Powell turns hawkish? A comprehensive look at the full text of the speech and key points of the Q&A session

On Monday, September 30th, in a speech at the National Association for Business Economics (NABE) annual meeting, Federal Reserve Chairman Powell stated that if the economic development meets expectations, the Fed's interest rates will gradually move towards a more neutral stance over time. He emphasized that the Fed does not have a preset interest rate path, and that risks are two-sided, with decisions being made at each meeting.

Commentators noted that Powell's prepared speech was "very consistent" with his remarks at the September Fed rate cut announcement press conference, reiterating many points from his post-meeting remarks in September. He mentioned that the U.S. economy is strong, as is the labor market, but there has been a cooling in the labor market over the past year.

In his speech, Powell reiterated his hope that the labor market will no longer weaken at this point. Due to the expected rise in inflation to 2%, the Fed is not welcoming further declines in job growth. Powell mentioned that the Fed intends to use rate cuts to maintain a "strong" economy, stating that the economic conditions have laid the foundation for further easing of price pressures, which is expected to lead to further cooling of inflation. Powell mentioned in his speech that the 4.2% unemployment rate falls within the "natural" estimate range of the unemployment rate consistent with non-inflationary growth.

Powell mentioned the goal of achieving a soft landing that reduces inflation without causing a significant increase in the unemployment rate, stating that the Fed has not yet achieved this but has made significant progress. Commentators believe that Powell is essentially saying that it is correct for the Fed to maintain high interest rates in the long term, and pointed out that the inflation rate is close to returning to the Fed's target of 2%.

Overall, compared to his post-meeting remarks in September, Powell's speech this time did not contain much new information. However, during the Q&A session after reading the speech, Powell showed a slightly hawkish tendency. He hinted that the Fed is not in a hurry to cut rates, mentioning the encouraging revisions made by the U.S. Department of Commerce last week to GDI, personal spending, savings rate, and other data, stating that these revisions have eliminated the downside risks to the economy.

When asked about what action the Fed will take at the next November FOMC meeting, Powell indicated that if the economic performance is consistent with current forecasts, the Fed will cut rates twice this year, by 25 basis points each time. Commentators pointed out that although this statement only reiterated the latest dot plot released after the September meeting, Powell mentioning this may imply that he is telling the market that the total rate cut for the remaining year should be 50 basis points, rather than the market's current expectation of about 75 basis points.

Decision-making depends on overall data, Fed expects two more 25 basis points rate cuts this year

During the Q&A session, Powell stated that most of the data that the Fed will consider for the November FOMC meeting decision has not yet been released. Before making a decision in November, two more employment reports and an upcoming inflation report need to be considered, "We will take all factors into account." He said that Fed policymakers will review all data to determine the next steps.

Powell explicitly stated:

"The (FOMC) committee is not in a hurry to cut rates quickly."

"From a fundamental perspective, we see this as a process that will take some time to complete, rather than something that needs to be rushed. It depends on the data and the pace at which we actually make progress." Powell said that if the economic performance meets expectations, it means that for the remaining time this year, the Fed will cut interest rates by a total of 50 basis points. He reiterated that the key is to look at the overall data to understand whether the required policy stance has been reached, "we will take all factors into consideration." Consistent with the post-September meeting press conference, Powell also stated this time that the FOMC's basic expectation is that if the economic performance meets expectations, there will be two more rate cuts this year, each by 25 basis points.

Labor market does not need to cool further from now

Regarding the labor market, Powell evaluated that from many indicators, the labor market is still robust but has cooled down. He once again mentioned that he does not want to see further weakness in the labor market:

"We believe that the labor market conditions do not need to cool further from now."

Powell mentioned the lesson of 2019 when the labor market was quite tight but there was no inflation. This indicates that a hot labor market does not lead to inflation.

Powell stated that goods and services inflation has largely returned to pre-COVID-19 levels. With changes in housing rents, housing inflation is expected to slow down, and the cooling process will take "a few years" to slow down housing inflation, with the direction of housing inflation change being clear.

"Very large" upward revision in personal income announced last week eliminates economic downside risks

Powell mentioned the GDP and consumer personal income revisions announced by the U.S. Department of Commerce last week. These data have been revised upwards. Powell described the income revision as "very large," which eliminates "economic downside risks." He also mentioned that the revised savings rate is not as low as previously thought. A higher savings rate "indicates that (consumers) can continue to spend at a healthy level."

Powell also pointed out that with the revisions announced last week, productivity now appears to have improved. Commentators say that such revisions certainly help to curb inflation. However, Powell expressed caution about the sustainability of the rise in productivity during the Q&A session. He said it is "too early" to assert that productivity will continue to rise.

Powell noted that the labor market usually provides better real-time signals than GDP data. "There is more evidence to support that the GDP data we receive is reliable. This is somewhat helpful. But this will not prevent us from paying very close attention to the labor market. Many people believe that in some cases, the labor market may reflect real-time situations better than GDP data."

In this regard, Powell cited previous recession cases, predicting that those recessions were not indicated by GDP data but by labor data. He said that positive GDP data is somewhat helpful, but labor is the key focus.

Decisions will consider data released during the blackout period and decisions will be made only at the meeting

Regarding the Fed's post-September release of GDP, unemployment rate, PCE inflation, and other economic outlooks (SEP), Powell emphasized that the SEP is only a summary of the forecasts of the 19 Fed policymakers. Most Fed policymakers may believe that there is "enormous uncertainty" in their current forecasts. Sometimes the outside world pays too much attention to the SEP. Saying that he loves and hates the policy rate forecasts of Fed policymakers "is not an exaggeration." Although Powell pointed out that the dot plot indicates that the Fed will not be in a hurry to cut interest rates, the pace of rate cuts will actually be determined by the data. He said:

"In the end, we will be guided by the data that are coming in. If the economy is slowing more than we expect, then we'll be more aggressive. If the economy is slowing less than we expect, then we'll be less aggressive. That's really the key."

Powell also noted that the Fed will take into account important data released during the blackout period before the FOMC meeting, stating that Fed policymakers will absolutely consider the economic data released during the blackout period. This usually refers to the period of ten days before the start of the meeting when Fed officials are not allowed to make public statements. He said that the Fed does a "lot of work" during the blackout period, and "what happens during that period can be very important for the meeting."

Powell stated that he will speak with all Fed policymakers on the Thursday and Friday before the meeting to understand their views and thoughts on the economy. However, decisions are typically made at the meeting.

"Decisions are made at the meeting."

Commentators noted that Powell did not make any comments to spark market bets on another 50 basis point rate cut by the Fed, but he made it clear that the Fed will act based on data.

Full Text of Speech

Here is the full text of Powell's speech before the Q&A session, with annotations from Wall Street News in parentheses:

I have a few brief comments on the economy and monetary policy and look forward to our discussion.

Our economy is generally strong. Over the past two years, we (the U.S.) have made significant progress in achieving our dual mandate of full employment and stable prices. The labor market remains strong, cooling off from its earlier overheated state. Inflation has moderated, and I and my colleagues at the Federal Open Market Committee (FOMC) have increased confidence that inflation will remain at our 2% target. At our meeting in early September, we lowered the target range for the federal funds rate by 0.5 percentage points, reducing the level of policy accommodation. This decision reflects our increasing confidence that we can sustain the strength of the labor market in an environment of moderate growth and inflation continuing to run near our objective by recalibrating our policy stance.

Recent Economic Data

Labor Market

Many indicators point to a strong labor market. Just to name a few, the unemployment rate remains well within the range of estimates of the natural rate. Layoffs are few. The labor force participation rate for the prime-age group of 25 to 54-year-olds is near its historical high, and the participation rate for prime-age women continues to set new highs. Real wages are rising steadily, roughly in line with productivity growth. The ratio of job openings to unemployed workers has been steadily declining but remains just above 1, meaning there are still more job openings than job seekers. This was rare before 2019.

However, the labor market has cooled noticeably over the past year. Workers now perceive fewer job opportunities than they did in 2019. Slower job growth and an increase in labor supply have pushed the unemployment rate up to 4.2%, still low by historical standards. We (the Fed) believe that we (the Fed) do not need to see further cooling in labor market conditions to achieve our 2% inflation goal In the past 12 months, the overall inflation rate and core inflation rate were 2.2% and 2.7% respectively. The phenomenon of inflation trending downwards is widespread, with recent data showing that the inflation rate is further returning to 2%. Due to the easing of supply bottlenecks, core commodity prices have fallen by 0.5% over the past year, approaching the pre-(COVID-19) pandemic speed. Excluding housing, core service inflation is also approaching pre-pandemic levels. Housing service inflation continues to decline, albeit at a slow pace. The growth rate of new tenant rents remains low. As long as this situation persists, housing service inflation will continue to decline.

The broader economic conditions have also laid the foundation for further downward inflation. The labor market is now roughly balanced. Long-term inflation expectations remain stable.

Monetary Policy

Over the past year, we have continued to see steady and healthy growth in labor and productivity. Our (Federal Reserve) longstanding goal has been to restore price stability while avoiding a painful rise in unemployment rates, which often accompanies efforts to lower high inflation. This would be a very ideal outcome for the communities, households, and businesses we serve. Although the task is not yet complete, we have made significant progress towards this goal.

For most of the past three years, the inflation rate has been well above our (Federal Reserve) target, and the labor market has been extremely tight. We appropriately focused on reducing inflation. By maintaining restrictive monetary policy, we have helped restore the balance between overall supply and demand in the economy. This patient approach has paid off: inflation is now closer to our 2% target. Today, we believe the risks of achieving employment and inflation goals are roughly balanced.

Since the July 2023 meeting, our policy rate has been at a two-decade high. At that meeting, the core inflation rate in the United States was above 4%, well above our target, and the unemployment rate was 3.5%, close to the lowest level in fifty years. In the following 14 months, inflation has fallen, and the unemployment rate has risen, with significant changes in both. It is time to recalibrate our policy stance to reflect the progress towards our goals and changes in risk balance.

As I mentioned, we have decided to lower the policy rate by 50 basis points, reflecting our increasing confidence that, with appropriate recalibration of our policy stance, we can maintain a strong labor market against the backdrop of moderate economic growth and continued decline in inflation to 2%.

Looking ahead, if economic developments roughly meet expectations, monetary policy will gradually move towards a more neutral stance over time. But we (Federal Reserve) do not have a preset path. Risks are two-sided, and we will continue to make decisions at each meeting. When considering further policy adjustments, we will carefully assess subsequent data, evolving outlooks, and risk balance. Overall, the economic conditions are good, and we intend to use our tools to maintain this state.

We remain firmly committed to achieving maximum employment and price stability. Everything we do is for our public mission

Thank you. I look forward to our conversation