Powell's Latest Signal: The Fed Shifts to Neutral Amid Inflation and Employment Pressures

Original Text Compiled and Translated by: Golden Data

Federal Reserve Chairman Powell pointed out in his speech early Thursday morning 东八区 that the U.S. economic growth has slowed, the unemployment rate has slightly increased, inflation has risen but remains above the 2% target. He mentioned that the impact of changes in trade, immigration, fiscal, and regulatory policies on the economy remains uncertain. In response to economic changes, the Federal Reserve recently cut the federal funds rate by 25 basis points to a range of 4%-4.25% at its latest meeting, emphasizing that policy will be flexibly adjusted based on data and economic outlook.

Powell's Full Speech

Thank you. I am delighted to be back in Rhode Island. The last time I had the opportunity to speak at the Greater Providence Chamber of Commerce was in the fall of 2019. At that time, I noted that "if the outlook changes materially, policy will change as well."

Who could have predicted! Just a few months later, the COVID-19 pandemic hit. The economy and our policies have undergone dramatic shifts that no one could have foreseen. Through the coordination of Congress, the government, and the private sector, the Federal Reserve's proactive response has helped avert the economy from experiencing a historically severe downturn.

The arrival of the COVID-19 pandemic followed the long and painful slow recovery post the global financial crisis. These two successive major global crises have left long-lasting scars that are hard to fade. In democracies around the world, public trust in economic and political institutions has been challenged. In this era, those of us in public service must focus on fulfilling our critical mission in the midst of storms and headwinds.

During this turbulent period, central banks like the Federal Reserve have had to devise innovative new policies aimed at achieving statutory goals during crises rather than in normal times. Despite facing two unique and extremely severe shocks, the performance of the U.S. economy has remained no less competitive compared to other major advanced economies globally, in some cases even better. As always, we must continually reflect and draw the right lessons from these trying times, a process that has actually been ongoing for over a decade.

Looking ahead, against the backdrop of significant changes in U.S. trade and immigration policies, as well as fiscal, regulatory, and geopolitical landscapes, the U.S. economy has shown some resilience. These policies are still taking shape, and their long-term effects will take time to materialize.

Economic Outlook

The latest data indicates that the pace of economic growth has slowed. The unemployment rate remains low but has slightly increased. Job growth has decelerated, and the downside risks to employment have risen. Meanwhile, inflation has risen recently and has been maintained at a slightly higher level. In recent months, the risk balance has clearly shifted, prompting us to adjust the policy stance closer to neutral at last week's meeting.

During the first half of this year, the gross domestic product (GDP) grew by approximately 1.5%, lower than last year's 2.5%. The slowdown in growth mainly reflects a deceleration in consumer spending. Activity in the housing sector remains weak, but investment by businesses in equipment and intangible assets has increased compared to last year. As highlighted in the September Beige Book, a report that compiles information from across the Federal Reserve System, businesses still widely believe that uncertainty is dampening their outlook. Consumer and business confidence indicators saw a sharp decline in the spring, followed by some recovery, but they remain below levels seen at the beginning of the year.

In the labor market, both labor supply and demand have significantly slowed—a development that is unusual and challenging. In this somewhat lackluster and subdued labor market, the downside risks to employment have increased. The unemployment rate rose slightly to 4.3% in August, but has generally remained at a low level over the past year. Job growth noticeably slowed in the summer months, with employers adding an average of only 29,000 jobs per month over the past three months. The current pace of job creation appears to be below the "breakeven" level needed to sustain a stable unemployment rate. However, some other labor market indicators remain generally stable. For example, the job openings-to-applicants ratio is still close to 1. Several job vacancy indicators and initial claims for unemployment insurance have held broadly steady.

Inflation has significantly retreated from its peak in 2022 but remains elevated relative to our 2% long-term target. The latest data shows that over the 12 months ending in August, overall PCE prices increased by 2.7%, higher than the 2.3% seen in August 2023. Excluding volatile categories such as food and energy, core PCE prices rose by 2.9% from a year ago. The decline in goods prices from last year has turned into a factor boosting inflation this year. The most recent data and surveys indicate that these price increases are primarily driven by higher tariffs rather than broader price pressures. Inflation in the services sector continues to moderate, including in housing. Short-term inflation expectations have risen this year overall due to tariff-related news. However, most longer-term inflation expectations indicators align with our 2% target over the next year or so.

The impact of significant changes in trade, immigration, fiscal, and regulatory policies on the overall economy is still to be observed. A reasonable baseline expectation is that the effect of tariffs on inflation will be relatively short-lived, resulting in a one-time upward shift in price levels. "One-time" does not mean "immediate and full pass-through." The increase in tariffs may take some time to propagate through the supply chain. Therefore, this one-time upward shift in prices may be spread out over several quarters and manifest as higher inflation during this period.

Nevertheless, there remains high uncertainty regarding the inflation outlook. We will cautiously assess and manage the risks of higher and more persistent inflation. We will ensure that this one-time price spike does not morph into a sustained inflation issue.

Monetary Policy

In the short term, inflation risks are biased to the upside, and employment risks are biased to the downside — this is a challenging situation. Two-way risks mean there is no risk-free path. If we overly aggressively ease policy, we may not complete inflation control and may have to reverse course to fully restore inflation to 2%. If we maintain a prolonged period of tight policy, the labor market may unnecessarily soften. When our objectives face this tension, our framework calls for seeking a balance at the two ends of the dual mandate.

The increased risk to employment has altered the risk balance of achieving our goals. Therefore, at the last meeting, we believed it was necessary to further move toward a neutral policy stance by lowering the federal funds rate target range by 25 basis points to 4% to 4.25%. I consider this policy rate to still be somewhat restrictive, but it allows us to better respond to potential economic developments.

Our policy is not pre-set. We will continue to decide on an appropriate policy stance based on the latest data, changes in the outlook, and risk balance. We are always committed to supporting maximum employment and sustainably returning inflation to the 2% target. We understand that the effectiveness of achieving these goals is related to all Americans. We understand that our actions will impact communities, households, and businesses nationwide.

Thank you again for inviting me here. I look forward to the upcoming discussions.