On Wednesday, September 18, Federal Reserve Chairman Powell's press conference sent out hawkish signals. U.S. stocks continued to rise during his speech, but then turned around and fell as they realized something was wrong, returning to the low point before midday. The bond market, gold and foreign exchange markets also made a 180-degree reversal.
This is mainly because Powell said that the Fed is only "moderately calibrating its policy stance" and has no pre-set policy route. It will continue to make decisions based on economic data at each meeting, and the pace of future interest rate cuts may be fast, slow, or even suspended.
For example, he mentioned several policy combinations: if the economy remains sound and inflation persists, the Fed will switch to a slower rate cut; and if the labor market weakens unexpectedly or inflation falls faster than expected, the Fed will be prepared to respond with aggressive rate cuts.
Overall, Powell intends to dispel market participants' radical bets that a 50 basis point rate cut will become the new normal.
The following is the full text of his speech before answering media questions:
Good afternoon. My colleagues and I remain focused on achieving the Federal Reserve's twin mandates of maximum employment and stable prices for the benefit of the American people.
The U.S. economy is generally strong and has made significant progress toward our goals. Over the past two years, the labor market has cooled from its previous overheating. As of August, inflation has declined sharply from a peak of 7% to an estimated 2.2% in August. The Federal Reserve is committed to maintaining a strong economy by supporting maximum employment and returning inflation to its 2% goal.
Today, the Federal Open Market Committee decided to reduce the degree of policy constraints by lowering the policy rate by 50 basis points. This decision reflects our growing confidence that, with appropriate calibration of our policy stance, the strong momentum in the labor market can be sustained in the context of moderate economic growth and inflation continuing to decline to 2%. We also decided to continue to reduce the balance sheet. I will provide additional comments on monetary policy after a brief review of economic developments.
Recent indicators suggest that U.S. economic activity continues to rise at a solid pace. In the first half of the year, GDP increased at an annualized rate of 2.2%, and available data suggest that growth in the third quarter was about the same. Growth in consumer spending has remained resilient, and investment in equipment and intangible assets has rebounded from last year's weak pace. In the housing sector, investment eased in the second quarter after strong growth in the first quarter. Improvements in supply conditions have supported the resilient demand side of the U.S. economy during the past year's strong performance. In our Summary of Economic Projections, FOMC Committee participants generally expect U.S. GDP growth to remain solid, with a median forecast of 2% over the next few years.
Labor market conditions continue to cool. Nonfarm payrolls have increased by an average of 116,000 per month over the past three months, a marked slowdown from the pace earlier this year. The unemployment rate has risen but remains low at 4.2%. Nominal wage growth has slowed over the past year, and the gap between job openings and job seekers has narrowed overall. A range of indicators suggest that labor market tightness is now less severe than before the outbreak in 2019. The labor market is no longer the source of high inflationary pressures. The median forecast for the unemployment rate at the end of this year in the Fed's economic forecast is 4.4%, 0.4 percentage points higher than the forecast in June.
Inflation has declined markedly over the past two years but remains above our 2 percent longer-run objective. Nominal PCE prices, excluding the more volatile food and energy categories, are estimated to have increased 2.2 percent in the 12 months through August, based on estimates from the Consumer Price Index and other data, and core PCE prices, excluding the more volatile food and energy categories, are expected to have increased 2.7 percent. Long-term inflation expectations appear to remain well anchored, as reflected in broad surveys of households, businesses, and forecasters, as well as in financial market indicators. The median forecast for total PCE inflation in the Fed's economic projections is 2.3 percent this year and 2.1 percent next year, slightly lower than the June forecast. The median forecast for 2026 and beyond is 2 percent.
Our monetary policy actions have a dual mandate of promoting full employment and price stability for the American people. For much of the past three years, inflation has been well above our 2 percent objective, and labor market conditions have been extremely tight. Our primary focus at that time has been on reducing inflation, and rightly so, with a keen awareness that high inflation can cause significant hardship because it erodes purchasing power, especially for those least able to afford the high costs of necessities such as food, housing, and transportation. Our restrictive monetary policy has helped to restore balance between aggregate supply and aggregate demand, mitigate inflationary pressures, and ensure that inflation expectations are well anchored.
Over the past year, our patient approach has paid off. Inflation is now closer to our objective, and we are more confident that inflation is on a sustained path toward 2 percent. With inflation declining and the labor market cooling, upside risks to inflation have diminished and downside risks to employment have increased. We now view risks to achieving our employment and inflation objectives as roughly balanced, and we focus on risks to each of our dual mandates given the balance of risks to inflation.
At today's meeting, the Committee decided to lower the target range for the federal funds rate by 50 basis points to 4.75% to 5%. This recalibration of the stance of policy will help sustain economic and labor market strength and will continue to push inflation further downward as we begin to move toward a more neutral stance.
We have no pre-set policy path and will continue to make those decisions at each meeting. We recognize that reducing policy restrictions too quickly could hamper progress toward cooling inflation. At the same time, reducing restrictions too slowly could unduly weaken economic activity and employment. The Committee will carefully assess incoming data, the evolving outlook, and the balance of risks as it considers additional adjustments to the target range for the federal funds rate.
At our September FOMC meeting, participating officials wrote down their assessments of the appropriate path for the federal funds rate, assuming the economy develops as expected, based on their respective judgments of the most likely future scenarios. The median forecast was that the appropriate level for the federal funds rate would be 4.4 percent at the end of this year and 3.4 percent at the end of 2025. These median forecasts are lower than those in June and are consistent with lower inflation, higher unemployment, and a shift in the balance of risks.
However, these projections do not constitute plans or decisions by the Committee. As the economy evolves, monetary policy will adjust to best promote our maximum employment and price stability goals. If the economy remains solid and inflation persists, we may ease policy constraints more slowly. We also are prepared to respond if the labor market weakens unexpectedly or if inflation declines faster than expected.
Policy is prepared to respond to the risks and uncertainties we face as we pursue our dual mandate. The Federal Reserve is charged with two monetary policy goals: maximum employment and stable prices. We remain committed to supporting maximum employment, reducing inflation to our 2 percent objective, and keeping longer-term inflation expectations well anchored. Our success in achieving these goals is of vital importance to all Americans. We understand that our actions affect communities, families, and businesses across the country. Everything we do is in service of our public mission. The Federal Reserve will do everything it can to achieve its goals of maximum employment and stable prices.
