On Thursday, Federal Reserve Chairman Powell remarked to business leaders in Dallas that the robust growth of the U.S. economy provides policymakers with ample room to adjust interest rate policies. He noted, "The current economy does not signal an urgent need to cut rates. We will make decisions more cautiously." This statement reflected the Fed's optimistic view of the current economic situation and set the tone for future monetary policy adjustments.
Powell stated that the U.S. economy is performing the best among major global economies. Although non-farm employment in October increased by only 12,000 jobs, falling short of market expectations, the overall labor market remains strong. He attributed the weak job growth to storm damage and labor strikes in the Southeast. He emphasized that while the unemployment rate has fluctuated, it remains relatively stable and at historically low levels.
Significant Inflation Progress but Goals Not Fully Achieved
Regarding inflation, Powell stated that the Federal Reserve has made "broad" progress. He noted that the Fed's preferred inflation metrics indicate that the overall inflation rate was 2.3% in October, and 2.8% for core inflation, excluding food and energy. Although inflation is nearing the long-term target of 2%, Powell warned that the inflation path might "occasionally encounter bumps." Additionally, inflation data released this week indicates rising consumer and producer prices, suggesting that inflationary pressures remain.
Powell emphasized the Fed's commitment to bringing the inflation rate down to its target level, but the process of policy adjustment will be made with great caution. He stated, "We are confident that through appropriate policy adjustments, we can maintain strong economic and labor market performance while achieving the goal of sustainable low inflation."
Cautious Rate Cut Pace, Market Expectations Adjust
Powell's speech clarified the Fed's cautious stance on rate cuts, resulting in a notable market reaction. The stock market fell as rate cut expectations cooled, bond yields rose, and traders lowered their expectations for a December rate cut. In last week's Open Market Committee meeting, the Fed had just lowered the benchmark interest rate by a quarter of a percentage point to the range of 4.5%-4.75%, following a 0.5 percentage point cut in September.
Although the market still expects the Fed to cut rates by 25 basis points in December and further ease policies in 2025, Powell was noncommittal about the specific policy path. He stated that the Fed seeks to adjust the key interest rate to a neutral level that neither stimulates nor restrains economic growth, but this process will be complex and uncertain. "Policy targets are not preset; we will be guided by data to gradually adjust rates to a more neutral level," he said.
Balance Sheet Reduction Continues
Powell also mentioned that the Fed is still reducing its massive balance sheet on a monthly basis but did not disclose when this process will end. He noted that continuing with balance sheet reduction is an important part of maintaining monetary policy normalization in the current strong economic environment.
Powell's speech highlighted the Fed's policy flexibility amid strong economic conditions while emphasizing a firm commitment to controlling inflation. However, his cautious attitude also elicited a mixed market response. In the coming months, the Fed's interest rate and balance sheet adjustment paths will continue to be closely monitored by the market.
