Powell: The economy is stronger than expected, the Federal Reserve can be "a bit more cautious" in cutting interest rates, and the Trump administration cannot set up a shadow Federal Reserve chair

Federal Reserve Chairman Jerome Powell reiterated that the Fed is capable of being more cautious about interest rate cuts in the context of a strengthening economy. He stated that it is too early to assess the impact of Donald Trump's presidency on interest rates and ruled out the possibility of a so-called "shadow Fed chairman" emerging after Trump's inauguration.

On December 4th, Wednesday, Eastern Time, at the DealBook/Summit conference hosted by The New York Times, Powell stated that the strength of the U.S. economy means the Fed can exhibit some restraint regarding interest rate cuts. He said:

“The U.S. economy is in very good shape, and there is no reason not to maintain this momentum. The good news is that we can be a bit more cautious (about interest rate cuts).”

This was Powell's last public speech before the quiet period leading up to the Federal Reserve's monetary policy meeting in December. One of the main reasons investors were focused on this speech was to look for clues about whether the Fed would continue to cut rates this month. However, Powell did not directly comment on whether the Fed's meeting on December 17-18 would decide to cut rates.

Powell believes that the risks of a downturn in the labor market have diminished. With strong economic growth and slightly sticky inflation, the Fed may be more cautious. Over time, the Fed's policy interest rate will become more neutral. The Fed can remain patient and cautiously move towards a neutral rate. He said:

“Economic growth is certainly stronger than we imagined, and inflation is slightly rising. The good news is that we can be a bit more cautious as we try to find the neutral (interest rate level).”

Powell commented that the Fed has not yet achieved its goal of lowering inflation but is still making progress in reducing inflation. Rising price levels in the U.S. have caused dissatisfaction among the public. From the perspective of employment numbers, the job market is good, but low-income groups are under pressure. Powell believes that the current economic situation is better than when the Fed began cutting rates in September. This situation means the Fed can cut rates more slowly. He said:

“We want to send a strong signal: If the labor market continues to weaken, we will provide support. The economy is performing strongly, stronger than we expected in September.”

Powell's cautious stance on interest rate cuts continues the remarks he made half a month ago when he first spoke publicly after Trump's election. On November 14th, Powell said, “The economy has not signaled any need for us to rush into rate cuts,” and because the economy is performing strongly, the Fed is capable of making decisions cautiously.

Not Worried About Losing Fed Independence, Confident in Good Relations with Trump Administration

In Wednesday's interview, Powell reiterated that the Fed's independence as a central bank is supported by Congress, and when the moderator asked about the Trump administration's idea of a “shadow Fed chairman,” he directly denied it, stating that the new administration would not seek to realize such a concept, “I think that is simply not possible.”

Powell stated that independence allows the Fed to make the best decisions. The Fed's independence has broad support from the U.S. Congress. He is not worried about the risk of the Fed losing its independenceTo some extent, the independence of the Federal Reserve means that its operating funds are self-sufficient.

Powell stated that he is confident in cooperating well with the future Trump administration and expects the Federal Reserve to maintain the same relationship with financial regulatory agencies and the Treasury Department as in the past, "most importantly, the relationship with the Treasury." He also mentioned that if Trump's Treasury nominee Scott Bessent is confirmed by the Senate, he "is confident... I will establish a relationship with him like with other Treasury Secretaries."

Powell reiterated that the U.S. debt situation is unsustainable. However, he pointed out that the Federal Reserve has never discussed the federal government's debt level when formulating monetary policy, and the Fed clearly delineates its financial functions from those of the Treasury.

Powell's term as Chairman of the Federal Reserve will end in 2026. The idea of a "shadow Federal Reserve Chairman" actually comes from Trump's Treasury nominee Bessent. Wall Street Insight mentioned that in an interview in October, Bessent stated that Trump could nominate a "shadow" chairman, making Powell a "lame duck" during his term. He said, "Once there is a 'shadow' Federal Reserve chairman and forward guidance, no one will really care about Powell's statements anymore."

At that time, analysts believed that Bessent's idea was to plan the future direction of the Federal Reserve during Powell's term. This means that if Trump returns to the White House, he may seize Powell's voice and push him to the sidelines.

It is too early to judge the impact of Trump's tariffs and other policies on the economy and interest rate outlook

At the end of last month, Trump stated that he would impose tariffs on three major U.S. trading partners, including Canada and Mexico, on his first day in office. Economists generally expect that tariffs will raise prices for consumer electronics, agricultural products, and certain alcoholic beverages. Once implemented, tariffs are likely to accelerate inflation, which would force the Federal Reserve to respond by either halting interest rate cuts or possibly raising rates again.

This Wednesday, Powell's remarks on Trump's tariffs continued his statements from half a month ago. At that time, he said it is too early to draw conclusions about the impact of the election results on the economic outlook.

This time, Powell still believes that it is too early to judge how policy changes under Trump and a Republican-led Congress will affect the economy and interest rate outlook next year.

Powell stated that the Federal Reserve currently faces too many unknowns to seriously consider any consequences that high tariffs may bring, such as which specific goods will be subject to tariffs and the duration of any new trade policies. It is unclear how large Trump's tariffs will be, when they will be implemented, and how long they will last.

Powell said that Trump's tariff ideas have not yet materialized, and the Federal Reserve cannot formulate corresponding policies. The Fed is modeling, monitoring, and assessing the implications of tariffs. The Federal Reserve has no independent views on immigration issues and tariff proposals