Summary of Powell's October press conference:
1. Policy Interest Rate Outlook: Another Fed rate cut in December is not a certainty. Opinions are very divided today. Some FOMC members believe it's time to pause.
2. Balance Sheet: The composition of the balance sheet was not decided today. Balance sheet composition is a long-term process and will be gradual. The goal is to adjust towards a balance sheet with a shorter (holding) duration.
3. Job Market: The job market continues to cool due to restrictive policies. No exacerbation of the weakness in the job market has been observed; job vacancies do indicate that the market has remained stable over the past four weeks. The dramatic decline in labor supply has impacted the job market. The Federal Reserve closely monitors layoff decisions.
4. Inflation: September CPI was more moderate than expected. Services inflation, excluding the housing market, has continued its unilateral trend. Core PCE, excluding tariffs, is likely at 2.3% or 2.4%. To date, non-tariff inflation has not strayed far from the 2% inflation target. The baseline forecast is that the US will experience some additional tariff inflation.
5. Government shutdown: Data disclosed by the private sector cannot replace statistical results from government departments (such as the Bureau of Labor Statistics). It is conceivable that a government shutdown would affect the December FOMC monetary policy meeting.
On Wednesday, Eastern Time, the Federal Reserve announced at its FOMC meeting that it would lower the target range for the federal funds rate from 4.00% to 4.25% to 3.75% to 4.00%, and decided to end its balance sheet reduction program on December 1. This marks the first time in a year that the Fed has cut rates for the second consecutive FOMC meeting. Fed Chairman Jerome Powell stated at the post-meeting press conference that another rate cut in December is not a certainty.
In his opening remarks at the press conference, Powell said that although the release of some important federal government data was delayed due to the US government shutdown, the public and private sector data that the Federal Reserve still has access to indicate that the employment and inflation outlook has not changed much since the September meeting.
Labor market conditions appear to be gradually cooling, while inflation remains slightly high.
Powell said existing indicators suggest that economic activity is expanding at a moderate pace. GDP grew by 1.6% in the first half of this year, down from 2.4% last year.
Data released before the government shutdown suggested that economic activity may have grown slightly better than expected, mainly reflecting stronger consumer spending.
Business investment in equipment and intangible assets continues to grow, while housing market activity remains weak. The ongoing federal government shutdown will drag down economic activity, but these effects should reverse once the shutdown ends.
Regarding the labor market, Powell said that as of August, the unemployment rate remained relatively low. Job growth has slowed significantly since the beginning of the year, a considerable portion of which is likely due to declining labor force growth, caused by factors including reduced immigration and a lower labor force participation rate; however, labor demand has also clearly weakened.
Despite the delay in official employment data for September, existing evidence suggests that layoffs and hiring remain at low levels; both households' perception of job opportunities and businesses' perception of difficulty in recruiting continue to decline.
In this sluggish and somewhat weak labor market, downside risks to employment have increased in recent months.
Tariffs are driving up prices for some goods, and a December rate cut is not a certainty.
Regarding inflation, Powell stated that inflation has fallen significantly from its mid-2022 high, but remains slightly higher than the Fed's long-term 2% target. Based on estimates using the Consumer Price Index (CPI), overall PCE prices rose 2.8% over the 12 months ending in September; core PCE prices, excluding food and energy, also rose 2.8%.
These readings are higher than earlier this year, primarily due to a rebound in goods inflation. In contrast, services inflation appears to be continuing to decline. Short-term inflation expectations have risen overall this year, influenced by tariff news, as reflected in both market and survey indicators.
However, most long-term inflation expectations remain consistent with our 2% inflation target one to two years from now.
Powell said that higher tariffs are driving up prices in certain categories of goods, leading to higher overall inflation.
A reasonable baseline assessment is that these inflationary effects will be relatively short-lived—that is, a one-off upward shift in the price level. However, there is also the possibility that the inflationary effects will be more persistent, which is a risk we need to assess and manage.
He stated that in the short term, inflation risks are skewed to the upside, while employment risks are skewed to the downside, presenting a challenging situation. The risk balance has shifted due to the increased downside risks to employment in recent months.
With today's interest rate decision, we are well-positioned to respond promptly to potential economic changes. We will continue to determine the appropriate stance of monetary policy based on the latest data, changes in the economic outlook, and the balance of risks. We still face two-way risks.
Powell revealed that during the meeting, the committee members had significant disagreements about how to act in December.
Another interest rate cut at the December meeting is not a certainty, far from it. There is no predetermined policy path.
The reduction of the balance sheet will end on December 1st.
In addition, the FOMC decided to end balance sheet reduction on December 1. Powell said that the Fed's long-standing plan was to stop reducing its balance sheet when reserve levels were slightly above the Fed's standard of "ample reserves." There are now clear signs that the Fed has reached that standard.
Powell said that in the money market, repurchase rates have risen relative to the Fed’s managed rates and have experienced more pronounced pressure on certain dates, while the use of the Standing Repurchase Facility (SRF) has increased.
Furthermore, the effective federal funds rate has begun to rise relative to the excess reserve rate. These developments are in line with our previous expectations of a decline in the size of the balance sheet, and therefore support our decision today to halt balance sheet reduction.
Over the past three and a half years of balance sheet reduction, the Federal Reserve's securities holdings have decreased by $2.2 trillion. As a percentage of nominal GDP, the balance sheet size has fallen from 35% to approximately 21%.
He stated that starting in December, the Federal Reserve will enter the next phase of its normalization plan, which involves maintaining a stable balance sheet size for a period of time. Meanwhile, as other non-reserve liabilities (such as cash in circulation) continue to grow, reserve balances will continue to gradually decline.
The Federal Reserve will continue to allow agency securities (such as MBS) to mature and exit its balance sheet, reinvesting the proceeds from these securities in short-term U.S. Treasury bonds to further shift its portfolio towards a structure dominated by U.S. Treasuries. This reinvestment strategy will also help bring the weighted average maturity of our portfolio closer to the maturity structure of the existing Treasury market, thereby further normalizing the balance sheet structure.
The following is a transcript of the Q&A session at Powell's press conference:
Q1: The market is currently almost assuming a rate cut at your next meeting. Are you uneasy about this market pricing? You and some colleagues have described your decision-making framework as "risk management" last month and today. How do you determine if you've "bought enough insurance"? Do you need to see an improved outlook before you stop? Or will it be like last year, with continued small adjustments over a longer period, taking a wait-and-see approach?
Powell: As I just said, whether there will be further rate cuts at the December meeting is not a done deal. So I think the market needs to take that into account.
I want to emphasize one point: the committee has 19 members, all of whom have worked very hard. At a time when there is a conflict between these two objectives, it's natural for members to have very strong differing opinions. As I mentioned, there were clearly differing views at today's meeting. The conclusion is: we have not yet made a decision regarding December. We will make our judgment based on the data, the impact on the outlook, and the balance of risks. That's all I can say for now.
My line of thinking is this: For a long time, our risks have been clearly skewed toward excessive inflation. But things have changed. Especially after the July meeting, we saw a downward correction in job growth, and the labor market landscape has changed, showing that the downside risks to employment are greater than we had initially thought. This means that policy—which we previously maintained at what I would call “slightly” tight (others might call it “moderately” tight)—needs to move toward neutral over time.
If the risks of two objectives are roughly equivalent, with one demanding interest rate hikes and the other demanding rate cuts, then policy should remain largely neutral to balance the two. In this sense, this reflects risk management. Today's decision-making logic is similar. As for the future, it will be a different story.
Q2: You just emphasized that the discussions and conclusions regarding December are still inconclusive. What specific viewpoints were raised at the meeting? For example, was the significant increase in current AI-related investments, and the issue of AI-driven stock market gains and increased household wealth discussed? Regarding balance sheet reduction, how much of the current pressure in the money market is due to the recent large-scale issuance of short-term debt by the US Treasury?
Powell: I would not say that these factors play a role in all committee members’ assessments of the economic outlook, nor would I say that they are the main factors in anyone’s judgment.
I would explain it this way: Currently, the risk of inflation is tilted to the upside, while the risk of employment is tilted to the downside. We only have one tool (interest rates), and we cannot simultaneously "precisely address" both of these opposing risks. Therefore, you cannot solve both at the same time.
Furthermore, the committee members had differing forecasts for the outlook, with some expecting inflation or employment to improve faster or slower than others; their risk appetites also differed, with some more concerned about excessive inflation and others more worried about underemployment. All these factors combined led to the disagreements.
You can sense these differences in the latest Summary of Economic Forecasts (SCP) and in the open remarks during the meetings; the viewpoints are very diverse, and these differences were clearly reflected in today's meeting. I also mentioned this in my remarks.
This is why I emphasize that we haven't made a decision for December. I've often said in the past that the Fed doesn't make decisions prematurely, and today I want to add that the market shouldn't treat a December rate cut as a done deal—that's precisely not the case.
Regarding balance sheet reduction, we have observed an increase in repurchase rates and the federal funds rate, which is exactly the signal we expected around the time we reached the "ample reserves" standard. As we have stated before, we will stop reducing our balance sheet when we feel that our reserve levels are slightly above the "ample" standard. From then on, as other non-reserve liabilities increase (such as cash in circulation), the reserve balance will continue to decline.
Money market conditions have gradually tightened over the past period. In particular, the tightness has intensified significantly in the last three weeks or so, leading us to conclude that the conditions for halting balance sheet reduction have been met.
Furthermore, the current pace of balance sheet reduction is already very slow. Our balance sheet has shrunk by about half, and there is little point in continuing to shrink it further, as reserves themselves will continue to decline.
Therefore, the committee supports announcing now that the balance sheet reduction will cease on December 1st. December 1st allows the market some time to adjust.
Q3: One of your main reasons for cutting interest rates now is concern about downside risks in the labor market. But if these risks ultimately do not materialize, and the labor market remains stable or even slightly recovers, will you reassess how low interest rates need to be cut? At that point, will you become more concerned about the "second-round effects" of inflation and tariffs? If the government shutdown lasts longer and key economic data is lacking, will the lack of data make it more difficult for you to assess the labor market, thus affecting your policy decisions in December?
Powell: In principle, if the data indicates that the labor market is strengthening, or at least stabilizing, it will certainly influence our future policy decisions.
We will continue to receive data, such as initial jobless claims data from each state, which currently indicates that the labor market remains at its current state. We will also see job openings data, various survey data, and the Beige Book.
Currently, we haven't seen an increase in initial jobless claims or a significant decrease in job openings, suggesting that the labor market may continue to cool very slowly, but not beyond that point. This gives us some confidence.
(Despite the government shutdown), we will still receive some data on the labor market, inflation, and economic activity, as well as information such as the Beige Book. While the details may not be comprehensive, I believe we can still sense significant changes in the economy from this data.
As for how this will affect December, it's difficult to predict at this point—there are still six weeks until the meeting. The high degree of uncertainty itself could be a reason to take more cautious action. But we need to wait and see how things develop.
Q4: Was this resolution a "barely passed" decision? Or was there intense internal debate regarding its direction?
Powell: The "tug-of-war" I mentioned earlier refers to the outlook for December, not the decision itself. There were two dissenting votes today: one for a 50 basis point cut and one for no cut. The decision to cut rates by 25 basis points received strong support.
The "significant differences" mainly lie in the future path: what to do next. Some committee members noted the recent strengthening of economic activity, with many forecasting agencies raising their economic growth forecasts for this year and next, some of which were quite substantial.
At the same time, we see the labor market—I wouldn't say completely stable, but it certainly hasn't deteriorated significantly; rather, it's likely to continue cooling very slowly. Different committee members have different expectations for the economic outlook and different risk appetites. You can see the internal divisions within the committee by looking at their recent speeches, which is why I emphasized that no decision has yet been made on how to act in December.
Q5: Now that you have stopped shrinking your balance sheet, are you required to resume increasing your asset holdings next year? Otherwise, the ratio of balance sheet size to GDP will continue to decline, thus constituting further tightening?
Powell: Your understanding is correct. Starting December 1st, we will freeze the size of our balance sheet. As agency mortgage-backed securities (MBS) mature, we will reinvest the proceeds into short-term Treasury bills (T-bills), which will increase the proportion of Treasury bonds on our balance sheet and make them shorter-term.
Even with a frozen balance sheet size, non-reserve liabilities (such as cash in circulation) will still naturally increase, thus the reserve balance will continue to decline. Reserves are the part we need to maintain at an "ample" level. This continued decline in reserves will persist for some time, but not for very long.
Ultimately, at some point, we will need to gradually increase reserve balances again to match the expansion of the banking system and the economy, so reserves will be increased again at some point in the future.
Furthermore, while we did not make a decision on this aspect today, we did discuss balance sheet structure. Currently, our asset duration is significantly longer than the average duration of government bonds in the market, and we hope to gradually shorten the duration to bring our balance sheet structure closer to the duration distribution of the government bond market. This process will be very slow and will take a long time, without causing significant market volatility, but this is the direction of future adjustments.
Q6: How are officials interpreting the latest CPI report? Some sub-items are below expectations, but core inflation remains at 3%. What new insights do you have into the drivers of inflation based on the current data? Furthermore, where do you think the Fed is more likely to err—in employment or inflation? What measures can you take to address persistent service sector inflation, especially given the potential constraint on labor supply?
Powell: Regarding the September CPI report, we haven't received the subsequent PPI data yet, and the PPI is very important for estimating the PCE inflation we are more concerned about. However, even so, we can still roughly assess its direction, and there may be a slight revision after the PPI is released.
Overall, inflation data was slightly softer than expected. We typically analyze inflation in three parts:
First, commodity prices are rising, primarily driven by tariffs. Compared to the past trend of slight deflation in commodity prices, the current price increases due to tariffs are pushing up overall inflation.
Second, housing services inflation is declining and is expected to continue to decline. If you recall a year or two ago, everyone thought it would decline, but it didn't happen for a long time, and now it has been declining for a while, and we expect it to continue.
Third, inflation in services excluding housing (i.e., core services) has been largely sideways over the past few months. A significant portion of this segment consists of "non-market services," whose price changes do not accurately reflect the tightness of the economy and therefore have limited signaling value.
In summary, there are several points:
First, if we exclude the impact of tariffs, current inflation is actually not far from our 2% target. Different calculations may vary slightly, but if the core PCE is 2.8%, then excluding tariffs, it would be around 2.3% to 2.4%, which is not far from the target.
Secondly, tariff-induced inflation should be a one-off event in the baseline scenario, although it may continue to push up inflation in the short term. However, a key focus for us this year is ensuring that it does not develop into persistent inflation and carefully assessing which channels could turn a "one-off" event into "stubborn inflation."
One possibility is an extremely tight labor market, but we haven't seen that yet; another is rising inflation expectations, but we haven't seen that either. Therefore, we remain highly vigilant, rather than assuming that tariff inflation is necessarily a one-off event. We fully understand that this is a risk that needs to be closely monitored and ultimately managed.
Within the services sector inflation, the portion that hasn't declined as we hoped is primarily in "non-market services" within the "non-housing core services" category. We expect this portion to gradually decline, as it largely reflects "market-valued rather than actually paid" income in financial services, which is related to the stock market rally.
Furthermore, I believe that current policies remain "modestly restrictive," which should contribute to a gradual cooling of the economy and is one of the reasons for the very slow cooling of the labor market. A slightly tight monetary policy itself helps to gradually reduce service inflation.
I want to emphasize that we are fully committed to bringing inflation back to 2%. As you can see from long-term inflation expectations and market pricing, our policy commitment remains highly credible, and there should be no doubt that we will ultimately achieve our goal.
Q7: AI infrastructure is currently experiencing a massive construction boom. Does this investment frenzy mean that interest rates aren't actually that tight? If interest rates are further lowered now, could this fuel investment and even create asset bubbles? How does the Federal Reserve view this? You mentioned that even without government data, there are still some data points to monitor inflation and growth trends. We have a clearer understanding of employment; when official data is lacking, what indicators do you rely on to track inflation?
Powell: You're right. There's a lot of data center construction and related investment happening across the US and globally right now. Large US companies are investing heavily in researching how AI will impact their businesses, and AI will rely on and operate within these data centers, so this is very important.
However, I don't think investments in building data centers are particularly sensitive to interest rates. It's more based on a long-term judgment—that this is an area where future investment will be substantial and can boost productivity. As for the ultimate impact of these investments, we don't know, but compared to other industries, I think they are not as sensitive to interest rates.
Regarding economic data, we look at many sources, but it's important to emphasize that these data cannot replace official government data. For example, we use online price data from PriceStats, Adobe, etc.; for wages, we look at ADP data; and for spending—I know you'll ask about that next—we also have various alternative data sources.
In addition, the Beige Book also provides information, and it is published as usual during this cycle. This data cannot replace government data, but it gives us a general overview. If there are significant changes in the economy, I think we can glean signals from this data. However, during periods of lack of official data, we certainly cannot make the very detailed, granular judgments we usually do.
Q8: I would like you to elaborate on your point earlier: the government shutdown leading to data gaps will make actions in December more difficult and may even make you more cautious. If you have to rely more on private data that is of lower quality than official data, or on your own surveys, Beige Books, and other information, are you worried that you will eventually fall into a situation of "making policy decisions based on fragmented anecdotes"?
Powell: This is a temporary situation. Our job is to collect all the data and information we can find and evaluate it carefully. We will do that; it's our responsibility.
You asked if the shutdown would affect the December decision? I'm not saying it definitely will, but it's certainly a possibility. In other words, if you're driving in heavy fog, you'll slow down. Whether this will happen, I can't say for sure right now, but it's entirely possible.
If the data is recovered and released, that's great; but if the data remains missing, then taking more cautious action might be a reasonable choice. I'm not making a promise, but I'm saying: there is indeed a possibility that—in situations where visibility is poor—you might choose to "go slower."
Q9: We've recently seen large companies like Amazon announce layoffs. I'd like to know if these signs have been incorporated into your discussion today? The tension between the labor market and economic growth seems to be starting to tilt in a direction unfavorable to employment. Second, are concerns about a "K-shaped economy"—such as a potential significant increase in healthcare costs for low-income families—being taken into policy consideration?
Powell: We are watching these situations very closely.
First, regarding layoffs, you're right, quite a few companies have announced reduced hiring or even layoffs. Many companies have cited AI and the changes it brings. We're paying close attention to this because it could indeed impact job growth. However, we haven't seen a clear reflection of this in the initial jobless claims data yet—which isn't surprising, as data usually lags, but we'll be monitoring it very closely.
The situation is similar regarding the "K-shaped economy." If you listen to corporate earnings calls, especially those of large companies targeting the consumer market, many will mention the same phenomenon: economic polarization, with low-income groups facing pressure, reducing consumption, and shifting towards cheaper goods; while consumption by high-income and high-wealth groups remains strong. We have collected a wealth of anecdotal information on this topic.
We believe this phenomenon is real.
Q10: You said that "a further rate cut in December is not a certainty, and is far from it." If the reason for not being able to cut rates in December is not due to a lack of data, what other factors might make you unwilling to cut rates? In other words, if it's not because of a lack of data, what are your concerns? Since you said that the disagreements within the committee mainly focus on the future path of interest rates, does this disagreement stem more from concerns about inflation, concerns about employment, or deeper differences in policy philosophy?
Powell: From the Committee's perspective, we have cut interest rates by a total of 150 basis points this year, and the current interest rate range is between 3% and 4%, which is also the range for many estimates of the neutral rate. Current interest rates are roughly near the neutral level and are higher than the median forecast of Committee members.
Of course, some committee members believe that the neutral interest rate is higher, and these views are open for discussion because the neutral interest rate itself cannot be directly observed.
For some members of the committee, now may be the time to pause and observe—to see if there are real downside risks to employment and whether the current economic growth recovery is genuine and sustainable.
Typically, the labor market reflects the true momentum of the economy better than spending data. However, the signs of a slowdown in employment this time make the interpretation more complex. We have already cut interest rates by an additional 50 basis points in the last two meetings, and some members believe that we should "pause for a while"; others want to continue cutting rates. This is why I said there is "significant disagreement."
Every member of the committee is committed to doing the right thing to achieve our policy objectives. The disagreements stem partly from differing economic forecasts, but also significantly from differing risk appetites—a normal phenomenon across all Federal Reserve administrations.
Different people have different risk tolerance levels, which naturally leads to different viewpoints. You should have already sensed this from the recent public speeches of the committee members.
The current situation is that we have cut interest rates twice in a row, and are now about 150 basis points closer to the "neutral level." There are increasingly voices suggesting that we should perhaps "wait and see for at least one cycle," observing before making a decision. The matter is that simple and transparent.
You've already seen this divergence in the September Economic Forecasts (SEP) and in the committee members' public statements. I can also tell you that these views will be reflected in the meeting minutes. What I'm saying now is exactly what happened at today's meeting.
Q11: How would you explain the current weakness in the job market? What effect will this interest rate cut have on improving the employment outlook?
Powell: I think there are two main reasons for the weakening job market.
First, there has been a significant decline in labor supply, encompassing two aspects: a decrease in the labor force participation rate (which has cyclical factors) and a reduction in immigration—a major policy shift initiated by the previous government and further accelerated under the current administration. Therefore, a large part of the reason stems from the supply side. In addition, labor demand has also decreased.
A decline in the unemployment rate means that the decrease in labor demand is slightly greater than the decrease in supply. Overall, the current situation is mainly due to changes on the supply side, a judgment that I and many others agree on.
So, what can the Fed's tools do? Our tools primarily affect demand.
Under the current circumstances, if employment is adjusted (considering the possibility that statistics may "overestimate employment growth"), the number of new jobs created is essentially zero. Maintaining zero new jobs for an extended period can hardly be considered a "sustainable maximum employment state"; it represents an unhealthy "balance."
Therefore, many members of the committee and I believe that cutting interest rates to support demand was the appropriate course of action in the last two meetings. We have done so, and interest rates are significantly less tight than before (though I would not say they have turned accommodative), which should help prevent the labor market from deteriorating further. However, the situation remains complex.
Some believe that the current problems mainly stem from the supply side, and that monetary policy has limited effect; however, others—myself included—believe that the demand side still plays a role, and therefore we should use policy tools to support employment when risks are identified.
Q12: You also mentioned that tariffs have led to a "one-off price increase." Will American consumers continue to feel the price increases caused by tariffs this year?
Powell: Our base case is that tariffs will continue to push up inflation for some time, as tariffs take time to gradually pass through the production chain to consumers.
The effects of the tariffs implemented in the previous months are now becoming apparent. New tariffs took effect successively in February, March, April, and May, and these effects will continue for some time, possibly into next spring.
These impacts are not significant, likely pushing inflation up by 0.1 to 0.3 percentage points. Once all tariffs are implemented, they will no longer increase inflation, but will instead cause a one-time upward shift in the price level. After that, inflation will fall back to the level excluding tariffs, which is currently not far from 2%.
Consumers, however, are ignoring these technical explanations; all they see is that prices are much higher than before. What truly fuels public discontent with inflation are the sharp price increases of 2021, 2022, and 2023. Even though the rate of increase has slowed, prices are still significantly higher than three years ago, and people continue to feel the pressure. The situation will gradually improve as real incomes rise, but this will take time.
Q13: Are you worried that the stock market is currently overvalued? You should also know that interest rate cuts will push up asset prices. So, how do we balance the contradiction between "interest rate cuts supporting employment" and "stimulating AI investment, which may even lead to more layoffs"? In recent weeks, there have been thousands of AI-related layoff announcements.
Powell: We don't look at the price of a particular asset class and say "this is unreasonable." That's not the Fed's job. We focus on the overall robustness of the financial system and its ability to withstand shocks.
Currently, banks have ample capital; although low-income households are under pressure, overall household assets and liabilities remain relatively healthy and debt levels are manageable. While lower-end consumption has indeed slowed, the overall situation is not particularly worrying.
To reiterate, asset prices are determined by the market, not by the Federal Reserve.
I don't believe interest rates are the key factor driving data center investment. Companies are building data centers on a massive scale because they believe these investments have very good economic returns and high discounted cash flow value. This isn't something that "25 basis points" can determine.
The Federal Reserve's mandate is to use tools to support employment and maintain price stability. Lowering interest rates marginally supports demand, thereby supporting employment, which is why we do it.
Of course, whether the rate cut is 25 or 50 basis points, it won't have an immediate decisive effect, but lower interest rates will support demand and boost hiring over time. At the same time, we must proceed cautiously because we are very aware that inflation remains uncertain, so the path of rate cuts has always been "small steps."
Q14: Regarding AI, a significant portion of current economic growth appears to be driven by AI investment. If technology investment were to suddenly contract, what impact would you be concerned about on the overall economy? Do other sectors have sufficient resilience to support this? In particular, do you think we can learn anything from the 1990s (the dot-com bubble) to address the current situation?
Powell: This time it's different. The tech companies with high valuations today are truly profitable, with established business models and revenue streams. If you look back at the "dot-com bubble" of the 1990s, many of those were just concepts, not mature companies; it was a very obvious bubble. (I won't name names.) But these companies now are profitable, with mature business models, so the nature of the situation is completely different.
Currently, equipment investment, as well as investments related to data centers and AI, are among the important drivers of economic growth.
Meanwhile, consumer spending far outpaces AI investment and has consistently outperformed many pessimistic forecasts this year. Consumers are still spending, though likely primarily from high-income groups, and consumption remains robust, carrying a much larger weight in the economy than AI-related investment.
In terms of contribution to growth, AI is an important factor, but consumption drives the economy more.
The current slowdown in the labor market is primarily due to a significant decline in labor supply, mainly caused by reduced immigration and a decrease in the labor force participation rate. This means a reduced demand for new jobs, as there is not enough new labor entering the market to absorb them.
In other words, there aren't that many new job seekers.
Furthermore, labor demand is also declining. The drop in labor force participation rate reflects weak demand more than just a trend factor. Therefore, we are indeed seeing a weakening labor market.
Economic growth is also slowing. Last year's growth rate was 2.4%, and we expect it to be 1.6% this year. Without the government shutdown, it could have been several basis points higher. There will be a rebound after the shutdown ends, but overall, the economy is still experiencing moderate growth.
Q15: I would like you to elaborate on how you think about monetary policy in the presence of data shortages? Does this "data shortage" make you more inclined to stick to the original path, or do you become more cautious due to uncertainty?
Powell: We'll know what to do when we actually face this situation—if it happens. There are likely two ways to interpret this situation.
As I've mentioned several times before, if we genuinely lack sufficient information and make unclear judgments, and the economy appears robust, stable, and without significant changes, some might argue that we should slow down when the outlook is unclear. I don't know how persuasive this argument would be at the time, but certainly some people would have advocated for it.
Of course, some might argue the opposite: since nothing seems to have changed, let's stick to the original plan. But the problem is, you might not know whether the situation has truly remained the same.
I don't know if we'll ultimately encounter this situation. I hope not, and I hope the data will return to normal by the December meeting, but in any case, we must do our jobs.
Q16: A few years ago you said that the overall capital level of the financial system was roughly appropriate. Now the Federal Reserve is moving forward with revisions that involve additional capital requirements for Global Systemically Important Banks (G-SIBs). Has this changed your view on capital levels? Do you plan to significantly reduce capital levels within the system?
Powell: There are currently discussions among regulators, and I don't want to comment prematurely on the outcome of those discussions. I still believe, as I said in 2020, that the level of capital in the system was roughly appropriate at that time. Since then, through various mechanisms, the level of capital has increased further.
I look forward to these discussions continuing. The discussions are still in their early stages and a complete plan has not yet been finalized, so I don't have much to add at this point.
Q17: Is the weakness in the job market accelerating? If interest rate cuts fail to effectively mitigate further slowdown in employment, which groups face the greatest risk? When deciding on interest rate cuts, did you consider low-income groups more, or those who might lose their jobs due to automation? Is there a particular group you are particularly concerned about?
Powell: We are not seeing the kind of "accelerating weakness in the labor market" you mentioned. Admittedly, we don't have the September nonfarm payrolls report, but we do look at initial jobless claims, and those numbers remain stable. You can also look at the relevant data; there have been no signs of deterioration in the past four weeks. And the job openings data on Indeed is also stable, showing no significant deterioration in the labor market or any part of the economy.
But as I mentioned, you'll see some large companies announce layoffs or indicate they won't be expanding their headcount for the next few years. They may be adjusting their workforce structure, but they don't need a larger headcount.
While the overall data doesn't yet reveal the full picture, the number of new jobs created is very low , and the proportion of unemployed people finding new work is also very low. Meanwhile, the unemployment rate remains low—4.3% is still considered low.
Our tools cannot target any specific group or income level. But I do believe that when the job market is strong, ordinary people benefit the most.
We've seen this in the long recovery following the global financial crisis. Low-income groups benefit the most from a strong job market. Over the past two or three years, low-income groups have seen the greatest income improvement, coinciding with a positive demographic and employment trend.
We are no longer at that stage. A stronger job market is the most important thing we can do for the public. That's half of our responsibility. Maintaining price stability is the other half. Inflation hurts those with fixed incomes the most, so we must balance both.
Q18: The terms of the 12 regional Federal Reserve presidents will expire at the end of February next year. Could you provide a timeline for the Board of Governors to consider these reappointments? Will we see all reappointments, or are there any changes? The recent three consecutive FOMC meetings saw dissenting votes on interest rate decisions. Did you feel pressure when chairing these meetings? What did this disagreement mean to you?
Powell: The relevant procedures will proceed as required by law. According to the law, regional Federal Reserve presidents must undergo a reappointment review every five years. This process is currently underway, and we will complete it in due course. That's all I can say for now.
(As for the opposing votes), I don't see it that way, nor do I feel any pressure from them. We must face the current situation, which is indeed very challenging: the unemployment rate is 4.3%, economic growth is close to 2%, and the overall situation isn't bad. However, from a policy perspective, we simultaneously face upside risks to inflation and downside risks to employment.
This is very difficult for the Fed because one risk points to interest rate cuts and the other to interest rate hikes, and we cannot satisfy both directions at the same time; we can only seek a balance in the middle.
In this environment, it's natural to see differing opinions among committee members, including on how to act and the pace of that action. This is entirely understandable. Committee members are all extremely serious and hardworking, hoping to make decisions that are in the best interests of the American people; they simply have different judgments about "what is the right thing to do."
It's an honor to work with such dedicated people. I don't find it unfair or frustrating. It's simply a period where we have to make tough adjustments in a real-time environment. I believe the actions we've taken this year have been correct and prudent. We can't ignore inflation, nor can we pretend it doesn't exist.
Meanwhile, the risk of "persistently high inflation" has significantly decreased since April. If it is appropriate to cut interest rates again in the future, we will do so.
Ultimately, we hope that by the end of this cycle, the labor market will remain robust, and inflation will have fallen back to 3% and move further towards 2%. We are doing our best to achieve this in a very complex environment.
Q19: Both regional and large banks are experiencing loan losses and delinquencies. As Jamie Dimon said, "If you see one cockroach, it probably means there are more." What are your thoughts on these loan losses? Does it pose a risk to the economy? Is this a warning sign?
Powell: We've been monitoring credit conditions very closely. You're right, we've seen subprime defaults rising for some time now. Recently, some subprime auto loan providers have suffered significant losses, some of which are reflected on bank balance sheets. We're watching this situation very closely.
However, at present, I don't believe this is a broader debt risk issue. It doesn't appear to be spreading widely among financial institutions. But we will continue to monitor the situation closely to ensure that this is indeed the case.
Q20: The economy is currently exhibiting a "dualistic" pattern: high-asset individuals are still consuming, while low-income groups are cutting back on spending. How much of the current resilience in consumption is dependent on the strong stock market performance? Has the stock market, to some extent, supported the economy?
Powell: The stock market does play a role, but it's important to remember that the more wealth you have, the lower the marginal benefit of each additional unit of wealth in stimulating consumption. Once wealth reaches a certain level, the marginal propensity to consume decreases significantly.
Therefore, a stock market decline will indeed affect consumption, but unless the stock market experiences a very sharp drop, it will not cause a sharp decline in consumption.
Low-income and low-asset groups have a much higher marginal propensity to consume, and any extra income or wealth they acquire is more likely to be directly converted into consumption, but they do not have much stock market wealth.
Therefore, the stock market is indeed one of the factors currently supporting consumption. If the stock market experiences a significant correction, you will see some weakening in consumption, but it should not be assumed that every dollar the stock market falls will reduce consumption by one dollar; that is not the case.
