Federal Reserve Chairman Powell insisted at a press conference after the Fed slashed its benchmark interest rate by 50 basis points that the move was not intended to support current President Biden on the one hand, nor to respond to an impending economic collapse on the other.
Powell began by acknowledging that recent inflation and employment data led the Federal Open Market Committee (FOMC) to conclude that 50 basis points was reasonable.
“We have two employment reports, July and August. We also have two inflation reports, one of which was released during a blackout. The QCEW report shows that the wage report number we get may be artificially high and will be revised down. We also see anecdotal data such as the Beige Book,” Powell said.
"We concluded that this was the right thing to do for the economy and the people we serve, and that's how we made the decision," he said.
1. When asked how the market should decide whether to cut interest rates by 25 basis points or 50 basis points in the future meeting, Powell said: "A good starting point is the Summary of Economic Projections (SEP). If you look at the SEP, given where we are now and our expectations, you will find that this is a process of re-adjusting our policy stance from high inflation and low unemployment a year ago to a more appropriate position."
He added: “There is nothing in the SEP that suggests the committee is in a hurry, this process evolves over time.”
2. Powell was asked about the Fed's latest forecast, which shows that the FOMC expects the federal funds rate to remain above the long-term neutral rate estimate by the end of next year, whether this indicates that officials believe the short-term neutral rate is slightly higher.
“We know that the stance of policy we will take in July 2023 is when the unemployment rate is 3.5 percent,” Powell said. “Today, the unemployment rate has risen to 4.2 percent, and inflation has fallen to a few tenths above 2 percent. We know that it is time to recalibrate our policy to be more appropriate as inflation and employment move toward more sustainable levels. The risks are now balanced.”
3. The Fed Chairman was then asked how close the FOMC was to voting for 50 basis points and whether it was clear that this would be the outcome of the September meeting.
Powell responded: "When the power went out, we left it on. There was a lot of back and forth today, great discussion, and there was broad support for the decision that the committee voted on."
Powell added: “All 19 members of the committee have written multiple rate cuts this year, all 19, which is a big change from June. We’re off to a good start on that, and frankly, it really demonstrates the confidence that we have in believing that inflation will come down to 2% on a sustainable basis, and that empowers us. We were able to get off to a good start, and I’m glad we did.”
4. When asked whether a deeper rate cut represented growing concerns about labor market conditions, Powell insisted that was realistic. The Fed's latest forecasts show unemployment peaking at 4.4%.
“Labor market conditions are solid, and the policy actions we are taking today are intended to keep them that way,” Powell said. “You could say that about the entire economy. The U.S. economy is in good shape, growth is solid, inflation is coming down. The labor market is in a strong position. We want to keep it that way.”
5. Powell was also asked whether a 50 basis point rate cut meant that the Fed was late in starting its easing cycle.
He responded: "We don't think we're behind, we think this is timely, and you can take this as a signal of our commitment not to fall behind."
6. He was asked why one should not expect labor market conditions to deteriorate further if policy remained at restrictive levels.
“You’re getting very close to what I would call maximum employment, and you’re close to that,” Powell said. “So what’s driving it? Obviously, there’s been a decline in job creation over the last few months, and that’s worth watching. But ultimately, we believe that with the appropriate adjustment of our policy, you can continue to see economic growth that will support the labor market.”
He added: "At the same time, if you look at the growth and activity data, the retail sales data we just got, second quarter GDP, all of that suggests the economy is still growing at a solid pace. So that should also support the labor market over time."
7. Powell was asked what the FOMC will learn between now and the November meeting that will inform the magnitude of the next move.
He responded: "There's more data than usual, we're going to see another jobs report, we're actually going to get a second jobs report on the Friday before the meeting, and inflation data. We're going to get all of that data and we're going to watch it very closely."
8. When asked about the possibility of a return to the "cheap money" era that preceded inflation in recent years, Powell said they could only speculate, but he thought it was unlikely.
“Intuitively, a lot of people would say we’re probably not going to get back to those days when there were trillions of dollars of sovereign bonds trading at negative rates and the neutral rate looked like it might be negative,” he said. “Now it seems very far away. My own sense is that we’re not going to get back to those days, but to be honest, we’ll find out. It seems to me that the neutral rate is probably much higher than it was then. How high is it? I just don’t think we know.”
9. Powell also answered some questions about whether today's big rate cut before the election was politically motivated and aimed at supporting the current president.
Powell insisted: "Our job is to serve all Americans. We are not for any politician, any political figure, any cause, any issue, nothing, just to achieve maximum employment and stable prices on behalf of all Americans. This is a good institutional arrangement, good for the public, and I hope and firmly believe that it will continue."
10. The last question facing the Fed Chairman is whether the FOMC sees any potential shocks in the future that could push the U.S. economy into a recession.
He responded: "I don't think so. I don't see anything that would suggest that the odds of a recession are increasing. You can see that the economy is growing at a solid pace, inflation is coming down, the labor market remains at a very solid level."
