Federal Reserve Semi-Annual Monetary Policy Report: Economy is gradually returning to normal, inflation is slowing down

According to the report submitted to the U.S. Congress on Friday, the Federal Reserve stated that as inflation slows down and the job market returns to a state of being "tight but not overheated" before the COVID-19 pandemic, the U.S. economy is gradually returning to normal.

"Last year, inflation slowed significantly, and this year has shown moderate further progress," the Federal Reserve pointed out in its latest semi-annual monetary policy report, especially in the housing services sector, where the pace of price increases is likely to return to pre-COVID-19 levels.

The report also noted that the job market in the first half of this year "continues to rebalance," with "weakening labor demand, reduced job vacancies in multiple economic sectors, and, benefiting from strong immigration rates, the labor supply continues to increase."

"The balance between labor demand and supply seems similar to the period before the pandemic, when the labor market was relatively tight but not overheated. Nominal wage growth continues to slow down," the report stated.

Before submitting this biannual report to Congress, Federal Reserve Chairman Jerome Powell will testify for two days next Tuesday and Wednesday, with a focus expected to be on the Fed's monetary policy plans entering a sensitive election season.

Employment and Inflation Status

Employment growth has been slowing down, with the unemployment rate steadily rising from 3.5% in July last year to 4.1% in June this year. Inflation remains around 2.6% in the personal consumption expenditures price index favored by the Federal Reserve, although policymakers still consider this level "high" but gradually approaching a less elevated state.

New inflation data will be released on Thursday, and if price pressures continue to ease, this may prompt Fed officials to at least consider a rate cut in September—Powell and his colleagues have stated that this decision will be entirely based on economic conditions, not on how it might affect the upcoming elections.

Policy Independence

One theme specifically mentioned in the report is "monetary policy independence, transparency, and accountability," which may be a response to current politics—Republican presidential candidate Donald Trump, if elected, may try to force Powell out of office before the end of his term in 2026.

The report points out that the Federal Reserve is first accountable to Congress, which has granted the central bank "operational independence" in setting interest rates to ensure that these decisions are not influenced by short-term politics.

The Federal Reserve stated in the report: "It is well known that monetary policy actions aimed at achieving long-term maximum employment and price stability may involve short-term economic costs, and actions that raise output and employment to unsustainable levels have no long-term real benefits and may instead lead to an increase in inflation." It is recognized internationally that the independence of central banks is a "norm."

However, whether Democratic or Republican lawmakers, they may question Powell during the two days of testimony about whether the Fed adheres to this standard.

Interest Rate Policy Outlook

At the recent June policy meeting, the Federal Reserve kept rates unchanged at 5.25%-5.50%, and policymakers' new forecasts show that they have reduced their expected rate cuts for this year from three to one. However, financial markets and some policymakers still expect the Fed to cut rates twice before the end of the year, each time by 25 basis points Some Democrats have been pressing Powell on the issue of high interest rates, complaining that high rates are exacerbating housing affordability issues for low- and middle-income families. Meanwhile, Republicans have criticized the Fed for its slow response to inflation and may express dissatisfaction with any signs of rate cuts by Powell before the elections.

But whether rate cuts start now or later, that moment may be approaching