Federal Reserve Chairman Powell insisted at a press conference after the Fed slashed its benchmark interest rate by 50 basis points that the move was not intended to support current President Biden on the one hand, nor to respond to the impending economic collapse on the other.
Powell acknowledged at the outset that recent inflation and employment data led the Federal Open Market Committee (FOMC) to conclude that 50 basis points was reasonable.
Powell said: "We have two employment reports, July and August. We also have two inflation reports, one of which was released during the power outage. The QCEW report shows that the wage report numbers we get may be artificially overestimated and will be revised down. We also see anecdotal data such as the Beige Book."
He said: "We concluded that this is the right thing to do for the economy and the people we serve, and that's how we make decisions."
1. When asked how the market should decide whether to cut interest rates by 25 basis points or 50 basis points in the future meeting, Powell said: "A good starting point is the economic forecast Summary (SEP). If you look at the SEP, given where we are now and what we expect, you will see that this is a process of recalibrating our policy stance from the high inflation and low unemployment of a year ago to a more appropriate position. ”
He added: “There is nothing in the SEP that suggests the committee is in a hurry. This process evolves over time.”
2.Powell was asked about the Fed’s latest forecasts, which show the FOMC expects the federal funds rate to remain above the long-run neutral rate estimate through the end of next year, whether this suggests officials see the short-run neutral rate moving slightly higher.
Powell said: “We know that the policy stance we took in July 2023 was when the unemployment rate was 3.5%. Today, the unemployment rate has risen to 4.2% and inflation has fallen to a few tenths above 2%. We know that it is time to recalibrate our policy to be more appropriate as inflation and employment are moving toward more sustainable levels. The risks are now balanced.”
3.The Fed chairman was then asked how far the FOMC came from voting for a 50 basis point move and whether it was clear that this would be the outcome of the September meeting.
Powell responded: "When the power went out, we left it on. There was a lot of back and forth today, great discussion, and there was broad support for the decision that the committee voted on."
Powell added: "All 19 members of the committee have written rate cuts multiple times this year, all 19, which is a big change from June. We're off to a good start on this, and frankly, it really shows that we have confidence that inflation will fall to 2% on a sustainable basis, which empowers us. We can get off to a good start, and I'm glad we did."
4.When asked whether the larger rate cuts represent growing concerns about the state of the labor market, Powell insisted that this is realistic. The Fed's latest forecast shows that the unemployment rate will peak at 4.4%.
Powell said: "The labor market is in solid condition, and the policy measures we are taking today are intended to maintain this condition." "You can say that about the entire economy. The U.S. economy is in good shape, the growth rate is stable, and inflation is falling. The labor market is in a strong position. We want to keep it."
5. Powell was also asked whether the 50 basis point rate cut meant that the Fed was late in starting the easing cycle.
He replied: "We don't think we are behind, we think it's timely, and you can take this as a signal of our commitment not to fall behind."
6. He was asked why labor market conditions should not be expected to deteriorate further if policies remain at a restrictive level.
Powell said: "The situation is very close to what I would call maximum employment, you're close to that goal. So what's driving it? Obviously, there has been a decline in new jobs over the last few months, which is worth paying attention to. But ultimately, we believe that with appropriate adjustments in our policy, you can continue to see economic growth, which will support the labor market."
He added: "At the same time, if you look at the growth and economic activity data, the retail sales data that we just got, the second quarter GDP, all of these show that the economy is still growing at a solid pace. So, over time, this should also support the labor market."
7.Powell was asked what the FOMC will learn between now and the November meeting that will provide the magnitude of the next move.
He responded: "There are more data than usual, we will see another employment report, in fact we will get a second employment report on the Friday before the meeting, and inflation data. We will get all of this data and we will pay close attention to it."
8.When asked about the possibility of a return to the "cheap money" era that preceded inflation in recent years, Powell said they could only speculate, but he thought it was unlikely.
He said: "Intuitively, a lot of people would say that we may not go back to that era when there were trillions of dollars of sovereign bonds trading at negative interest rates and the neutral rate looked like it might be negative. Now it seems very far away. My own feeling is that we will not go back to that era, but to be honest, we will find out the answer. It seems to me that the neutral rate may be much higher than it was then. How high is it? I just don't think we know."
9.Powell also answered some questions about whether today's sharp rate cut before the election was politically motivated and whether it was aimed at supporting the current president.
Powell insisted: "Our job is to serve all Americans. We are not for any politician, any political figure, any reason, any issue, nothing, just to achieve maximum employment and price stability on behalf of all Americans. This is a good institutional arrangement that is good for the public, and I hope and firmly believe that it will continue."
10.The final question facing the Fed chairman is whether the FOMC sees any potential shocks in the future that could drive the US economy into a recession.
He responded: "I don't think so. I don't see any signs that the likelihood of a recession is increasing. You can see that the economy is growing at a solid pace, inflation is coming down, and the labor market remains at a very solid level."
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