve, even though inflation forecasts have risen, overall progress remains stable. In the last policy decision before Trump's second term, Federal Reserve Chairman Powell attempted to explain the contradictory narratives and conflicting data. Among all the uncertainties, this central bank governor provided a final word of caution: vigilance.

Powell said at a press conference on Thursday: "When the road ahead is unclear, you slow down a bit, just like driving in foggy weather or walking into a dark room full of Furniture. You just need to take it slow."

According to Powell, the narrative of declining inflation has essentially remained unchanged. Even if the Federal Reserve announces a third consecutive rate cut, having already reduced rates by a full percentage point this year, monetary policy still maintains a restrictive stance. This is because officials still believe inflation will continue to pose challenges during the next administration. Compared to previous predictions, officials now forecast that inflation will be higher than expected by the end of this year and remain at elevated levels into next year.

Powell stated, "The situation still is that we are recovering from the significant shocks the economy suffered in 2021 and 2022."

If price pressures remain stubborn, the other side of the Federal Reserve's goals—the risk of deterioration in the labor market seems to have receded, and the risk of the labor market driving up prices has also faded. Powell indicated that the labor market is in a normal state, looser than before the pandemic, still cooling down, but not enough to sound the alarm.

To this end, the Federal Reserve has actually lowered its unemployment rate forecast for the end of this year from 4.4% to 4.2%, and for the end of next year from 4.4% to 4.3%.

The initial reaction from the market was a decline, which led to the worst hour for the stock market since the COVID crisis.

The lesser expectation of interest rate cuts means that the federal funds rate will experience another year of being 'higher for longer,' which seems to overshadow Powell's cautiously optimistic remarks. However, as Neil Dutta, director of macroeconomic research at Renaissance, pointed out, the Fed may lower the threshold for future rate cuts by raising inflation forecasts and lowering unemployment rate forecasts.

Trump's return is a huge policy unknown. New tariffs, retaliatory tariffs from other countries, and their impact on Consumer prices will bring layers of uncertainty. But Powell stated that the Fed can take its time. After all, none of the plans proposed by Trump have been implemented, and many of those plans are unlikely to ever be enacted. Powell said, 'The outlook for our economy is quite bright, but we must stay the course.'

Editor/rice