Powell: The economy is strong, the Federal Reserve does not need to rush to cut interest rates, and has time to understand the impact of Trump's policies

After the Republican Party took control of both houses of Congress and Trump has greater power to implement policy plans next year, Federal Reserve Chairman Jerome Powell spoke for the first time, stating that the recent performance of the U.S. economy is "quite good," giving the Fed room for cautious interest rate cuts, and that there is no rush to cut rates. The Fed has time to first understand and assess the economic impact of future policies introduced by Trump before reacting.

On Thursday, November 14th, during a dialogue with local business leaders hosted by the Federal Reserve Bank of Dallas, Powell stated that the current state of the U.S. economy does not suggest that the Fed needs to rush into cutting rates. Because the economic performance is strong, the Fed can consider decisions cautiously. The path to the Fed's inflation target of 2% can sometimes be bumpy.

"The economy has not sent any signals that require us to rush into cutting rates. The strong economy we see right now allows us to make decisions cautiously."

After Powell indicated there was no rush to cut rates, the two-year U.S. Treasury yield, sensitive to interest rate outlooks, rose 3 basis points in the short term, approaching 4.32%, while U.S. stocks briefly tested 4.37% at the end of trading. U.S. stocks turned slightly positive by over 0.1% at midday, while spot gold fell about $6 to around $2,570, turning back to decline during the day. The dollar index's gains expanded.

In light of the plans proposed during Trump's campaign, the market expects the Trump administration to impose tariffs externally, carry out large-scale deportations of illegal immigrants internally, and exacerbate the fiscal deficit through tax cuts, all of which are seen as measures that could drive up inflation. Therefore, after Trump's victory, the possibility that the Fed may slow down interest rate cuts due to inflation risks has become a hot topic of discussion.

The U.S. CPI growth for October, released this Wednesday, met market expectations. Wall Street analysts believe that the CPI data almost ensures the Fed will continue to cut rates in December, but the market still needs to assess the impact of Trump's presidency on inflation, which could lead the Fed to slow down the pace of rate cuts next year.

Also on Wednesday, former U.S. Treasury Secretary Summers warned that if Trump insists on fulfilling the promises made during his campaign, the U.S. will face a more severe inflation shock than in 2021. This could mean double-digit inflation, representing an "inflation crisis not seen in decades."

Summers accurately predicted the last round of inflation in the U.S. in 2021, when he warned that the Biden administration's pandemic stimulus plan was inflationary, and the $1.9 trillion relief plan would create excess demand and lead to an overheating economy However, the Biden administration ignored his warnings, believing that inflation is only "temporary." Summers expressed hope that Trump could learn from this and adjust his plans to avoid causing inflation. If inflation ultimately resurfaces, the Federal Reserve will not tolerate it.

Labor market indicators return to more normal levels; inflation will continue to decline towards the target; interest rate path depends on data and economic outlook

When evaluating the economy this Thursday, Powell stated that the U.S. economy ranks among the top in major global economies.

Specifically regarding employment, the non-farm payroll growth in October, released earlier this month, was disappointing. Powell attributed this mainly to hurricane damage in the Southeast and strikes by employees at large companies like Boeing. He believes that the U.S. labor market remains in a "solid state." Many indicators have returned to a "more normal" level consistent with full employment goals.

Powell pointed out that the unemployment rate has been rising but has stabilized in recent months and remains low by historical standards.

"Improved supply conditions support strong economic performance. The labor force has grown rapidly over the past five years, and productivity growth has exceeded the levels of the previous twenty years before the pandemic, allowing the economy to grow rapidly without overheating."

At the same time, Powell indicated that as employment data approaches neutral levels, officials may consider slowing the pace of interest rate cuts. He said:

"If the data tells us to slow down a bit, then slowing down seems like a wise move."

Regarding inflation, Powell noted that inflation has "generally" improved and indicated that Federal Reserve officials expect inflation to continue to decline towards the Fed's target of 2%. He stated:

"The inflation rate is getting closer to our long-term target of 2%, but it has not yet been achieved. We are committed to completing this mission, and under conditions where the labor market is roughly balanced and inflation expectations are well anchored, I expect inflation rates to continue to decline towards the 2% target, although there may be bumps along the way."

Powell did not comment on the possibility of an interest rate cut at next month's Federal Reserve monetary policy meeting. Pricing in the futures market this Thursday showed that traders expect about a 70% chance of a 25 basis point rate cut by the Fed in December.

Powell reiterated that future Federal Reserve decisions depend on data and do not have a predetermined path. He said, "The path of the policy rate will depend on the upcoming data and the evolution of the economic outlook," adding that the Fed "is gradually shifting policy towards a more neutral environment over time. But the path to achieving this goal is not predetermined."

Congress generally considers the independence of the Fed to be very important; it is too early to draw conclusions about the Trump administration's policies

Regarding the impact of political factors such as the election, Powell stated that he has spent a lot of time in Congress, where members of both parties generally believe that an independent Federal Reserve is very important for serving the public as much as possible. He said, "We are not perfect. Everyone makes mistakes, but if your people focus solely on this task and do not engage in politics, you will get the best results."

Last week, Powell downplayed the impact of the election on the Federal Open Market Committee (FOMC) policies during a press conference following the Fed meeting, stating that it remains to be seen. In Thursday's dialogue, the host asked Powell that if the Republican Party controls both houses of Congress and the White House, would the Fed's decision-makers be more confident about the economic outlook if they found that the Fed's staff considered tax cuts as a reasonable assumption? Would the election results at least significantly reduce the downside risks to growth as assessed by the Fed? Powell responded: "I think it's too early to draw conclusions now."

He explained that the work of Federal Reserve staff is very flexible, making real-time assessments, much like the capital markets. Federal Reserve decision-makers will wait longer to see the actual effects, so it is certain that at the December FOMC meeting, the staff will present what the Federal Reserve knows. But the issue is that the Federal Reserve does not actually know what policies the government will implement; it knows that policies in several areas will change but does not know the extent of those changes or the timeframe for them.

Regarding fiscal policy, Powell said that Congress takes a long time to pass relevant legislation. He believes that the results of the election may not have any economic impact this year, and the Federal Reserve has time to assess the net impact of policy changes on the economy before reacting to those changes. He stated, "I think we will cautiously change policy until we have much more certainty."

The impact of AI may come later and be greater than we expect

When discussing some reasons for productivity being above trend levels, Powell said that generative artificial intelligence (AI) will certainly have an impact on productivity. Generative AI is just getting started. Companies that deal with the Federal Reserve, such as banks, have not really deployed it yet, and they are very aware of the risks involved. Some credible organizations estimate that over time, generative AI will create explosive growth in productivity over the next decade, leading to significant increases in productivity. Of course, there are skeptics who believe that the effects are exaggerated.

Powell then said that history always shows that with innovation comes technology. It will not first appear in productivity statistics; by the time it does, it will be a long time later. Therefore, he believes that the impact of AI may come later than we expect and be greater than anticipated. This is because AI indeed represents a series of extraordinary developments, and it is clearly capable of replacing a large amount of work currently done by humans, including well-educated individuals.

Regarding monetary policy, Powell believes that AI will not impact monetary policy. He said that in the short term, the Federal Reserve is closely monitoring the labor market. Monetary policy is trying to stimulate the economy, maintain full employment, and ensure price stability, attempting to achieve this with the tools at the Federal Reserve's disposal. In two to three years, what drives long-term productivity and relates to long-term prospects is not actually the tools in the Federal Reserve's hands. For technological advancement, the best the Federal Reserve can do is create macroeconomic price stability, which means price stability and a good, strong, stable labor market, so that people do not have to worry about inflation fluctuations or high levels.

The host mentioned that financial institutions currently regulated by the Federal Reserve are also experimenting with new AI technologies, considering that certain systemic risks may have blind spots, and asked whether this would increase the difficulty of regulation, as AI is like a black box, and often software engineers or others using it cannot explain how it makes decisions.

Powell responded that this indeed raises various issues. From the perspective of regulators, the good news is that banks are very aware of this. He believes that people are very cautious about AI, at least in banks regulated by the Federal Reserve. They are very careful and thoughtful about how to implement AI technology, have done a lot of work, and have not deployed AI extensively in their operations Powell said that everyone is trying to understand the development direction of AI technology, what its capabilities are, and what risks it poses. If you don't understand why AI makes these decisions, how can you address discriminatory outcomes in lending? So this will be a challenge. But he said that the Federal Reserve is very clear about this, and so are the banks