Powell: The time to gain confidence in rate cuts will be longer than expected, but the next step is unlikely to be a rate hike (full text attached)

On Wednesday, May 1st, the Federal Reserve announced at the FOMC meeting that the target range for the federal funds rate remains at 5.25% to 5.50%, and it will slow down QT starting from June, as expected by the market.

Federal Reserve Chairman Powell stated in a subsequent press conference that the time to gain confidence in rate cuts will be longer than originally anticipated. Short-term inflation expectations have risen, but the next step is unlikely to be a rate hike. After Powell's speech, the three major U.S. stock indexes briefly rose by over 1%, but eventually closed lower for the S&P 500 and Nasdaq indexes after full digestion.

Powell emphasized that the Federal Reserve is committed to fulfilling its dual mandate, and the U.S. economy has made significant progress towards achieving full employment and maintaining price stability. He briefly reviewed the recent economic situation in the U.S., noting that the latest economic indicators show that the U.S. economy continues to expand at a solid pace. Despite pressure from high rates on housing and equipment investment, consumer spending has remained strong over the past few quarters, and improved supply conditions have supported resilient demand.

Furthermore, Powell mentioned that the labor market remains relatively tight, with increased balance and labor still in surplus. The labor force participation rate for the 25 to 34 age group has risen, and continued immigration has increased labor market supply. The gap between job openings and the number of workers has narrowed. He stated that labor demand remains strong, but has cooled compared to the peak since the COVID-19 pandemic.

Although inflation has significantly slowed down over the past year, it remains above the 2% target. Powell highlighted that there has been no further progress in combating inflation, and U.S. inflation data has been higher than expected up to 2024. Short-term inflation expectations have risen, while long-term inflation expectations have stabilized. With economic prospects still uncertain, the Federal Reserve will continue to closely monitor inflation risks.

Powell expressed that high inflation poses significant challenges to the public, eroding purchasing power, especially for low-income groups. Unless the Federal Reserve has greater confidence in moving towards the 2% inflation target, it is not expected to lower the target range for the federal funds rate. He mentioned that data has been higher than expected so far this year, but has not instilled this greater confidence.

Powell stated that in terms of rate cuts, gaining confidence will take longer than originally imagined. The Federal Reserve is prepared to maintain the current rate range at the appropriate time and is also prepared to address unexpected weakness in the labor market. FOMC will make decisions based on data at each meeting.

"Premature or excessive removal of policy restrictions may weaken the progress we have made in inflation. At the same time, delayed or insufficient removal of policy restrictions may inappropriately weaken economic activity and employment. When considering any adjustments to the target range for the federal funds rate, FOMC will carefully assess upcoming data, evolving outlooks, and risk balances."

During the Q&A session that followed, Powell stated that it is unlikely that the next step for FOMC will be a rate hike. "I do think it's pretty clear that policy is restrictive," Powell said. "We believe that over time, it will reach a sufficiently high level of restrictiveness." Regarding the slowdown in Quantitative Tightening (QT), Powell stated that starting from June 1st, the upper limit for the Fed's monthly Treasury redemptions will be reduced from the current $60 billion to $25 billion. He said that the decision to slow down QT does not mean that the Fed's balance sheet will ultimately shrink less than originally expected, but rather approach its final level more gradually.

Here is a summary of the Q&A session:

Q1: Are you still confident that current interest rates are sufficient to curb inflation and return to 2%? Is the restriction sufficient?

Powell: I do believe that the evidence is very clear that current monetary policy is restrictive and is affecting demand. I can point out several aspects. First, the labor market demand is still strong, but it has cooled from the extremely high levels of a few years ago, as can be seen from job vacancies. Quit rates and hiring rates have basically normalized.

On the expenditure side, such as housing and investment, you can also see that higher interest rates are putting pressure on these activities. We believe that over time, it will be sufficiently restrictive.

Q2: Fed Governor Michelle Bowman previously anticipated the risk of rate hikes, do you also see such risks? Under what circumstances would you consider raising rates?

Powell: I think the likelihood of the next policy rate adjustment being a rate hike is not high, I would say it is unlikely. You know, our policy focus is actually what I just mentioned, which is the duration of maintaining policy restrictiveness.

So what conditions would warrant a rate hike? We would need to see strong evidence that our policy rate is insufficient to bring inflation down to 2%. But that is not the situation we are seeing now, as we mentioned. We will look at all data to answer this question, including inflation, inflation expectations, and all other data. I mean if we were to conclude that policy is not tight enough to achieve that goal. So, it will be a comprehensive look at the issue, possibly expectations, possibly a combination of factors, to see if that conclusion would be reached. And we do not currently see evidence supporting that conclusion to warrant further rate hikes.

Q3: You did not mention today that a rate cut later this year would be appropriate, which is different from what was said in previous press conferences. So, has the Fed abandoned its dovish stance? What is your position? Will inflation be a key data point for decision-making?

Powell: So, let me talk about the issue of rate cuts. Obviously, our decisions on the policy rate will depend on upcoming data, the evolution of economic outlook, and risk balance. We will consider all data. We believe the current positioning of monetary policy is good and can respond to different paths the economy may take.

We have stated that it is inappropriate to loosen the restrictiveness of monetary policy until we have greater confidence that inflation will sustainably decline to 2%. For example, if we encounter a situation where inflation persists longer than expected, such as a strong labor market while inflation moves sideways, we have not gained greater confidence. In this case, delaying a rate cut may be appropriate I believe the economy may still take other paths. There are two scenarios that could give us greater confidence in rate cuts: one is if inflation sustainably falls to 2%, and the other is if the labor market unexpectedly weakens. These are possible paths for rate cuts. I think it depends on the data. Of course, one aspect we will pay attention to is the performance of inflation. We will monitor inflation expectations. We will monitor the overall situation. Clearly, future inflation data will be at the core of interest rate policy decisions.

Q4: To what extent has the pause in rate hikes since November last year accelerated economic growth? Do you now expect a period of sustained tightening to ensure the trend of last year's slowing inflation continues? You have previously said that strong economic growth does not necessarily prevent rate cuts. If the labor market remains strong and wages accelerate, would you change your view?

Powell: It's hard to say. In fact, the growth we have seen in the first quarter of this year is roughly in line with last year, without accelerated growth. It is generally believed that the pause in rate hikes in December last year and the easing financial environment would lead to increased economic activity, which would in turn lead to inflation or a tightening labor market, but this situation has not really occurred. The actual situation is that the level of economic activity is roughly the same as last year. So, what has caused this inflation? With time, we will have a better understanding. I haven't seen a clear connection between the economic situation and the loose financial environment.

As for tightening, the current rates are higher than before the December meeting last year, and have been maintained for some time. Considering the inflation situation in the first quarter, this is appropriate, considering the inflation situation in the first quarter.

A cautious statement is that we do not set targets for wage growth and the labor market. Last year, we saw strong growth, a tight labor market, and historically rapid inflation decline. This is because we know that there are two forces at work here: the resolution of distortions on the supply and demand sides related to the epidemic, and restrictive monetary policy.

I would not rule out the possibility that a similar situation cannot continue. It is not impossible for such a situation to reappear on the supply side, as we do see companies still reporting that they are facing supply-side issues. Even if supply-side issues are resolved, it will take some time to impact economic activity and ultimately affect inflation.

I don't like to say that growth or a strong labor market itself will automatically create problems with inflation. Of course, this situation did not occur last year. We also do not set targets for wages; our goal is to control inflation. Wages are one of the influencing factors. Regarding wages, of course, we hope to see high wages, but we also hope that wages will not be eroded by high inflation. This is what we are trying to do, to cool the economy and, in conjunction with changes on the supply side, bring the economy back to a 2% inflation level. Part of this may involve gradually reducing wage growth to a more sustainable level.

Q5: You mentioned the goal is for inflation to slowly decline to 2%. It is now May, considering the date, do you still have time to cut rates three times this year? Looking back at the data for the first three months of this year, are there any signs that the situation is more worrying than turbulent inflation expectations?

Powell: I don't think of it in that way. What we're saying is we need more confidence. We didn't see progress in the first quarter, and it seems like it will take longer to reach that level of confidence. I don't know how long that will take. I can only say that when we have that confidence, rate cuts will be considered. I'm not sure when that will be.

There are currently no more worrying signs. So I think it's appropriate to maintain our current judgment until we have the data for the entire quarter. Stepping back, what do we see from the first quarter now? Strong economic activity. We see a strong labor market. We see inflation. We see three inflation readings. I think you should get some signals from there. We don't like to react to one or two months of data. We are getting signals. The signal we are getting is that it may take longer for us to reach the 2% inflation path. That's the signal we're getting.

Q6: In the first quarter's inflation data, what temporary issues do you think there are? How will the next few months or quarters develop? Is slowing QT and maintaining high rates contradictory?

Powell: Yes. We have carefully analyzed the data, and there is nothing in it that would change our views. In fact, we have not gained confidence and believe that it will take longer to gain this confidence.

Since December last year, what you have seen is commodity inflation higher than expected, and non-residential service inflation higher than expected. The combination of these two is higher than we expected. There are reasons behind this. And, I think my expectation is that at some point this year, we will see inflation come down. That's my forecast. But due to the data we are seeing, my confidence in this is lower than before.

I don't think slowing QT and maintaining high rates are contradictory. The active tool of monetary policy is, of course, interest rates. Slowing QT is a plan we have had for a long time, with the purpose of just slowing the pace, not to ease the economy or reduce the restrictiveness of the economy. This is actually to ensure that the process of shrinking the balance sheet proceeds smoothly, without causing financial market turmoil as we did last time.

Q7: Considering the data since March, do you think the likelihood of no rate cuts this year has increased or remained the same? I think there is some overconcern about inflation. Would you be more patient with inflation as it decreases with the economic cycle?

Powell: I can't estimate the likelihood of no rate cuts. But I can only say that it is inappropriate to cut rates until we have more confidence that inflation can sustainably fall to 2%. Our confidence in this in the first quarter did not increase. In fact, our view is that it will take more time to gain this confidence. I think the path of the economy has always been difficult to predict for a wide range of forecasters.

But there is a path of no rate cuts, and there is a path of rate cuts. It really depends on the data. Of the two major tasks of the Fed, if one is further from the target, then you focus on that one, and obviously the inflation issue was more severe before. With inflation now falling below 3% on a 12-month basis, we are now shifting our focus to employment. That's how we're looking at this issue

Q8: It seems that you believe that inflation is most likely to occur when interest rates are lowered to a level lower than the current level by the end of the year. Is this understanding correct? Additionally, key GDP data has sparked discussions about "stagflation" in the US economy. Does the Fed now see this as a risk?

Powell: I'm not actually dealing with probabilities. Among the paths the economy can take, some may involve rate cuts, while others may not. I don't have much confidence in which of these paths will happen.

My personal forecast is that we will see further progress in inflation this year. But I don't know if this forecast is sufficient, it requires data to guide us.

Regarding stagflation, I have experienced stagflation, which was a 10% unemployment rate, high single-digit inflation, and very slow economic growth. Now we have 3% growth, I would say, by any standard, this is quite solid growth. And our inflation rate is below 3%. So I really don't understand where the view of stagflation comes from. In fact, I have not seen any signs of stagflation.

Q9: Earlier, the Vice Chairman of the FOMC mentioned that potential growth has increased. Do you agree with this? Does this mean that monetary policy is still not tight enough? You mentioned not really considering raising rates, but if growth is higher and you still don't consider raising rates, does this mean you are more concerned about the economy slowing down excessively rather than inflation rising again?

Powell: We see very high economic growth in 2023, while in 2022 we see negative productivity growth. So, I think it's hard to draw conclusions from the data. The question is whether productivity will continue to be above long-term levels? I think we don't know. As for potential economic output, this is a separate issue. We have experienced significant growth equivalent to potential economic output, which is not related to productivity. This is actually due to having more labor, through an increase in labor force participation, as well as through immigration.

So, we are very similar to other forecasters and economists. We are trying to understand what this means for potential output for this year, next year, and last year. In this case, I think you do see a significant increase in potential output. But you also get more supply, more people entering the labor market, they have jobs, they consume, they have demand. Initially, there may be an oversupply. But ultimately, it should not trigger inflation or deflation over a longer period of time.

I think we believe that our monetary policy stance is in a good place and suitable for the current situation. We believe it is restrictive. And, I have already talked about some evidence, in the labor market, in consumption, you can see it. Demand has dropped significantly in the past few years.

Q10: Currently, the GDP growth rate is about 2%, the unemployment rate is about 4%, which feels like a stable state. We currently have 3% inflation, although you say you don't see the possibility of raising rates, theoretically, to go from 3% inflation to 2%, you need to raise rates. Was there any discussion of raising rates at today's meeting? Are you satisfied with the 3% inflation for the remainder of the year? Is there a timeframe for sustained inflation to trigger a rate hike?

Jerome Powell: A 3% inflation rate will not satisfy us, so we will gradually restore the inflation rate to 2% over time. We believe our policy stance is appropriate for achieving this. Therefore, if we conclude that our policy is not sufficient to sustainably lower the inflation rate below 2%, that would be a reason for us to consider raising interest rates, but currently we do not see evidence of that. That's our current situation.

The policy focus of the FOMC meeting has always been on how to maintain the current level of monetary policy restraint. This is part of the policy. The policy discussions in the meeting are about this.

Regarding rate hikes, there is no specific timeframe. Clearly, a restrictive monetary policy takes more time to take effect. This is very clear based on what we have seen. How long it will take and how patient we should be depends on the overall situation of all data and how the outlook evolves.

Q11: You mentioned the non-partisan nature of the Federal Reserve. Considering this is an election year, is it more difficult to raise rates at this time? Also, is there a significant difference in the economy between rate cuts starting in September and rate cuts in December?

Jerome Powell: When we reach a consensus that it is the right thing to do for the economy, we always do what we believe is appropriate for the economy. We do not consider anything else, just managing the economy is already difficult enough. If we were to consider a whole set of other factors, it would reduce the likelihood of us correctly addressing economic issues. Our decisions are based on data and how these data affect the outlook and risk balance. Elections are not within our consideration.

Q12: You mentioned that the labor market is normalizing. Could you share some analysis on why this is happening, and is this a lagging indicator?

Jerome Powell: Wage growth peaked about two to three years ago, and since then labor costs in various industries have seen significant declines, but not to pre-pandemic levels, still about one percentage point higher than pre-pandemic levels. We have seen quite consistent progress on this, but it is not uniform. The ECI reading on Tuesday showed a slight decline, but in fact it was flat year-on-year, I think roughly so.

Again, we do not set targets for wage growth. However, in the long run, if you have wage growth that exceeds what productivity can support, there will be inflationary pressures. If that's the case, employers will gradually raise wages over time. So, we have seen progress, but it is uneven, and we have seen a significant overall decline in labor costs. But we still have a long way to go in this regard.

Q13: Consumers are now feeling the pressure of interest rates. Mortgage rates are rising, as are car loans and credit cards. People are feeling discouraged about borrowing. This reflects their view of the economy. What do you have to say to them? Can current policies effectively combat inflation?

Jerome Powell: Inflation hurts everyone, especially the low-income group. If you are someone who relies on a salary to live, suddenly everything you buy, essential goods, all increase in price. You will immediately be in trouble Therefore, considering these people, what we are doing is using our tools to reduce inflation. This takes some time. But we will succeed. We will bring the inflation rate back to 2%. Then people won't have to worry anymore. That's what we are doing. We know it's painful, inconvenient, but the benefits are significant in the long run. Everyone will share these rewards. We have made quite a bit of progress. Just think, our core PCE inflation rate once reached 7.1%, now it's 2.7%.

Restrictive monetary policy is playing its rightful role. But this time is different because the supply side also needs to recover. A large part of this inflation is due to the collapse on the supply side. This is related to the economic shutdown and reopening around the time of the pandemic. There are also some factors that truly increase demand. So, both supply and demand need to be addressed together. The reversal of the supply-demand distortion caused by the pandemic, along with restrictive monetary policy. These two things are working together to lower inflation. We have made progress. We still have work to do, but we are no longer facing the very high inflation rates of two years ago.

Q14: Inflation relief in the housing sector has not yet arrived. How do you explain the significant lag between the private sector data we see and government data? How confident are you that rental prices in the coming months will help in the inflation outlook?

Powell: Basically, many areas of the economy in the inflation process have lags, and housing is one of them. So, when someone goes to rent a new apartment, there is what's called market rent. You can see that market rents have hardly increased. This part of inflation is very low. But before that, they were very high, leading inflation at one point. So, these market rents actually take a few years to fully reflect in the rents of renewing tenants.

Landlords usually do not significantly increase rents for renewing tenants, which accumulates unrealized rent growth, leading to a significant increase in rents for new tenants in the future. It's very complex, it takes some time to manifest. As long as market rents remain low, this will show up in inflation data. I think we have realized that the lag time will be longer, much longer than initially imagined. It may not be predictable in terms of time, but it will happen.

Q15: Over the past three to four years, central banks in most developed countries have followed similar policy paths, but based on economic data from Europe, the United States, Japan, and their central banks, this consistency seems to be ending this year. So, what considerations or risks does the FOMC have with a more divergent global economy and central bank policies?

Powell: Yes, you are right. I think that could happen. You know, we are all serving domestic missions, right? So I think the difference between the United States and other countries considering rate cuts now is that they have not experienced the kind of growth we have. Their inflation performance is roughly similar to ours, perhaps slightly better. But they have not experienced the growth we have. So we actually have strong growth and a strong labor market, and very low unemployment rates, and so on.

So we can be patient, and when deciding on rate cuts, we will be cautious. And I think other regions may act earlier. In terms of impact, you know, I think the market has obviously anticipated this, and it is already priced in now Therefore, I believe that the market and the economy can adapt to it. In addition, for emerging market economies, we have not seen the more frequent turmoil that we saw 20 or 30 years ago. I think this is partly because emerging market economies have more credibility in terms of inflation. So, this time they handled it quite well.

Q16: Considering the resilience of first-quarter inflation data, can the economy achieve inflation relief along a relatively painless path? Or, in order to reduce inflation, is some weakness in the labor market and the economy necessary? If the unemployment rate rises to 4% and inflation has not fallen to 2%, how would you view it? Will a 4% unemployment rate attract attention?

Powell: You are right. We used to think that there had to be quite a bit of turmoil in some part of the economy, such as the labor market, to bring inflation down from the very high levels at the beginning of this phase. But that didn't happen. This is a huge achievement. We are very pleased that this did not happen. A large part of this is due to the resolution of crises unrelated to monetary policy, such as distortions on the supply side. The resolution of these issues did help bring inflation down. Now, as I said, I have not given up on this. I think these forces will continue to play a role in helping us lower inflation.

We cannot guarantee that this will always happen, so we are trying to use our tools in a way that keeps the labor market strong and the economy strong, but also helps to sustain inflation at 2%. We hope to achieve this without causing significant turmoil in the labor market or elsewhere.

Note that I am describing unexpected weakness. We would only react to this if we thought the labor market was indeed significantly weak, and a rise in the unemployment rate of a few percentage points may not trigger such a response. Whether you decide to cut interest rates will depend on all the facts and circumstances.

Q17: You have said that the final proposal for Basel III needs broad and substantive reforms. Do you have a timetable in mind for when action will be taken in this regard? Will there be a resubmission?

Powell: Let me first say that the Federal Reserve will adhere to its commitment to participate in Basel III, but U.S. regulatory agencies have not made decisions on capital regime proposals. If it is necessary to resubmit capital regime proposals, the Federal Reserve will not hesitate to do so.

Q18: We have not seen many dissents within the FOMC, how do you avoid group decision-making mistakes and reduce the greater risks of policy errors?

Powell: If you listen to the 18 FOMC colleagues express their views, you will find that we do not lack diversity. This is one of our great strengths. We have 12 Federal Reserve Banks, each with its own economic team. Therefore, each Reserve Bank has its own culture regarding monetary policy, its own methods, and characteristics. This ensures diversity of viewpoints. I think the viewpoints are very diverse.

Regarding dissents, we do have dissents. A thoughtful dissent is a good thing. It really makes you think. From my perspective, I carefully listen to others' opinions. I try to incorporate their ideas into what we are doing. I think we have a very diverse group sitting around the table