Powell: The Federal Reserve is close to its interest rate target, and there may be another rate hike this year. "Soft landing" is the primary goal but not the base expectation.

On Wednesday, September 20th, after the conclusion of the Federal Reserve's monetary policy meeting, Federal Reserve Chairman Powell held a press conference. During the conference, Powell expressed his views on the Federal Reserve's interest rate decision, its outlook on the US economy, interest rates, labor market, and other topics, as well as answering questions from reporters.

At the press conference, Powell reiterated that the Federal Reserve is firmly committed to its dual mandate given by Congress, which is to maintain price stability and labor market stability. Powell stated that the FOMC is firmly committed to bringing the inflation rate down to 2%, which means that the Federal Reserve remains steadfast in this goal and has not made any changes.

Powell reiterated that there can be no strong job market without price stability. He stated that the Federal Reserve has made significant progress, but its full impact has not yet been felt.

Powell stated that the best thing the Federal Reserve can do for everyone is to restore price stability.

The Federal Reserve will maintain a restrictive stance and is inclined to overlook short-term energy price fluctuations

Powell made it clear that the current policy stance is restrictive, and inflation has moderated since the middle of last year.

Powell stated that there is still a long way to go to bring the inflation rate down to 2%, but it is reassuring that long-term inflation expectations remain well anchored. He expressed that he is well aware of the significant difficulties high inflation brings to people. As the inflation target approaches, the Federal Reserve has the ability to act cautiously.

Powell also stated that sustained high energy prices will affect inflation expectations. However, he also emphasized that energy prices do not have a significant signaling effect on the economic trend, and the Federal Reserve is inclined to overlook short-term fluctuations in energy prices. Powell recognizes the importance of energy prices to consumers, but the key lies in the sustainability of high energy prices.

He stated that the Federal Reserve is committed to achieving and maintaining a sufficiently restrictive policy to bring the inflation rate down to 2% over time. The Federal Reserve will maintain a restrictive stance on interest rates until there is confidence that inflation will fall to 2%. Powell stated that the recent three inflation data points have been very good.

The Federal Reserve is close to its target and may raise rates further this year

Powell stated that given the progress the Federal Reserve has made, the FOMC has decided to keep interest rates unchanged this time. However, maintaining interest rates unchanged does not mean that the Federal Reserve has reached the restrictive stance it seeks, and the Federal Reserve has not made a decision on whether interest rates are sufficiently restrictive. The Federal Reserve wants to see convincing evidence that interest rates have reached an appropriate level. Powell stated that the Federal Reserve is very close to the target it needs to reach. He believes that people will only know the existence of a sufficiently restrictive policy when it is achieved.

In the future, the FOMC will continue to make decisions step by step, and if appropriate, be prepared to further raise interest rates. Most policymakers believe that another rate hike this year is more likely to be appropriate. Powell stated that the Federal Reserve's decisions will be based on data and risk assessments, and the Federal Reserve will proceed with caution. Officials hope to be cautious and not draw any hasty conclusions. Regarding the last two monetary policy meetings of this year, Powell stated that the decisions made by the Federal Reserve in these two meetings will depend on the overall situation of all the data. Powell reiterated that as interest rates approach an appropriate policy stance, risks become more balanced between over-tightening and over-loosening.

Powell explained that the cautious approach of the Federal Reserve is due to the lag in policy effects. The Fed is still facing too much uncertainty at present.

He emphasized during the press conference that recent consumer spending data has been particularly strong, and the Fed did not anticipate a decrease in consumer spending.

Powell stressed that the Fed remains vigilant about uncertainty. He also reminded investors that Fed forecasts are not set in stone, and policies will be adjusted as needed, with a high degree of uncertainty in the forecasts.

Powell stated that real interest rates are now "meaningfully positive."

Regarding the level of neutral interest rates, Powell believes that we can only know when we get there. He thinks that neutral rates may have risen and could be higher than long-term rates. The median expectation for neutral rates has not increased, but people are changing their estimates.

Rate cuts will depend on economic demand

Regarding rate cuts, Powell stated that he never intended to signal a specific timing for any rate cuts and that the timing will depend on when it is appropriate. He believes that part of the reason for considering rate cuts may be that real interest rates are rising as inflation is declining. Powell once again emphasized that the current focus is to find a rate level that the Fed can sustain.

However, Powell hinted that by 2024, the Fed will consider both policy lags and data. The market believes that this means the Fed's decisions will be more cautious starting next year. He emphasized that any decisions regarding future rate cuts will be based on economic demand.

Labor market remains tight, no stance on strikes

Powell stated that the labor market remains tight, but the Fed sees a better balance. The FOMC believes that the rebalancing of the labor market will continue, as labor demand still exceeds supply. The unemployment rate remains at 3.8%, still at a low level. Powell stated that he still believes the labor market needs to slow down.

However, nominal wage growth shows signs of slowing down, reducing concerns about the possibility of a "wage-inflation spiral." Powell emphasized that the largest wage increases are in low-income positions. He pointed out that according to most indicators, real wages are currently growing positively.

Powell stated that there has been substantial rebalancing in the labor market without a significant increase in the unemployment rate, which is a positive development.

In the median forecast, Powell does not expect a significant increase in the unemployment rate, but he also emphasized that it is not a guarantee.

Furthermore, Powell believes that the natural unemployment rate is declining.

Regarding the ongoing strike by U.S. auto workers, Powell stated that the FOMC will not comment on it. However, he pointed out that the duration of the strike by the United Auto Workers will impact output, employment, and inflation.

U.S. economy stronger than expected, soft landing is the Fed's primary goal

Powell stated that U.S. economic activity is stronger than expected, and the strong economic activity is the main reason for considering more rate hikes. There are many possible explanations for GDP outperforming expectations. Currently, the balance sheets of U.S. households and businesses are stronger than expected. He pointed out that the actual GDP growth in the United States exceeded expectations, and the US economic activity has been growing steadily at a robust pace, with GDP growth driven by strong consumer spending. Powell stated that the economic growth is stronger than expected and requires higher interest rates.

Housing market activity has rebounded, but housing supply is constrained by structural limitations. The Federal Reserve has observed that the gradual slowdown in housing services inflation has affected rents.

Powell emphasized that the US economy seems to still have a clear momentum of strength, and a soft landing is the primary goal of the FOMC. The Federal Reserve does not want to weaken the possibility of a soft landing. However, the Federal Reserve does not consider a soft landing as the baseline expectation. Powell believes that there is a feasible path for the US economy to achieve a soft landing.

Powell believes that economic growth is not the mission of the Federal Reserve. The question will be whether economic growth really poses a threat to achieving 2% inflation. However, he also acknowledges that surveys show people are dissatisfied with the US economy. He is also aware that when the Federal Reserve raises interest rates, those who rely on borrowing for a living will feel it more strongly.

Powell stated that a recession caused by rate hikes is "always a concern." It is a good thing for the economy to remain stable under rate hikes, but if the economy performs stronger than expected, it means that the Federal Reserve will have to take more measures to lower inflation.

He believes that strikes, government shutdowns, the recovery of student loan repayments, and rising long-term interest rates are all risks. Powell believes that government shutdowns usually have little impact on the macroeconomy. Powell stated that the FOMC will not comment on government shutdowns, but they may delay some of the data that the Federal Reserve needs, and the Federal Reserve must deal with this issue.

Market Reaction

All three major US stock indexes fell, with the S&P 500 down 0.66%, the Nasdaq down 1.14%, and the Nasdaq 100 down 1.1% - hitting the lowest intraday level since August 28. The offshore yuan against the US dollar remained unchanged, temporarily reporting 7.3039 yuan; the two-year US Treasury yield rose by 4.3 basis points to 5.133%, staying near the highest level since 2006 of 5.1480% set after the release of the statement; spot gold rose by 0.34% to $1938 per ounce, previously rising to $1947.47 before the release of the statement.

Paul Ashworth of Capital Economics reported that the Federal Reserve hopes the market believes that "higher interest rates will persist for a longer period of time." In order to prove that the forecast for future rate hikes in the next few years is reasonable, officials have to significantly raise their economic forecasts. The bank is skeptical whether the economic growth in the next 12 months will reach such a strong level, and a more likely outcome is a mild recession or near-recession.

"New Bond King" Gundlach believes that the current economic data is extremely unreliable, and there are many intersecting factors in the economy. Due to the rise in oil prices, the possibility of future rate hikes is higher, which poses resistance to the Federal Reserve's interest rate cuts.