Author: Du Yu, Foresight News
Powell intended to emphasize that, first of all, any decision on interest rate cuts made by Federal Reserve officials will depend on the current economic situation and data, and that the risks between the two major missions of inflation and employment are currently balanced, so it is time to start cutting interest rates to boost the labor market.
Second, the Fed will make decisions meeting by meeting, will not be influenced by the market's pricing of expected rate cuts, and will not consider any political factors or issues, but will instead "take action at a faster or slower pace than is appropriate at the time."
Third, Powell does not think that a sharp interest rate cut means that the US economy is approaching a recession, nor does it mean that the job market is on the verge of collapse. The interest rate cut is more of a preventive action aimed at maintaining the "robust" status quo of the economy and the labor market.
Fourth, he admitted that non-farm payrolls may be revised downward, but it is still an important data point worthy of reference. Other labor data that the Fed pays attention to include: unemployment rate, employment rate, wage growth, the ratio of job vacancies to the number of unemployed people, resignation rate and other indicators:
The point is, "the problem is not the level of the specific numbers," but that the situation has changed in the past few months. The upside risks to US inflation are indeed declining, and the downside risks to employment have increased, so now the Fed has adjusted its policy stance to support employment.
The following is a full transcript of the Q&A session at Powell's press conference after the September FOMC's sharp rate cut, compiled by Wall Street News:
Question 1: Strong third quarter GDP running 3% so what changed to made the committee go 50. And how do you respond to the concerns that perhaps it shows the Fed is more concerned about the labor market, and I guess should we expect more 50s in the months ahead? And based on what should we make that call?
The US GDP is expected to grow strongly by 3% in the third quarter. So what changes made the Fed decide to cut interest rates by 50 basis points? Does this mean that the Fed is more concerned about the labor market and will continue to cut interest rates by 50 basis points in the future? What should we base this judgment on?
Answer 1:
Let me jump in. So since the last meeting, we have had a lot of data come in. We've had the two employment reports July and August. We've also had two inflation reports, including one that came in during blackout. We had the QCW report, which suggests that the payroll report numbers that we're getting may be artificially high and will be revised down. and we cleared that this was the right thing for the economy, for the people that we serve, and that's how we made our decision. So that's one question.
We've had a lot of data since our last meeting, two nonfarm payrolls for July and August, two inflation reports, one of which was released during the Fed's quiet period. There was also the QCW report that indicated that our nonfarm payrolls may have been artificially inflated and would be revised down. We also saw anecdotal data like the Fed's Beige Book, so we collected all of that data and then went into the quiet period of speaking publicly, and we thought about what to do and made it clear that this was the right thing for the economy and the American people that we serve, and that's how we made our decisions.
So a couple things, a good place to start is the SEP. But let me start with what I said, which was that we're going to be making decisions, meeting by meeting, based on the incoming data, the evolving outlook, the balance of risks. If you look at the SEP, you'll see that it's a process of recalibrating our policy stance, away from where we had a year ago, when inflation was high and unemployment low, to a place that's more appropriate given where we are now and where we expect to be. And that process will take place over time. There's nothing in the SEP that suggests the committee is in a rush to get this done. This this process evolves over time.
A good place to start is to look at the Summary of Economic Projections (SEP). First, we will make decisions on a meeting-by-meeting basis based on incoming data, the changing outlook, and the balance of risks. Looking at the SEP, you will see that this is a process of recalibrating our policy stance, away from the stance of high inflation + low unemployment that prevailed a year ago, to a stance that is more appropriate to current conditions and our expectations. This process will occur over time. There is nothing in the SEP that suggests the Committee is in a hurry to complete this work; this process evolves over time.
Of course, that's a projection. That's a baseline projection. We know, as I mentioned in my remarks, that the actual things that we do will depend on the way the economy evolves. We can go quicker, if that's appropriate, we can go slower if that's appropriate. , assuming that their particular forecasts take, you know, are realized.
Of course, this is just a forecast. It's a baseline forecast. As I mentioned in my remarks, what we actually do will depend on how the economy evolves. We can move faster if it's appropriate, we can move slower if it's appropriate. We can pause if it's appropriate. But that's what we're considering. And again, I want to note that the SEP is just an assessment of what the Committee is thinking today, and what individual members of the Committee are thinking today, assuming that their particular forecasts play out.
Question 2: The projections show that the Fed officials expect the Fed funds rate to still be above their estimate of long run neutral by the end of next year. So does that suggest you see rates as restrictive for that entire period? Does that threaten the weakening of the job market you said you'd like to avoid, or does it suggest that maybe people see the short run neutral as a little bit higher?
Forecasts show that Fed officials expect the federal funds rate to remain above their estimate of the long-run neutral rate through the end of next year. So does that mean you think rates are going to be restrictive over that whole period? Does that threaten the job market weakness that you say you want to avoid, and does that also mean that people might think the short-run neutral rate is going to be a little bit higher?
Answer 2:
I would really characterize it as this. I think people write down their estimate. Individuals do. I think every single person on the committee, if you ask them, what's your level of certainty around that, and they would say there's a wide range where that could fall. So I think we don't know there are model based approaches and empirically based approaches that estimate what the neutral rate will be at any given time. But realistically, we know it by its works. So that leaves us in a place where we'll be, where we expect, in the base case, to be continuing to remove restriction, and we'll be looking at the way the economy reacts to that, and that will be guiding us in our thinking about the question that we're asking at every meeting, which is, is our policy stance the appropriate one?
I would really describe it this way. It's the estimate that each individual official on the committee makes, and if you ask them how certain they are about it, they'll say, it's probably a wide range. So I don't think we know whether there's a model-based way and an empirical way to estimate what the neutral rate is at any given time. But we know it by how it works, really. So in the base case, we expect to continue to ease monetary policy, and we'll be watching how the economy responds to that, and that will guide our thinking about the question that we ask at every meeting, which is, is our stance of policy appropriate?
We know, if you go back, we know that the policy stance we adopted in July of 2023 came at a time when unemployment was three and a half percent and inflation was 4.2%. Today, unemployment is up to 4.2%, inflation is down to a few tenths above 2%, so we know that it is time to recalibrate our policy to Something that is more appropriate given the progress on inflation and on employment moving to a more sustainable level. So the balance of risks are now even, and this is the beginning of that process I mentioned, the direction of which is toward a sense of neutral, and we'll move as fast or as slow as we think is appropriate in real time, what you have is our individual accumulation of individual estimates of what that will be in the base case.
We know that if we look back, we'll see that the stance of policy that was taken in July 2023 was when unemployment was 3.5% and inflation was 4.2%. Today, unemployment has risen to 4.2% and inflation has fallen closer to 2%, so we know that given the progress toward more sustainable levels of inflation and employment, it's time to recalibrate our policy to be more appropriate. So the balance of risks is now balanced, and this is the beginning of that process that I mentioned, which is moving in the direction of neutral, and we will move faster or slower as we think is appropriate at the time, and the dots are the Fed's personal estimates of the base case.
Question 3: How close was this in terms of the decision, you do have the first dissent by a governor since 2005 I think was the weight clearly in favor of a 50, or was this a very close decision?
This is the first time since 2005 that a Fed board member has raised an objection. How much consensus is there for a 50 basis point rate cut?
Answer 3:
I think we had a good discussion. You know, if you go back, I talked about this at Jackson Hole, but I didn't address the question of the size of the cut. And I think we left it open going into blackout. s a big change from June, right? 17 of the 19 wrote down three or more cuts, and 10 of the 19 wrote down four more cuts. So, you know, there is a dissent, and there's a range of views, but there's actually a lot of common ground as well.
I think we had a great discussion. I talked about this at Jackson Hole, but I didn't answer the question about the magnitude of the rate cuts. I don't think we addressed this question before the quiet period. So we had a great discussion. It's good to have diversity of viewpoints. It was a great discussion today. I think the decision that the committee voted on also had broad support. I would add that looking at the SEP, all 19 participants supported multiple rate cuts this year, which is a big change from June, when 17 of the 19 supported three or more rate cuts this year and 10 supported four or more rate cuts. So there are differences of opinion and there are a variety of views, but there is actually a lot of common ground as well.
Question 4: On the pacing here, would you expect this to be running every other meeting?
At this pace, do you think such discussions (of a significant rate cut) will occur at every other meeting?
Answer 4: Once we get into next year, we're going to take it meeting by meeting, as I mentioned, we would. There's no sense that the committee feels it's in a rush to do this. We made a good, strong start to this. And that's really, frankly, a sign of our confidence, confidence in inflation is coming down toward 2% on a sustainable basis. That gives us the ability we can, you know, make a good, strong start. But, and I'm very pleased that we did to me the logic of this, both from an economic standpoint and also from a risk management standpoint, was clear, but I think we're going to go carefully meeting by meeting and make our decisions as we go.
Once we get into next year, we'll be discussing this on a meeting-by-meeting basis, as I mentioned earlier. The committee is not going to rush into this. We've made a good start. And frankly, it really demonstrates our confidence that inflation will come down to 2% in a sustainable way. That gives us the ability to make a good start. But I'm glad we did it, and the logic is clear both from an economic perspective and from a risk management perspective, but I think we're going to move cautiously at each meeting and make decisions as we go along.
Question 5: Your colleagues in your economic projections today see the unemployment rate climbing to 4.4% and staying there, obviously, historically, when the unemployment rate climbs that much over a relatively short period of time, it doesn't typically just stop. It continues increasing. And so I wonder if you can walk us through why you see the labor market stabilizing sort of, what's the mechanism there, and what do you see as the risks?
Your colleagues in today's economic forecasts predict that the unemployment rate will climb to 4.4% and remain at this level, and obviously, historically, when the unemployment rate climbs to this level in a relatively short period of time, it usually does not stop but continues to rise. So why do you think the labor market will stabilize, what are the mechanisms, and what risks do you think there are?
Answer 5:
So again, the labor market is actually in solid condition, and our intention with our policy move today is to keep it there. You can say that about the whole economy. The US economy is in good shape. It's growing at a solid pace. Inflation is coming down. The labor market is in a strong pace. We want to keep it there that's what we're doing.
So the labor market is actually in a solid position, and the policy actions we're taking today are intended to keep it that way. You could say that across the economy. The U.S. economy is in a good position. It's growing at a solid pace, inflation is coming down, and the labor market is strong. We want to keep it that way, and that's what we're doing.
Question 6: Nick Timiraos from New Fed News Service: Given the sharp revisions to recent employment data, does today's action constitute catch-up, or is this larger-than-typical rate cut the result of an increase in the nominal level of the policy rate, so that we can expect the accelerated pace of rate cuts to continue?
Answer 6:
multiple questions in every list. So I would say we don't think we're behind. We do not think we're. We think this is timely, but I think you can take this as a sign of our commitment not to get behind. So it's a strong move.
We don't think we're behind (the curve). We think it's timely (rate cut), but I think you can look at this as a sign of our commitment not to fall behind (the curve). So it's a strong move.
I think it's about we come into this with a policy position that was put in place. As you know, I mentioned in July of 2023 which was a time of high inflation and very low unemployment, we've been very patient about reducing the policy rate. We've waited. Other central banks around the world have cut many of them several times. We've waited, and I think that that patience has really paid dividends in the form of our confidence that inflation is moving sustainably under 2% so I think that is what enables us to take this strong move today .
I think the key is that we approached this with the policy stance that we have. As you know, I mentioned that July 2023 is a period of high inflation and low unemployment, and we have been very patient in waiting for the right time to lower our policy rate. We have been waiting. Other central banks around the world have cut rates many times, but the Fed has been waiting, and I think that patience has really paid off, and we have confidence that inflation will continue to be below 2%, so I think that's why we are able to take this strong move today.
I do not think that anyone should look at this and say, Oh, this is the new pace. You know, you have to think about it in terms of the base case. Of course, what happens will happen. So in the base case, what you see is, look at the SEP you see cuts moving along. The sense of this is we're recalibrating policy down over time to a more neutral level, and we're moving at the pace that we think is appropriate given developments in the economy. And the base case, the economy can develop in a way that would cause us to go faster or slower, but that's what the base case says.
I don't think anybody should look at this and say, oh, that's the new pace. You know, you have to think about it from the perspective of the base case. Of course, what's going to happen is going to happen. So in the base case, what you see is, if you look at the SEP, you see the rate cuts are going on. What that means is that we are recalibrating policy over time to a more neutral level, and we are moving at a pace that we think is appropriate for the development of the economy. In the base case, the way the economy develops may cause us to go faster or slower, but that's what the base case says.
Question 7: If I could follow up on the balance sheet in 2019 when you did the mid cycle adjustment, you ceased the balance sheet runoff with a larger cut. Today, is there any should there be any signal inferred about how the committee would approach end state on the balance sheet policy?
Regarding the balance sheet in 2019, you did a mid-cycle adjustment, stopped the balance sheet reduction, and made a larger rate cut. Are there any signals today about how the Committee will handle the ultimate state of balance sheet policy?
Answer 7:
So in the current situation, reserves have really been stable. They haven't come down. So reserves are still abundant and expected to remain so for some time. As you know, the shrinkage in our balance sheet has really come out of the overnight. RFP, so I think what that tells you is we're not thinking about stopping runoff because of this at all. We know that these two things can happen side by side, in a sense, they're both a form of normalization. And so for a time, you can have the balance sheet shrink, you would also be cutting rates.
So, in the current situation, bank reserves are really stable. They are not falling. So reserves are still ample and they are expected to remain so for some time. As you know, the reduction of our balance sheet really happened overnight. We are not considering stopping the reduction at all. We know that these two things can happen at the same time, and in a sense, they are both a form of normalization. So, for a period of time, you can reduce the balance sheet and also reduce interest rates.
Question 8: just following up on rising unemployment, is it your view that this is just a function of a normalizing labor market? amid improved supply, or is there anything to suggest that something more concerning, perhaps is taking place here given that other metrics of labor demand have softened. is do you not? Why should we not expect a further deterioration in labor market conditions if policy is still restricted?
Following up on the question about the higher unemployment rate, do you think this is just a function of the normalization of the labor market? An increase in supply, or are there any signs that perhaps something more worrisome is going on given that other indicators of labor demand have weakened? Don't you think so? Why shouldn't we expect labor market conditions to deteriorate further if interest rate policy remains restrictive?
Answer 8:
So I think what we're seeing is clearly labor market conditions have cooled off by any measure, as I talked about in Jackson Hole and but they're still at a level. The level of those conditions is actually pretty close to what I would call maximum employment, you know. So you're close to mandate, maybe at mandate on that. So what's driving it? Clearly, payroll job creation has moved down over the last few months, and this bears watching, meant by many other measures, the labor market has returned to or below 2019 levels, which was a very good, strong labor market, but this is more sort of 2018, 2017. So the labor market bears close watching, and we'll be giving it that but ultimately, we think, we believe, with an appropriate recalibration of our policy that we can continue to see the economy growing and that will support the labor market in the meantime, if you look at the growth and economic activity data, retail sales data that we just got, second quarter GDP, all of this indicates an economy that is still growing at a solid pace, So that should also support the labor market over time.
Clearly, labor market conditions have cooled by any measure, as I talked about at Jackson Hole, but they are still at a level. The level of those conditions is actually very close to what I would call full employment. So close to the Fed's statutory mandate, maybe already at the statutory mandate. So what's driving it? Obviously, job creation has declined over the last few months, which is worth watching, and by many other indicators, the labor market is back to or below the levels we saw in 2019, which was a very good, strong labor market, but now it's more like 2018, 2017. So the labor market is something to watch closely and we will watch it, but ultimately, we believe that with the appropriate adjustment of policy, we can continue to see economic growth, which will support the labor market, and at the same time, if you look at the growth and economic activity data, the retail sales data that we just got, the GDP for the second quarter, all of these show that the U.S. economy is still growing at a solid pace, so this should also support the labor market over time.
So, but again we're watching, and just on the point about starting to see rising layoffs. If that were to happen, wouldn't the committee already be too late in terms of avoiding a recession?
Follow-up: So, we are again looking at this, and it is just as layoffs are starting to rise. If this happens, is it too late for the committee to avoid a recession?
There's some more on that. So that's the situation we're in. We have, in fact, begun the cutting cycle now, and we'll be watching, and that will be one of the factors that we consider. Of course, we're going to look at the totality of the data as we make these decisions, meeting by meeting.
Our plan certainly is to start recalibrating policy, and we're not seeing an uptick in unemployment claims, we're not seeing an uptick in layoffs, we're not hearing companies say those things are imminent. So we're not going to wait because, one would argue, the best time to support the labor market is when it's strong. There's more to come on that. That's where we are. The fact that we've now started a rate-cutting cycle, we're watching very closely, and that will be one of the things we consider. And of course, at every meeting, we're going to look at all the data and then make those decisions.
Question 9: what would constitute for you and the committee a deterioration in the labor market you're pricing in, basically, by the end of next year, 200 basis points of cuts just to maintain a higher unemployment Rate. Would you be moving to a more preemptive monetary policy style, rather than, as you did with inflation, waiting until the data gave you a signal
What would constitute a "deterioration in the labor market" for you and the committee? Do you think that a 200 basis point rate cut would be needed just to keep unemployment higher by the end of next year? Would you adopt a more preemptive monetary policy style, rather than waiting until the data gives you a signal, as you have done on inflation?
Answer 9:
we're going to be watching all of the data, right? So if, as I mentioned in my remarks, if the labor market were to slow unexpectedly, then we have the ability to react to that by faster. We're also going to be looking at our other mandate. Though we have greater confidence now that inflation is moving down to 2% but at the same time, our plan is that we will be cutting at 2% over time. So and policy we think is still restrictive, so that should still be happening.
We're watching all the data, so if the labor market slows unexpectedly, we have the ability to respond by cutting rates faster. We're also watching the other inflation mandate. While we're now more confident that inflation is moving down to 2%, at the same time, our plan is for inflation to be at 2% over time. So we think policy is still restrictive and should remain so.
I'm just curious as to how sensitive you'll be to the labor market, since you forecast we are going to see higher unemployment, and it is going to take a significant amount of monetary easing to just maintain it.
Follow-up: I'm just curious about your sensitivity to the labor market because you predict that we're going to see higher unemployment and that it's going to take a lot of monetary easing to keep it that way.
So you know what I would say is we don't think we need to see further losing in labor market conditions to get inflation down to 2% but we have a dual mandate. And I think you can take this, this whole action as takes take a step back. What have we been trying to achieve? We're trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with disinflation. That's what we're trying to do, and I think you can take today's action as a sign of our strong commitment to achieve that goal.
What I'm saying is that we don't think we need to see any further deterioration in labor market conditions to get inflation down to 2%, but we have a dual mandate. I think you can think of this whole action as taking a step back and thinking about what we've been trying to accomplish? We're trying to achieve a situation where we restore price stability without the kind of painful increases in unemployment that sometimes accompany deflation. That's what we're trying to do, and I think you can think of today's action as a sign of our strong commitment to achieving that goal.
Question 10: You're describing this view that you don't think you're behind when it comes to the job market. Can you walk us through the specific data points that you found to be most helpful in the discussions at this meeting? You mentioned a couple, but would you be able to walk us through what that dashboard told you as far as what you know about the job market now?
You described this view that the Fed doesn't think it's behind on the job market. Can you walk us through some of the specific data points that you think are most helpful in this discussion at this conference? You mentioned a few, what else is there to watch for in the job market right now?
Answer 10:
Sure. So start with unemployment, which is the single most important one. Probably you're at 4.2% that's, you know, I know that's higher than we were. We were used to seeing numbers in the mid and even below mid threes last year. But if you look back over the sweep of the years, that's a low, that's a very healthy unemployment rate. And anything in the low fours is, A, really, is a good labor market. So that's one thing. Participation is at high levels, it' s, you know, we've had, we're right adjusted for demographics, for aging, participation, said, at pretty high levels, that's a good thing. Wages are still a bit above what would be their wage increases. Rather, are still just a bit above where they would be over the very longer term to be consistent with 2% inflation, but they're very much coming down to what that sustainable level is. So we feel good about that. Vacancies over per unemployment is back to what is still a very strong level. It's not as high as it was. That number reached two to one, two vacancies for every unemployed person as measured, it's now around one, but that's still, that's still a very good number. I would say quits have come back down to normal levels. I mean, that could go on and on there.
First, the unemployment rate, which is the most important factor. The unemployment rate of 4.2% is higher than last year. In the past, the unemployment rate was in the mid-3% or lower. If you look back over the years, you will find that this is a very low and very healthy unemployment rate. Any unemployment rate below 4% indicates that the labor market is in good condition. That's one thing. The labor force participation rate is at a high level. We have adjusted for demographics, aging, and other factors. The labor force participation rate is at a fairly high level, which is a good thing. Wages are still a little bit higher than they should be, or more precisely, they are still a little bit higher than the long-term wage growth that is consistent with 2% inflation, but they are gradually coming down to sustainable levels. So we are happy with that. The number of vacancies per unemployed person is down, but it is still a very strong level. It's not as high as it was before. It used to be two to one, that is, two vacancies for every unemployed person. Now it's about one to one, which is still a very good number. The quit rate has come back to normal levels, and this may continue.
There are many, many employment indicators. What do they say? They say this is still a solid labor market. The question isn't the level.
There are a lot of employment indicators. What do they say? They say it's still a solid labor market. The issue is not the level. The issue is that, particularly over the last few months, that has changed, so that we are saying that as the upside risks to inflation have indeed come down, the downside risks to employment have increased because we have been patient and kept inflation under control as it came down. I think we are now in a very good position to manage the risks to each of our two missions.
And what do you expect to learn between now and November that will help inform the scale of the cut of the next meeting?
Follow-up question: What information do you expect to learn between now and November to help determine the size of the rate cut at the next meeting?
You know, more data. The usual. Don't look for anything else. We'll see another labor report. We'll see another jobs report. I think we get. We actually, we could to, we get a second jobs report on the day of the meeting. evolving outlook and the balance of risks? And then go through our process and think, what's the right thing to do? Is policy where we want it to be, to foster the achievement of our goals over time. So that's what it is, and that's what we'll be doing.
You know, more data. Same as always. Don't look for anything else. We'll see two labor reports, we'll also get inflation data, all of these data that we'll be watching. You know, it's always a question of looking at the data that's coming in and asking, what does that mean for the evolving outlook and the balance of risks? And then thinking through our process, what's the right thing to do? Is policy in line with our expectations and is it helping to achieve our goals. So that's what we're going to do.
Question 11: we've only been running a little above 100,000 jobs a month on payrolls last three months. Do you view that level of job creation as worrying or alarming, or would you be would you be content if we were to kind of stick at that level? And relatedly, one of the welcome trends over the last couple of years has been labor market steam coming out through job openings, falling rather than job losses. Do you think that trend has further to run? Or do you see risk that further labor market cooling will have to come through job losses?
We've been adding just over 100,000 jobs per month for the last three months. Do you think this level of job gains is worrisome or a cause for alarm? Or would you be comfortable if we kept going at this level? Relatedly, one of the nice trends over the last few years has been that heat in the labor market has been coming through job openings, not job losses. Do you think that trend will continue? Or do you think the risk of further cooling in the labor market will have to come through job losses?
Answer 11:
So on the job creation, it depends on the inflows, right? So if you're having millions of people come into the labor force then, and you're creating 100,000 jobs, you're going to see unemployment go up. So it really depends on what's the trend underlying the volatility of people coming into the country. We understand there's been quite an influx across the borders, and that has actually been one of the things that's allowed unemployment rate to rise as and the other thing is just the slower hiring rate, which is something we also watch carefully. So it does depend on what's happening on the supply side and on the curve.
Job creation depends on the flow of people into the job market, so if you have millions of people entering the workforce and only 100,000 jobs are created, then unemployment is going to go up. So it really depends on the trends behind the fluctuations in the flow of people into the country. We know that the inflow of migrants across the border is pretty large, and that's actually one of the reasons why unemployment is going up, and the other factor is the slowdown in hiring, which is something we're watching very closely. So it really depends on what's happening on the supply side and the supply and demand curves.
So we all felt on the committee, not all, but I think everyone on the committee felt that job openings were so elevated that they could fall a long way before you hit the part of the curve where job openings turned into higher unemployment, job loss. And yes, I mean, I think we are. It's hard to know that. You can't know these things with great precision, but certainly it appears that we're very close to that point, if not at it so that further declines in job openings will translate more directly into unemployment. , it's been a great ride down. I mean, we've seen a lot of tightness come out of the labor market in that form without it resulting in lower employment.
So I think everybody on the committee thinks that the number of job openings is so high that it can be down for a long time before it passes through to higher unemployment. It's hard to know when we'll get to that point. You can't know these things with great precision, but certainly we're very close to that point, and we may even be there now, when further declines in job openings will translate more directly into unemployment. But it's a big decline. I mean, we've seen a lot of easing of tightness in the labor market in this form, but it hasn't led to a decline in employment.
Question 12: so we've heard some speculation that you may be going with the federal funds rate to three and a half, maybe under 4% and there's basically an entire generation that has experienced zero or near zero federal fund rate as something we're heading in that direction. Again. What's the likelihood that cheap money is now the norm?
We've heard some speculation that the Fed Funds rate could go down to 3.5%, maybe below 4%, and after basically an entire generation of having had zero or near-zero Fed Funds rates, we're heading in that direction. What are the chances that cheap money/ultra-low rates will become the norm again?
Answer 12:
So this is a question. You mean, after we get through all of this, it's just great question that we just we can only speculate about. Intuitively, most many, many people anyway, would say we're probably not going back to that era where there were trillions of dollars of sovereign bonds trading at negative rates, long term bonds trading at negative rates. And it looked like the neutral rate was might even be negative. So there was people were issuing debt, issuing debt at negative rates. It seems that's so far away. Now, my own sense is that we 're not going back to that, but you know, honestly, we're going to find out. But you know, it feels, it feels to me and that the neutral rate is is probably significantly higher than it was back then. How high is it? I just don't think we know it's again, we only know it by its works.
We can only speculate about this. Intuitively, most people would say that we are probably not going to go back to a time where there were trillions of dollars of sovereign bonds trading at negative rates, long-term bonds trading at negative rates, and it looked like the neutral rate might even be negative. So there were people issuing debt at negative rates. That seems like a long way off now. My sense is that we are not going to go back to that time, and my sense is that the neutral rate is probably much higher than it was then. How high is it? I don't know either, and I can only learn about it by working through it.
One more, how do you respond to the criticism that will likely come that a deeper rate cut now before the election, has some political motivations.
Follow-up question: Another question, how do you respond to possible criticism that the large interest rate cut before the election is politically motivated?
Yeah, so, you know, this is my fourth presidential election at the at the Fed, and you know, it's always the same. We're always, we're always going into this meeting in particular and asking, what's the right thing to do for the people we serve. And we do that, and we make a decision as a group, and then we announce it, and it's that's always what it is. for the most part with with a lag. So nevertheless, this is what we do. Our job is to support the economy on behalf of the American people, and if we get it right, this will benefit the American people significantly. So this really concentrates the mind, and it's something we all take very, very seriously. We don't put up any other filters. I think if you start doing that, I don't know where you stop. And so we just want to do that.
This is my fourth time at the Fed going through a U.S. presidential election, and you know, it's always the same. We always ask ourselves what is the right thing to do for the American people that we serve. We do that, we make a decision as a group, and then we announce it, and it's always that. It never gets into anything else. There's no other discussion. I would also point out that what we do does affect the state of the economy to a great extent, and there are lagged effects. So nonetheless, that's our job. Our job is to support the economy on behalf of the American people, and if we do it right, it will greatly benefit the American people. So that really keeps us focused, and it's something that we all take very, very seriously. We don't put any other filters on. Otherwise if you start doing that, I don't know where you'd stop.
Question 13: My first question is, very simply, what message are you trying to send American consumers, the American people with this unusually large rate cut?
My first question is a simple one: What message are you trying to convey to American consumers, to the American people, by this unusually large rate cut?
Answer 13:
I would just say that, you know, the US economy is in a good place and and our decision today is designed to keep it there. More specifically, the economy is growing at a solid pace. Inflation is coming down closer to our 2% objective over time, and the labor market is still in solid shape. So our intention is really to maintain the strength that we currently see in the US economy, and we'll do that by returning rates from their high level, which has really been the purpose of which has been to get inflation under control. We're going to move those down over time to a more normal level over time,
I would just say that the U.S. economy is in good shape, and our decision today is designed to keep it that way. More specifically, the economy is growing at a solid pace. Inflation is coming down over time close to our 2 percent objective, and the labor market remains in good shape. So our intention is really to maintain the strength that we're seeing in the U.S. economy, and we're going to do that by bringing interest rates down from their high levels, and keeping interest rates high with the goal of keeping inflation under control. We're going to bring interest rates down to more normal levels over time.
just a follow up to that, listening to you talk about inflation moving meaningfully down to 2% is the Federal Reserve effectively declaring a decisive victory over inflation and rising prices.
Follow-up question: Hearing you talk about the sharp drop in inflation to 2%, does this actually mean that the Fed has achieved a decisive victory in the fight against inflation and rising prices?
No, we're not so inflation. You know what we say is we want inflation. The goal is to have inflation move down to 2% on a sustainable basis. And, you know, we're not really, we're close, but we're not really at 2% and I think we're going to want to see it be, you know, around 2% and close to 2% for some time, but we're certainly not doing, we're not we're not saying mission accomplished or anything like that. But I have to say, though we're encouraged by the progress that we have made.
No, we're not that worried about inflation. We want inflation. The goal is to get inflation down to 2% sustainably. But we're not really at 2% right now, we're probably going to be close to 2% for a while, so we're not going to say that the mission is accomplished. But I must say that we're encouraged by the progress that's been made.
Question 14:
I'm just wondering how the Committee thinks about the persistent housing inflation that we're seeing and do you think that with housing inflation being so high, that overall inflation can get back to our 2% target?
Answer 14:
Yeah, so housing inflation is the is the one piece that is kind of dragging a bit. If I can say we know that market rents are doing what we would want them to do, which is to be moving up at relatively low levels, but they're not rolling over that the leases that are rolling over are not coming down as much, and OER is coming in high. So, you know, it's been slower than we expected. I think we now understand that it's going to take some time for those lower market rents to get into this. But, you know, the direction of travel is clear, and as long as market rents remain, you know, relatively low inflation over time that will show up just the time it's taking now, several years, rather than just one or two cycles of of annual lease renewals. So that's, I think we understand that now, I don't think the outcome is in doubt again. PCE, inflation or have behaved pretty well. You know, they're all they all have some volatility. We will get down to 2% inflation, I believe, and I believe that ultimately, we'll get what we need to get out of the housing services piece too, some of your colleagues have experienced concern.
Yes, housing inflation is a bit of a drag. But right now market rents are doing what we would like them to do, which is to grow at a relatively low level, but the rents on the renewal homes are not coming down as much, and the OER is high. So, housing inflation is cooling down more slowly than we would have expected. I think we understand now that it takes a while for those lower market rents to work. But the way forward is clear, as long as market rents remain relatively low inflation, the effect of pulling down inflation will be seen over time, and it will take several years, not just one or two annual lease renewal cycles. So, I would not question the cooling of inflation because of this. As long as market rents remain under control, the results are not in doubt, and other parts of the economic data, including core PCE inflation, are doing quite well. You know, they all have some volatility. I believe that we will get inflation down to 2%, and I believe that eventually, we will also get the gains we need from the housing services component.
It's hard to gain that out. The housing market is in part frozen because of lock in with low rates. People don't want to sell their homes, so because they have a very low mortgage to be quite expensive to refinance. As rates come down, people will start to move more, and that's probably beginning to happen already. But remember, when that happens, you've got a you've got a seller, but you've also got a new buyer, in many cases. So it's not, you know, obvious how much additional demand that would make me the real issue with housing is that we have had and are on track to continue to have not enough housing. And so it's going to be challenging. It's hard to find to zone lots that are in places where people want to live. It's all of the aspects of housing are more and more difficult. And you know, where are we going to get the supply? and getting those rates normalized and getting the housing housing cycle normalized, that's the best thing we can do for householders. And then the supply question will have to be dealt with by the market and also by government.
Even, you know, how likely is that to happen? How would you respond to the housing market? It's hard to know. The housing market is somewhat frozen by the low interest rates that people have locked in. People don't want to sell their homes because their mortgage rates are so low and the cost of refinancing is pretty high. As interest rates go down, people are going to start moving more, which is probably already starting to happen. But remember, when that happens, you have a seller, but you also have a new buyer in a lot of cases. So, you know, how much additional demand there would be is not obvious to me. The real problem with housing is that we have and will continue to have an inadequate supply of housing. So it's going to be a challenge. It's hard to find zoning lots where people want to live. All aspects of housing are increasingly difficult. You know, where are we going to get supply from? That's not something that the Fed can really solve, but I think as interest rates normalize, you'll see a normalization of the housing market. I mean, ultimately, that's the best thing we can do for families by getting inflation down, normalizing interest rates, normalizing the housing cycle. And then the supply problem has to be solved by the market and the government.
Question 15: Just following up on some of the labor market talk earlier. You know, monetary policy operates with long and variable lags, and I'm wondering how much you see being able to keep the unemployment rate from rate right raising too much comes from the fact that you're starting to act now, and that's going to give people more room to run, versus just the labor market is strong. And then also, if I could follow up on next question, do you see today's 50 basis point move as partially a response to the fact that you didn' t cut in July, and that sort of gets you to the same place.
Monetary policy operates with long and variable lags, and I'm wondering to what extent you think you'll be able to prevent unemployment from rising too much thanks to you starting to act now, which will give people more wiggle room than if the labor market was strong alone. And then if I could follow up with the next question, do you think the 50 basis point rate cut today is a response and compensation for the fact that you didn't cut rates in July?
Answer 15:
So you're right about lags, but I would just point to the overall economy. You have an economy that is growing at a at a solid pace. If you look at forecasters or talk to companies, they'll say that they think 2025 should be a good year too. So there's no sense in the US economy. Basically fine, if you talk to market participants. I mean, I mean, you know, business people who are actually out there doing business. So I think, you know, I think we, I think our move is timely. I do. And as I said, you can, you can see our, our our 50 basis point move as as a commitment to make sure that we don't fall behind. So you're really asking about your second question. You're asking about July. And I guess if you, if you ask, you know, if we gotten the July report before the meeting, would we have cut we might well of we didn't make that decision, but you know that we might well have, I think that's not, you know, that doesn't really answer the question that we ask ourselves, which is, let's look, you know, when at this meeting, we're looking back to the July employment report, the August employment report, the two CPI reports, one of which came, of course, during blackout, and all the other things that I mentioned, we're looking at all of those things and we're asking ourselves, what's the right what's our what's the policy stance we need to move to? We knew it's clear that we clearly, literally everyone on the committee agreed that it's time to move . It's just how big, how fast you go, and what do you think about the pass forward? So this decision we made today had broad support on the committee, and I've discussed the path ahead. Elizabeth,
You're right about the lag, but I would just point to the overall economy. The U.S. economy is growing solidly. If you look at forecasters or talk to companies, they say they think 2025 should be a good year as well. So the U.S. economy is basically OK. I think our move was timely. You can think of our 50 basis point adjustment as a commitment to make sure we don't fall behind. If we had the non-farm payrolls data for the month before the July FOMC meeting, would we have cut rates then? Probably, but I don't think it really answers the question we asked ourselves, which is, let's see, at this meeting, we're looking at the July jobs report, the August jobs report, two CPI reports, one of which was released during the blackout period, and all the other things I mentioned, we're looking at all of these things, and we're asking ourselves, what is the right thing to do, what policy stance do we need to take? We know, obviously, everyone on the committee agrees that it's time to act. It's just how big, how fast, and what do you think about the path of interest rates going forward? So this decision we made today was broadly supported by the committee, and I've discussed the path forward.
Question 16: Mortgage rates have already been dropping in anticipation of this announcement. How much more should borrowers expect those rates to drop over the next year?
Mortgage rates have already fallen in anticipation of rate cuts. How much further are they expected to fall over the next year?
Answer 16:
Very hard for me to say that's from our standpoint. I can, I can't really speak the mortgage rates. I will say, you know, that will depend on on how the economy evolves. Our intention, though, is we think that our policy was appropriately restrictive. , other rates in the economy will come down as well. However, the rate at which those things happen will really depend on how the economy performs. We can't see, we can't look a year ahead and know what the economy is to be doing.
From our perspective, it's hard for me to say. I can't really talk about mortgage rates. I will say that it depends on how the economy develops. But our intention is that we think our policy is appropriately restrictive. We think it's time to start readjusting it to a more neutral level rather than a restrictive level. We expect that process to take some time, as you can see in the forecasts that we released today, if things develop as forecasted, other interest rates in the economy will also come down. However, the speed at which those things happen really depends on how the economy performs. We can't see, we can't look ahead a year from now to where the economy is going to be.
What's your message to households who are frustrated that home prices have still stayed so high as rates have been high? What do you say to those households?
Follow-up question: What do you say to families who are struggling with high housing prices because interest rates are high?
Well, I can what I can say to the public is that we had the highest we had a burst of inflation. Many other countries around the world had had a similar burst of inflation. And when that happens, part of the answer is that we raise interest rates in order to cool the economy off in order to reduce inflationary pressures. It's not something that people experience as pleasant, but at the end, what you get is low inflation restored. Price stability, restored. And a good definition of price stability is that people anymore in their daily decisions, they're not thinking about inflation. That's where everyone wants to be, is back to what's inflation, you know, just keep it low, keep it stable. We're restoring that. So what we're going through now, really, it restores it will benefit people over a long period of time. Price stability benefits everybody over a long period of time, just by virtue of the fact that they don't have to deal with inflation. the economy, of course, and of course, people are experiencing high prices, as opposed to high inflation, and we understand that's painful.
What I can tell the public is that we've experienced peak inflation, and many other countries around the world have experienced similar inflation. When that happens, part of the solution is that we raise interest rates so that we cool the economy and so that we reduce inflationary pressures. That's not something that people are going to be happy about, but at the end of the day, what we've got is a return to low inflation. A return to price stability. A good definition of price stability is that people are no longer thinking about inflation in their day-to-day decisions. That's what everybody wants, is to keep inflation low and stable. We're returning to that. So what we're experiencing now, really, a return to that will benefit people for a long time. Price stability benefits everybody for a long time because they don't have to deal with inflation. That's what's happening. I think we've made real progress. I'm not at all telling people how they should think about the economy, of course, people are experiencing high prices, not high inflation, and we understand that's painful.
Question 17: I was wondering if you could go through you said just at the beginning that coming into the blackout, there was like an open thought of 25 or 50. You know, the fact that we're either 25 or 50, I would sort of argue that when we had those two last speeches by Governor Waller and New York President John Williams, that they were, they were sort of saying that maybe a gradual approach was going to win the day. I mean, I sort of want to ask a seven part question about this. But I mean, could you talk, would you have cut rates by 50 basis points if the market had been pricing in, like, low odds of a 50 point move, like they were last Wednesday. You know, after the CPI number came out, there's a really small probability of a 50 point cut. Does it play playing your consideration at all.
When Fed officials first entered the silent period of public speaking, people were open to whether to cut interest rates by 25 basis points or 50 basis points. Speech by Governor Waller and New York Fed President Williams also said that gradual rate cuts would prevail. If the market is pricing in a 50 basis point rate cut is unlikely, will you still cut interest rates significantly this time? Do market pricing bets affect the Fed's decision-making?
Answer 17:
Thank you. We're always going to try to do what we think is the right thing for the economy at that time. That's what we'll do, and that's what we did today.
We're always going to try to do what we think is right for the economy at the time. That's what we would do and that's what we do today.
Question 18: you've mentioned how closely you're watching the labor market, but you also noted that payroll numbers have been a little bit less reliable lately because of the big downward revisions. Does that put your focus overwhelmingly on the unemployment rate? And given the SEP projection of 4.4 basically being the peak in the cycle, would going above that be the kind of thing that would trigger another 50 basis point cut.
You mentioned that you're watching the labor market closely, but you also noted that the reliability of the payrolls has decreased recently due to the large downward revisions. Does this mean that your focus is primarily on the unemployment rate? Given that the SEP forecast of 4.4% is essentially the peak unemployment rate for the cycle, would exceeding this level trigger another large 50 basis point rate cut?
Answer 18:
So we will continue to look at that broad array of labor market data, including the payroll numbers. We're not discarding those. I mean, we'll certainly look at those, but we will mentally tend to adjust them based on the Q, C, E, W adjustment, which you referred to. There isn't a bright line, you know, it will be the light that the unemployment rate's very important, of course, but there isn't a single statistic or a single bright line over which that thing that might move, that would dictate one thing or another. We'll look at each meeting, we'll look at all the data on inflation, economic activity and the labor market, and we'll make decisions about is our policy stance where it needs to be to, you know, to foster over the medium term, our mandate goals. Yeah, so I can't, I can't say we, we have a bright line in mind.
We will continue to watch a broad range of labor market data, including nonfarm payrolls. We're not going to abandon those data. I mean, we'll certainly watch them, but we'll be psychologically inclined to adjust them based on the QCEW adjustments that you mentioned. There's no bright line, of course, the unemployment rate is very important, but there's no one statistic or a bright line that determines one thing or that. We look at all the data on inflation, economic activity, and the labor market at every meeting and decide on our policy stance in order to promote our mandate over the medium term. So I can't say that we have a bright line in mind.
Question 19: I know that you discussed earlier how the Fed does whatever the right thing is and nothing else factors in. But in general, can you talk about whether or not you believe a sitting US president should have a say in fed decisions on interest rates? Because that's something that former President Trump, who obviously points of view, has previously, suggested, and I know the Fed is designed to be independent, but why can you tell the public why you view that so important?
I know you've discussed before that the Fed will do the right thing, all else being equal. But in general, can you talk about whether you think the current president of the United States should have a say in the Fed's interest rate decisions? Because this is something that former President Trump has brought up before, and he obviously has his own views, and I know the Fed was designed to be independent, but why can you tell the public that you think this is so important?
Answer 19:
Sure, so countries that are democracies around the world, countries that are sort of like the United States, all have what are called independent central banks. And the reason is that that people have found, over time, that insulating the central bank from direct control by political authorities avoids making monetary policy in a way that that favors, maybe people who are in office as opposed to people who are not in office. So that's, that's the idea, is that, you know, I think the data are clear that countries that have independent central banks, they get lower inflation. And so we're, you know, we're not, we do our work to serve all Americans. We're not serving any politician, any political figure, any cause, any issue, nothing. It's just maximum employment and price stability on behalf of all Americans, and that's how the other central banks are set up to it.
Of course, democratic countries like the United States have so-called independent central banks. The reason for this is that over time, people have found that isolating the central bank from direct control by political authorities avoids setting monetary policy that only benefits those in office. That's our idea, and I think the data clearly shows that countries with independent central banks have lower inflation. So our job is to serve all Americans. We don't serve any politician, any political figure, any cause, any issue, nothing. We simply work to achieve maximum employment and price stability for all Americans, and that's how other central banks are set up. It's a good institutional arrangement that works for the public good, and I hope and believe it will continue.
Question 20: a couple regulatory developments in the past week that I want to ask you about. First last week, Vice Chair for supervision, Michael Barr outlined his views for the changes to the Basel three end game. I'm wondering if you are in line with him on those changes should be if those have support the board in a broad way that you're looking for, and if you think the other agencies are also fully on board with that approach
I wanted to ask you about a couple of regulatory developments over the past week. First, last week, Michael Barr, the Fed's vice chairman for supervision, outlined his thoughts on changes to the Basel III regulatory rules. I was wondering if you agree with him and if other agencies are fully supportive of this approach as well?
Answer 20:
So the answer to your question is that, yes, those those changes were negotiated between the agencies with my support and with my involvement, with the idea that we were going to re propose, we propose the changes that we, that Vice Chair Barr talked about, and then take comment on them. So yes, that is, you know, that's happening with my support. That's not a final proposal, though. You understand, we're putting them out for comment. have a calendar date for that. And as for the other agencies, you know, the idea is that we're all moving together. We're not moving separately. So that I don't, I don't know exactly where that is, but the idea is that we will move as a group to put this out again for comment, and then, you know, it'll, it'll come the comments will come back 60 days later, and we'll dive into them, and we'll try to bring this to a conclusion sometime in the first half of next year.
The answer to your question is yes, those changes were negotiated by the agencies with my support and involvement, and the idea is that we'll re-propose, we'll propose the changes that Vice Chairman Barr talked about, and then we'll ask for comments. So yes, that's happening with my support. But it's not the final proposal. You know, we're asking for comments. We'll ask for comments and make the appropriate changes, but we don't have a specific date. As for the other agencies, you know, the idea is that we all move together. We don't move separately. So I don'
