Powell: Approaching the right time to cut interest rates, but not there yet, the earliest will be in September (full text attached)

Key Points of Powell's Press Conference:

• Rate Cut Outlook: The market's feeling of being closer to a rate cut by the FOMC in September is reasonable. The earliest rate cut may be chosen in September, weighing the risks of acting too early or waiting too long. Therefore, scenarios ranging from "zero rate cuts this year to multiple cuts" are imaginable.
• Inflation: The current decline in inflation is better than in 2023, and it is more widespread. Due to good data, our confidence in inflation continuing to fall towards the 2% target has grown.
• Employment: The labor market conditions have recovered to pre-pandemic levels, strong but not overheated. The downside risks facing the labor market are actually low. Particularly focused on private sector employment demand.
• Elections: Absolutely believe that the potential Fed rate cut in September is unrelated to political factors. The Fed has never used (policy) tools to oppose a party or election result, nor will it base FOMC policy decisions on the results of U.S. elections.
• Digital Currency: The FOMC did not discuss the issuance of a Fed digital currency at all. Progress on central bank digital currencies (CBDCs) is not significant, and there are no plans to discuss this issue with Congress.

The Federal Reserve remained on hold at its FOMC meeting in July, deciding to keep the federal funds rate target range between 5.25% and 5.5% and continue reducing its holdings of securities. Fed Chair Powell stated that the feeling of being closer to a rate cut is reasonable, and the FOMC may discuss cutting rates in September.

Powell stated in his speech that the Fed has always been focused on achieving its dual mandate of ensuring employment and price stability. Significant progress has been made on these two goals over the past two years, with the labor market trending towards balance, the unemployment rate remaining at a low level, and the inflation rate dropping significantly from its peak of 7% to 2.5%. He noted that the Fed's decision in July to maintain the current policy rate and reduce its holdings of securities is to continue the tightening of monetary policy and reduce inflationary pressures.

Reviewing the economic situation, Powell stated that recent indicators show that economic activity continues to expand at a steady pace. In the first half of this year, U.S. GDP growth rate declined from 3.1% last year to 2.1%. Private domestic final purchases (PDFP), which exclude inventory investment, government spending, and net exports and usually more clearly reflect underlying demand, grew by 2.6% during the same period.

Consumer spending growth has slowed from last year's strong levels but remains steady. Investment in equipment and intellectual property has rebounded from last year's weak levels. In the housing sector, investment stalled in the second quarter after strong growth in the first quarter.

Powell mentioned that in the labor market, supply and demand conditions are trending towards balance. The average monthly job gains in the second quarter were 177,000, lower than the first quarter but still robust. The unemployment rate has risen slightly but remains at a low level of 4.1%. Strong job growth in recent years has been accompanied by an increase in labor supply, benefiting from the rising participation rate of the 25-54 age group and strong growth in immigration. Nominal wage growth has moderated over the past year, and the employment gap has narrowed He believes that overall, a series of broad indicators show that the labor market conditions have returned to pre-pandemic levels, strong but not overheated.

Regarding inflation, Powell said that although the inflation rate has significantly declined over the past two years, it still slightly exceeds the Federal Reserve's long-term target of 2%. In the 12 months ending in June, overall personal consumption expenditures (PCE) prices rose by 2.5%, excluding the volatile food and energy categories, core PCE prices rose by 2.6%. Long-term inflation expectations seem to be well anchored, as reflected in a wide range of household, business surveys, and financial market measures.

Powell stated that as the labor market cools and inflation rates decline, the risks of achieving employment and inflation targets continue to balance. However, before having greater confidence in moving inflation towards the 2% target, Powell still believes it is not appropriate to lower the federal funds rate target range. But he noted that the second-quarter inflation readings have increased confidence, and more positive data will further enhance this confidence.

He said that the Fed will continue to make decisions at each meeting, as premature or excessive policy tightening could lead to a reversal of progress made in inflation. At the same time, delaying or insufficiently reducing policy restrictions could overly weaken economic activity and employment.

When considering any adjustments to the federal funds rate target range, Powell stated that the FOMC will carefully assess the latest data, evolving outlook, and risk balance.

If the economy remains robust and inflation persists, the Fed can maintain the current federal funds rate target range at the appropriate time. If the labor market unexpectedly weakens or inflation declines faster than expected, the Fed is also prepared to respond. The Fed's policy is prepared to address the risks and uncertainties faced in pursuing its dual mandate.

During the subsequent Q&A session, Powell stated that the market's feeling that the FOMC is closer to cutting interest rates is reasonable. He said that at the September FOMC monetary policy meeting, a rate cut may be an option, with the earliest FOMC choosing to cut rates in September.

He also reiterated that the Fed must balance the risks of acting too early or waiting too long, and scenarios ranging from "no rate cuts this year to multiple cuts" are conceivable. He said that he hopes to see more positive data and gain confidence in (continuing progress in combating high inflation). Current data shows that the job market is continuing to normalize gradually, and he does not want to see a significant further cooling of the labor market at this stage. He believes that, at present, the job market is not a significant source of inflation.

Q&A:

Q1: The market almost entirely expects a rate cut in September. I want to know if you think this is a reasonable expectation? If so, why not take action today? In what areas are you not confident about inflation returning to the 2% target?

First, regarding September, what I would say is that we have not made any decisions about future meetings this week, including the September meeting. The general view of the FOMC is that the economy is gradually approaching a point where it is appropriate to lower policy rates We will rely on data, but not just on one or two data releases. The issue is whether the overall situation of all data and the evolution of risk balance are consistent with the increasing confidence in inflation and maintaining a strong labor market. If this condition is met, a rate cut may be on the agenda as early as the next meeting in September. The general view of the FOMC is that we are approaching a point where it is appropriate to lower policy rates, but we have not fully reached that point yet.

Whether to cut interest rates will be decided based on actual circumstances, for example, some situations may be suitable for rate cuts while others may not. If we see inflation rapidly declining, roughly in line with expectations, economic growth remains relatively strong, and the labor market conditions remain as they are, then I believe a rate cut may be up for discussion at the September meeting. If inflation proves to be more stubborn, we would like to see a higher degree of inflation disappointment data, and we will weigh these circumstances along with other factors.

I believe this is not just a matter of one factor, but a combination of inflation data, employment data, the overall situation of risk balance we see, all of these factors will help us make decisions.

I think we need to see more and better inflation data. The recent readings have indeed boosted confidence, and we have seen progress in all three categories of core PCE inflation, including goods, non-housing services, and housing services. So, we had a weak quarter of inflation data at the beginning of the year, and then we saw some better inflation data in the last seven months of last year. We just want to see more data to increase confidence. As I said, we have indeed gained confidence, and more good data will make us more confident.

Q2: Market forecasts for March indicate three rate cuts in 2024, with core inflation at 2.6% and unemployment at 4%. Since we have now reached this level in terms of inflation, and the labor market conditions have exceeded expectations, does this mean that this rate path has once again become the best policy guidance?

All I can say is that the future path will depend on the evolution of the economy, and I cannot provide better forward guidance than this. Of course, we did not make an SEP (Summary of Economic Projections) at this meeting. We will do one at the September meeting.

I can only imagine a scenario from zero rate cuts to several rate cuts, depending on the evolution of the economy, but I don't want to set a benchmark path for you today.

Q3: You have previously stated that you will not cut rates until inflation reaches 2% because of the lag in inflation. Does this also apply to the labor market? If the labor market has already rebalanced, why is it necessary to maintain a tight policy now, especially in the case of high real interest rates? If the labor market is weaker than expected, will this change your view on inflation data?

This is one of the reasons we are considering. We have stated in our statement that we will refocus on the dual mandate and believe that risks are rebalancing. We believe that the data on the labor market shows that the labor market conditions are gradually normalizing, which is what we want to see. We have observed this and seen the labor market transitioning from an overheated state to a more normal state We are closely monitoring the labor market conditions, and if we see developments that are beyond our expectations, we will be prepared to respond. This is one of our considerations.

We have two mandates: maximizing employment in the labor market and maintaining price stability. Both are equal under the law. When we are far from our inflation target, we must focus on inflation, but now we are back to a more balanced focus. Therefore, we will be looking at the labor market conditions to see if they are evolving as we expect. As I mentioned, if we see developments that are not as desired, we will respond by gradually normalizing the labor market conditions. If we see unexpected developments, we will make corresponding adjustments.

While the unemployment rate is often considered a good single indicator, we will not rely solely on one statistical data point. We will also look at wages, participation rates, survey data, resignations, hirings, and all other factors to assess the overall labor market conditions. We are currently observing these factors.

I want to emphasize again that the current labor market conditions are similar to those in 2019 when the economy did not have inflationary pressures, and core inflation was actually below 2%. Therefore, I do not see the current labor market as a significant source of inflationary pressure. I do not want to see a significant cooling off in the labor market, and this is part of our considerations.

Another reason is that we have made actual progress on the inflation front, and we are confident in our progress, although we have not fully reached our target yet. We are more confident that we are on a sustainable path towards the 2% target. Both of these factors are at play, and we are incorporating them into our policy considerations.

Q4: You mentioned that you do not want to see further cooling off in the labor market. Why is that? Would you consider cutting rates preemptively to prevent unexpected cooling risks? How do you view the recent JOLTS employment report?

If we see significant economic downturn, we will respond.

Regarding the question of preemptive rate cuts, I do not see it that way. I believe we are currently in a good position balancing two risks. Acting too early would jeopardize the progress on inflation, while waiting too long or acting too slowly would endanger the economic recovery. Therefore, we need to balance these two aspects. This is the essence of the dual mandate. I believe we have achieved that. While it is a rough balance, the labor market feels like it is in a process of normalization. The 4.1% unemployment rate is still historically low.

Regarding the JOLTS report, I believe all data points continue to trend in the direction we want to see. The decrease in job openings is seen as positive. The Employment Cost Index (ECI) today was slightly softer than expected, which is a good sign indicating that wage growth remains strong but is gradually declining to a more sustainable level. This is the pattern we want to see. Therefore, I believe the data observed in the labor market largely align with the normalization process. We will continue to closely monitor to determine if it starts to show signs beyond expectations.

Q5: In March, you mentioned viewing rate cuts as a process and that a single rate cut would not have a significant impact. Are you now weighing the economy's capacity to withstand multiple rate cuts? Please explain your thought process to us, or do you believe rates need to be normalized now?

Yes, to be honest, I really can't say. You know, we have seen significant changes in the labor market. We are very attentive to this issue: is this normalization or more? We believe this is just normalization, and we really hope to support the labor market while seeing progress in inflation.

Now, we have made great progress in the labor market, and I think it's time for an adjustment to support this ongoing process. There has been a significant decline in inflation currently, with the unemployment rate still very low. We have been thinking about how to maintain this trend, and this is part of it. Therefore, given the progress we have made, we no longer need to focus 100% on inflation.

The 12-month core inflation rate is 2.5%, and the core inflation rate is 2.6%, which is much lower than before. Although the inflation issue has not been completely resolved, we can start gradually relaxing policy rates. I think this is just the beginning of a process. In most cases, you would expect policy rates to start declining from here, but I don't want to provide specific forward guidance because it really depends on the economy, which is highly uncertain.

Q6: Regarding inflation, the good reports of the past few months seem similar to last year, when there was a lot of momentum, despite some fluctuations in between. Do you think this momentum has put inflation back on track? Do you now think that the rebound in inflation in the early months of the year was just some fluctuations, and rate cuts could have come earlier?

In fact, the situation we see is slightly better than last year. Last year, as we pointed out at the end of the year, most of the progress we saw came from the decline in commodity prices, which is not sustainable. We are now also seeing progress in two other major categories, namely non-housing services and housing services. We only have one quarter of data now, while last year we had seven months of low inflation data. This is higher-quality data, but so far, it's only one quarter of data. So I think we need to see more data to be more confident that we are on the right path to 2% inflation.

But as I mentioned, our confidence is growing as we receive good data, such as the ECI report. And frankly, the easing labor market conditions also give us more confidence that the economy is not overheating. It doesn't look like an overheated economy, it looks like a normal economy.

If the early-year inflation was indeed just some fluctuations, it actually means that inflation data for other months was underestimated. That's why we look at 12-month data. We look at 12-month data because it eliminates all this noise. The 12-month data now shows a 2.5% core inflation rate and a 2.6% core inflation rate. This is much better than a year ago. Nevertheless, the work is not done. I want to emphasize that we are committed to keeping inflation consistently below 2%. But we need to acknowledge these progress, and we now need to more balancedly weigh the risks of the labor market and the inflation target.

Q7: What is the current risk balance? Would maintaining the current rates pose greater risks? After all, higher rates can damage the economy, slow demand, and push up prices. Or is it more important to maintain current rates in order to bring down inflation?

Our responsibility is to achieve maximum employment and price stability. We look at these two goals, and if one is further from the target than the other, we will focus on the variable that is further from the target to reach the goal more quickly. Therefore, in the past few years, it was best to focus on the issue of inflation. However, with the decline in inflation, the labor market is also cooling, reducing the upside risks of inflation, and now the labor market is softening.

Currently, inflation may be slightly further from the target than the employment goal, but I believe there is a real downside risk in the labor market. So we must weigh all these factors. As central banks around the world face the same issues, the time has come to begin appropriately reducing restrictive measures so that we can achieve both goals.

Q8: There will be two more employment reports before the next meeting. If you wait until September to cut rates, will you lag behind the situation, leading to unnecessary unemployment?

There is never certainty in our business. Between now and September, we will receive a lot of data, not just one or two data points, but the sum of all data and how these data affect the outlook and risk balance. This will be the content of our assessment. Of course, we will carefully look at the employment report, but there are many other data points to consider, and many things will happen between now and the September meeting for us to make a judgment.

Q9: The statement has shifted the focus on balancing inflation and employment concerns. We see wage data showing a sudden slowdown. We continuously hear news of layoffs in corporate earnings conference calls, such as Intel's sudden layoffs. In the Bureau of Labor Statistics employment report, government jobs are the main creators. Does government hiring mask potential weaknesses in the employment report?

We have seen a trend of narrowing job creation bases in some months, but we have also seen broader job creation in some months. Overall, the number of jobs is decreasing. You know, we will look at the whole situation, and I think you need to look particularly closely at private sector demand. From your perspective, I think government jobs are also an aspect that needs attention.

We need to balance the risks of acting too early and acting too late. We had seven months of good inflation data at the end of last year, but we felt we needed to see more good data. We pointed out that too much of the inflation decline came from commodities. Indeed, the first-quarter inflation data was not very good, and now we have another good quarter of data. We are balancing the risks of acting too early and acting too late. This is what we are doing, and it is essentially a very difficult judgment.

The overall feeling of this FOMC meeting is that we are approaching the time to start cutting rates, but we are not there yet. We want to see more good data. This decision is unanimous, with all participants in support. However, you know, there was indeed a lot of discussion today exploring the reasons for taking action. Most people support not taking action at the moment, which is a strong consensus of the committee, but there was indeed discussion today

Q10: When the Federal Reserve raises interest rates, there is a lot of discussion about policies having long and variable lag effects. I want to know if this also applies to your thinking within the committee? So, when lowering interest rates, are you concerned that the Fed's monetary policy may also fail to help the labor market or the broader economy slow down?

Yes, it does apply. I think this lag effect has been evident in the past six months. A few months ago, people were still questioning the restrictiveness of policies on the labor market. But now you can see that inflation and rate-sensitive spending indicate that policies are indeed restrictive. I wouldn't say it's extremely restrictive, but it is certainly effective restrictive policy. This lag effect should not show up during the downward process. It takes some time to fully impact the economy, financial conditions, and further affect economic activities, employment, etc. Ultimately, inflation is not immediate, although it is faster than before because the market now anticipates our actions.

As for the lag in interest rate cut policies, this is a very difficult and challenging judgment. We don't want to act too early or too late. This is how we make judgments. I am satisfied with our current position. If we really see economic weakness, we certainly have a lot of room to maneuver. But that is not the situation we currently see. Look at the growth data for the first half of the year, look at the growth rate of private domestic final purchases (PDFP) in the first half of the year at 2.6%. This does not indicate economic weakness, nor does it indicate overheating.

Regarding the labor market, although the unemployment rate has risen by 0.7 percentage points, we see a normalization phenomenon. However, wage growth remains at a high level, the unemployment rate remains low, and the layoff rate is very low. The number of initial claims for unemployment benefits has increased, but it is still relatively stable and historically low. Therefore, the data overall indicate that the labor market is normalizing. We will continue to monitor carefully to ensure this situation persists.

Q11: In terms of the labor market, are you concerned that the unemployment rate is rising too quickly? Will this affect the speed of interest rate cuts? Will the performance of the labor market this time be different from historical trends?

Currently, the data suggests that it looks like the normalization of the labor market. Again, emphasizing that job creation is at a fairly good level, wages are growing at a strong level but gradually declining, job vacancies have decreased but are still above historical standards. So, I have mentioned some data, but we believe what we are seeing is the normalization of the labor market. We will monitor closely, and if it shows more signs of weakness, we are prepared to respond.

I believe history will not repeat itself entirely, but there will be certain patterns. You can never assume that the situation will be exactly the same. An example is, is there a trend of increasing job vacancies? There are many examples. So the situation will never be exactly the same.

We also need to remember that in this COVID-19 pandemic, many obvious rules have been broken, such as the inverted yield curve. Many widely accepted wisdom did not work this time because the situation is really unusual, and much of the inflation is due to economic closures and supply issues in the face of strong demand. So the whole situation is different from many inflations or economic recession cycles we have seen before. Therefore, we must be very careful in making judgments, and I would say we cannot assume that these patterns will automatically repeat

Q12: It seems that there is a significant difference between anecdotal data and hard data at the moment, such as the recent pessimistic brown book and hard data. Do you take these anecdotal data seriously? Do you think the cooling speed of the economy and labor market is much faster than what the data shows?

Yes, we take those data seriously, the brown book is very good. It is even better to hear central bank governors talk about their dialogues with businesses, business leaders, workers, and private sector individuals. However, this picture is not a slowdown or really bad economic situation. It is just that growth in some regions is stronger than in others, but overall, again, looking at the overall data, especially the 2.6% growth in private domestic final purchasing power (PDFP) project, which is a good indicator of private demand.

So, we will listen to all these opinions, and I think it is important to listen to anecdotal data rather than just looking at the overall data, especially since GDP data is difficult to measure from quarter to quarter. Therefore, measuring economic activity is very difficult. So, I will look at both, but I will not say that these anecdotal data are consistently pessimistic, they are mixed.

Q13: You have always stated that the Federal Reserve does not consider political factors when making decisions. If there is a possibility of a rate cut in September, less than two months away from the election, and former President Trump has reportedly stated that a rate cut so close to the election is something the central bank should not do. What is your response? Do you think it is really possible to remain politically neutral when cutting rates in September?

I absolutely believe it is possible. First of all, we have not made any decisions yet, we will just evaluate the situation at that time. The current situation is that inflation has already approached our target significantly, while the unemployment rate remains low. We are very focused on using our tools to continue promoting the sustainability of this state. This is the focus of our discussions at every meeting, all decisions revolve strictly around this point, there really are no other factors, we will not change our approach to address other factors (such as the election calendar), nor will we base our policies on future presidents.

Q14: It has been a while since there has been a dissenting vote on interest rate decisions. If the data develops as expected, if you have more confidence at the September meeting, do you think there will be a unanimous vote on the interest rate adjustment in September? Or are there significant differences among committee members in assessing how much confidence is needed?

There will always be some meaningful differences. We have a lot of discussions before, during, and after the meeting. We have indeed had very in-depth discussions on these matters. You are right, in most cases, if people feel that their views are being heard and that their positions are being seriously considered, that is enough for most people.

Dissenting votes exist, that's for sure. No one has a veto, no one has a veto. So, it's just a matter of voting for or against. During the pandemic, we did not have many dissenting votes. It may be because we were more united under pressure and felt that we had to do things right. But before the pandemic, we had many dissenting votes, dissenting votes are part of the process

Q15: As the first rate cut of this round, is a 50 basis point rate cut possible or under consideration?

I don't want to say no, and I don't want to specify what we will do, but this is not something we are considering at the moment. So far, we have not made any decisions.

Q16: Without going into specifics, you mentioned that there was indeed a discussion at today's meeting about the possibility of taking action at this meeting. I am curious, can you provide more details about the discussion at today's meeting regarding a rate cut in September? If inflation data meets expectations, will action be taken at the next meeting?

The setup of the FOMC meeting is to have discussions on financial stability on the first day, as we do this every other meeting, and then we have the opportunity to comment on that. Then we have an economic roundtable discussion, and this morning we had a monetary policy roundtable discussion.

I think in the economic roundtable discussion and the monetary policy roundtable discussion, members expressed their views and there was a range of views. People can see from their speeches that they have different views on the economy. In the meeting minutes, we will detail this in a better way than my impromptu remarks. There is a range of views, but I do believe that we are a consensus-driven organization, people come together. It's a unanimous decision, and ultimately everyone supports this outcome, not just the voting members, but everyone. So, I would also like to say, some have considered the possibility of taking action at this meeting, but the vast majority of the committee members believe this meeting is not appropriate, but it may be considered at the next meeting, depending on the data performance.

Assuming all inflation data supports a rate cut, then a rate cut will happen. As I mentioned, we believe the time is approaching. If we get the data we hope for, then at the September meeting, lowering our policy rate may be on the agenda.

Q17: Former New York Fed President Bill Dudley recently wrote an article earlier this month stating that using rate cuts to ward off an economic downturn "may be too late now," and "unnecessarily increases risks by delaying," is he wrong? If he is right, does the likelihood of a hard landing increase?

This is the judgment we have to make, and we are very clear about this judgment. As I said, we have to weigh the risks of acting too early against the risks of acting too late. If we act too early, for example, we received a lot of advice suggesting we should have cut rates immediately after getting seven good inflation data last year. But we didn't do that, we said we need to see more data. Then we saw higher inflation. We saw a quarter of good inflation data, and we saw a lot happening in the labor market.

As I mentioned, I believe the labor market does not need further cooling to achieve inflation outcomes related to the labor market. Of course, not all inflation is related to the labor market. So I think this is a very difficult judgment to make, and the current judgment of the committee is that the time is approaching, and that time may be September I don't know if the probability of a hard landing has increased, I think the probability is very low. I see no reason to believe that the U.S. economy is either overheating or sharply weakening. This is not reflected in the data. Current data indicates that the economy is growing at a steady pace, the labor market has cooled off, but the unemployment rate remains low. Overall data shows a strong labor market.

So what we are currently seeing is an economy that is neither overheating nor sharply weakening, which is exactly what we want to see. Of course, we are monitoring the economic trends. We are prepared to respond to any trend of economic weakening, but that is not what we are currently seeing. What we see is strong economic activity and a healthy labor market, with inflation decreasing.

Q18: In the minutes of the June meeting, some Fed officials indicated that the Fed may not have clearly communicated its reaction mechanism. When I talked to other commentators, they said they really didn't understand what triggered the first rate cut and the future rate cut path. They don't have a good understanding of this. Can you explain this issue?

I think the reality is that forecasters, not just the Fed, have always been surprised by the forces of the economy. So we must be very humble on this issue, giving clear forward guidance needs to be done very carefully. Of course, when you say you will rely on data, it means how data affects the outlook and risk balance, but no one has deep insights into the future.

Regarding the reaction mechanism, this is a long-standing issue that people will always discuss. I think people have actually long understood that we are very focused on reducing inflation, and no one is confused about that. The data has shown significant improvements, the market is very sensitive to the data, this is not just a question of what we are going to do, but the continuous changes in the data.

Q19: FedNow has been online for over a year, but there is not much discussion about Central Bank Digital Currency (CBDC). Can you provide an update on the progress? Is this considered a closed topic?

No, this is still a topic of internal committee discussion. Digital finance overall has a significant impact on payment methods, instant payments will change the efficiency and security of payments. We have research teams following these developments, as we play an important role in the payment field, both as a convener and operator.

Regarding CBDC, there are currently no new developments. We do not have the authority to issue CBDC, nor are we seeking such authority. We are just following the developments and assessing the situation. Almost all major central banks are at least conducting assessments, some are seriously considering implementing CBDC. We are not in that scope, we are just keeping track and evaluating its potential impact. This is the work we need to do, but we have no plans to seek authorization from Congress, nor has anyone decided that we think it's a good idea