Original author: Zhao Yuhe, Li Dan

Original Source: Wall Street Journal

Summary of the key points from Powell's regular press conference on September 17:

1. Monetary Policy: Today's action was a risk management type rate cut. There was little support among the FOMC for calls for a 50 basis point rate cut.
2. Dot plot: An extremely rare economic situation has led to a wide divergence in the Fed's interest rate forecasts.
3. Labor Market: Revised employment data suggests the labor market is less solid. The unemployment rate remains low but has risen. Job growth has slowed, increasing downside risks, which labor market indicators suggest are substantial. Artificial intelligence (AI) may be contributing to the hiring slowdown.
4. Inflation: The transmission of tariff inflation has slowed, and its impact has become less pronounced. The likelihood of persistent tariff inflation has decreased. US PCE inflation is projected to rise 2.7% year-over-year in August, with core PCE expected to rise 2.9% year-over-year. Disinflation is expected to continue in the services sector. Long-term inflation expectations remain rock solid.
5. Federal Reserve Independence: The Fed is firmly committed to maintaining its independence. It would be inappropriate to discuss the legal battle between Fed Governor Tim Cook and US President Trump. The FOMC declined to comment on US Treasury Secretary Benson's criticisms and declined to commit to an internal review of the Fed, as he had called for. However, it hinted at the possibility of further staff reductions. The FOMC remains united in its pursuit of its dual mandate.
6. Tariffs: Tariffs contribute 0.3-0.4 percentage points to core PCE inflation.

On Wednesday, September 17, Eastern Time, the Federal Reserve announced after the FOMC meeting of its Monetary Policy Committee that the target range for the federal funds rate would be lowered from 4.25% to 4.5% to 4.00% to 4.25%, a decrease of 25 basis points.

This is the first interest rate cut decided by the Federal Reserve in six FOMC meetings since the beginning of the year. Fed Chairman Powell stated at a press conference that while the unemployment rate remains low, it has risen slightly, job creation has declined, and downside risks to employment are increasing. Meanwhile, inflation has recently risen but remains slightly above normal levels. The Fed has also decided to continue reducing its securities holdings.

During the question-and-answer session, he said there was not much support among the Federal Open Market Committee (FOMC) for a 50 basis point rate cut today.

You could think of today's action as a risk management type of rate cut.

In his opening remarks at the press conference, Powell said recent data indicate that U.S. economic activity has slowed. In the first half of this year, U.S. GDP growth was approximately 1.5%, down from 2.5% last year. This decline was primarily due to slower consumer spending. In contrast, business investment in equipment and intangible assets has increased compared to last year. Housing market activity remains weak.

In the Summary of Economic Projections released by the Federal Reserve, the median expectation of FOMC members is that GDP will grow by 1.6% this year and 1.8% next year, slightly higher than the forecast in June.

Regarding the job market, Powell stated that the unemployment rate rose to 4.3% in August, but remained relatively low despite little change over the past year. Nonfarm payroll growth has slowed significantly over the past three months, averaging just 29,000 jobs per month. This slowdown is largely due to slower labor supply growth, driven by declining immigration and a drop in the labor force participation rate.

But he also said that labor demand has weakened and the current number of new jobs appears to be below the "equilibrium level" needed to keep the unemployment rate stable. Powell said that wage growth, while still exceeding inflation, has continued to slow.

Overall, the current labor market is experiencing a slowdown in both supply and demand, which is unusual. Downside risks to employment have increased in this less active and slightly sluggish labor market.

The FOMC's median forecast shows the unemployment rate reaching 4.5% by the end of this year and declining slightly thereafter.

Regarding inflation, Powell said that while inflation has fallen sharply since its peak in mid-2022, it remains above the Fed's 2% long-term target. Based on estimates from the Consumer Price Index (CPI) and other data, the overall personal consumption expenditures price index (PCE) rose 2.7% in the 12 months ending in August; core PCE, which excludes food and energy, rose 2.9%.

He said these readings were slightly higher than at the beginning of the year, mainly due to a pickup in inflation for goods prices. In contrast, inflation for services prices continued to slow. Short-term inflation indicators have been volatile, partly due to the impact of tariffs.

Most measures of longer-term inflation expectations remain consistent with the Fed’s 2% objective over the next year or so. The median FOMC member forecast shows overall inflation at 3.0% this year, falling to 2.6% in 2026 and 2.1% in 2027.

Powell said that the US government's policy changes are still ongoing and their impact on the economy is still unclear. Higher tariffs have begun to push up prices in some categories of goods, but their impact on overall economic activity and inflation remains to be seen.

He said a reasonable basic judgment is that the impact of tariffs on inflation is only a one-time one, causing a short-term increase in price levels. However, there is also the possibility that the inflationary impact may be more lasting, and the Fed's responsibility is to ensure that the one-time price increase does not evolve into a persistent inflationary problem.

In the short term, inflation risks are tilted to the upside, while employment risks are tilted to the downside, creating a challenging situation. When our objectives conflict, our policy framework requires us to balance our dual mandates.

As downside risks to employment have increased, the policy balance has shifted. Therefore, we believe it is appropriate to move closer to a "neutral" policy stance at this meeting.

In the Summary of Economic Projections, FOMC members individually projected the path of the federal funds rate, based on their respective most likely economic scenarios. The median forecast indicates the federal funds rate will be 3.6% by the end of this year, 3.4% by the end of 2026, and 3.1% by the end of 2027. This rate path is 0.25 percentage points lower than the June forecast.

Powell said these individual forecasts are subject to uncertainty and do not represent the committee's plans or resolutions:

Our policy is not a preset path.

The following is the Q&A session with Powell:

Q1: You welcomed new Federal Reserve Board member Steven Myron today, but he remains in his White House position. This marks the first time in decades that a Fed governor has had direct contact with the White House administration. Does this diminish the Fed's ability to maintain political independence in its day-to-day affairs? Furthermore, how will you maintain public trust in the Fed's political neutrality under these circumstances?

POWELL: We did welcome a new member to the Committee today, as we always do. The Committee remains united in pursuing its dual mandate. We are deeply committed to maintaining our independence. Beyond that, I have no further information to share.

Q2: You and other Fed officials often talk about the impact of tariffs on inflation, but now that many businesses appear to be absorbing the costs of tariffs, they may be impacting the labor market and other parts of the economy more. Do you believe the current weakness in the job market is more related to tariffs than inflation?

Powell: It's entirely possible. We're already seeing higher commodity prices, which are contributing to higher inflation—commodity prices have driven much of the increase in inflation this year. While the impact hasn't been significant yet, we expect those effects to continue to play out throughout the rest of this year and into next year.

As for the job market, it may also be affected, but I believe the main reason is the changes in immigration. The labor supply has decreased significantly, with almost no growth. At the same time, labor demand has also dropped significantly.

What we're seeing now is what I call a "strange equilibrium" - usually equilibrium is a good thing, but this time both supply and demand have fallen significantly. Demand, in particular, has fallen more, which is one of the reasons we're seeing rising unemployment.

Q3: Do current economic conditions and the balance of risks no longer support maintaining restrictive policies? Under what circumstances would a rate cut of more than 25 basis points be possible? Was this possibility seriously discussed at this week's meeting?

POWELL: I wouldn't say that. But we can say this: We've maintained very clearly restrictive policies throughout this year—and many people define "restrictive" differently, but I think our policies have been restrictive. We've been able to do that because of the strong labor market conditions, the strong job growth, and so on.

But if you look back, starting from April, and then looking at the revised employment data for July and August, you can no longer say that the labor market was that strong. This means that the risks are no longer clearly tilted towards inflation, but are moving towards equilibrium. Maybe not quite there yet, but clearly moving in that direction.

Therefore, our decision today is to take another step towards a "neutral policy".

There is no broad support for a 50 basis point rate cut today. You know, we have had some very large rate hikes and cuts over the past five years, but that was generally when you thought the policy position was significantly off and needed to be adjusted quickly.

That's not the case at all. I think our current policies have worked well so far this year, and we've been right to wait and see what happens with tariffs, inflation, and the job market.

Now we are seeing a sharp decline in job creation and other signs of labor market weakness. This tells us that while risks may not yet be fully balanced, they are moving closer to equilibrium, and this change warrants a policy adjustment.

Q4: How should we interpret today's rate cut? Is the committee "hedging" against the risk of a weakening labor market, or do you believe that downward economic dynamics are already underway? Why are your interest rate forecasts more skewed toward rate cuts than they were three months ago, while your unemployment rate forecasts are unchanged?

Powell: You can think of this rate cut as a "risk management rate cut."

If you look at our published economic forecast (SEP), the forecasts for GDP growth this year and next year have actually been slightly raised, while inflation and unemployment have remained almost unchanged.

So what has changed? Our assessment of the risks to the job market has shifted significantly. At our last meeting, we were looking at 150,000 new jobs per month. Now, when you look at the revised data and the latest data, the picture is very different.

I'm not saying we should be overly reliant on the nonfarm payrolls, but it's one of many signs we're seeing that the job market is cooling significantly, and so we have to reflect that in our policy.

Q5: In the Summary of Economic Projections, the median forecast of committee members indicates that inflation will be higher than previously expected by the end of next year, and that you will not return to your 2% target until 2028. Would launching a series of rate cuts now risk increasing inflationary pressures?

POWELL: We fully understand and we take seriously that we must remain firmly committed to returning inflation to 2% on a sustainable basis. We will do that.

But at the same time, we have to balance the risks between the two objectives. I believe that since April, the risk of persistent high inflation has decreased, in part because the labor market has weakened and GDP growth has slowed.

So I would say that the risks on inflation are not as high as they were before. On the employment side, although the unemployment rate is still relatively low, we do see downside risks increasing.

Q6: You cut rates because of employment issues, but you also said the job market problems are more due to reduced immigration, which is not something interest rates can influence. So why is this more important than inflation? After all, inflation is still nearly a percentage point above target.

POWELL: I was saying earlier that changes in the job market have more to do with changes in immigration than they do with tariffs - and I said that in response to that question. I wasn't saying that all the problems in the labor market are due to tariffs.

That's exactly what's happening now: while the labor supply has weakened because of the decline in immigration, the demand for labor has also fallen significantly, and even more rapidly. We know this because the unemployment rate is rising.

This is what I meant by what I just said.

Q7: Since 2015, your annual economic forecast summary has stated, "We will achieve our 2% inflation target over the next two years," but we've never achieved it. This year, you're saying we won't reach the target until "2028." Does this mean that your 2% inflation target is unrealistic? Will the public still believe you?

POWELL: You're right, this year we're forecasting that we won't get back to our 2% inflation target until 2028. But that's really how this forecasting process works.

Within this framework, we are going to write down the path of interest rates that we believe is most likely to get inflation back to our 2% target, including achieving maximum employment.

So it's more about technically outlining a policy path, rather than how confident we are about the direction of the economy over the next three years. No one can accurately predict the economy three years from now.

But the task of the forecast brief is to write down, within that time frame, the policy mix that you think will get you there.

Q8: The latest inflation report shows that prices are still rising on key items of expenditure for many households. What will the Federal Reserve do if these prices continue to rise?

POWELL: Our expectation, as you can see from what we've been saying throughout the year, is that inflation will rise this year, primarily due to the impact of tariffs on commodity prices. But we expect that this increase will be a one-time jump in prices and not a sustained inflationary process.

This has always been our forecast. Almost all of the individual forecasts of our members also reflect a similar view. But of course, we can't just assume this will happen – our job is to ensure that this is truly a one-off and does not become a persistent inflationary event. That is our responsibility.

What's happening now is that we do see inflation continuing to rise, but the magnitude of the rise may not be as large as we expected a few months ago because the tariffs are being passed through to inflation more slowly and less sharply than expected.

In addition, there has been some weakness in the labor market, so we believe the risk of inflation getting significantly out of control has diminished.

That is why we believe it is time to acknowledge that risks to our other mission – jobs – are also rising and that we should adjust our policy in a more neutral direction.

You asked, "What will we do?" — we'll do what needs to be done. But we have two mandates, and we strive to balance them. We've long used a framework for what to do when two goals conflict, because our tools can't handle both simultaneously. We ask ourselves: Which goal is further away? Which will take longer to achieve? And we make trade-offs based on those judgments.

In the past, we had a clear bias toward inflation protection because inflation risks were higher then. But now we see clear downside risks to the labor market, so we are moving toward a more neutral policy direction.

Q 9: For ordinary families, especially young people who are looking for jobs, how should they understand the current employment situation?

Powell: The labor market is very unique right now. We do believe that it is appropriate to lower interest rates and make policy more neutral at this time, which will help improve the labor market to some extent.

We've noticed that people on the margins of the labor market—like recent college graduates and minorities—are having more trouble finding jobs. The current "job search rate" is very low, meaning people are finding jobs much more slowly than in the past.

On the other hand, layoffs are also very low. In other words, we're currently experiencing a "low hiring, low layoff" situation. Our concern is that if layoffs begin to increase, the unemployed will face an environment where "no one is hiring," which could easily and quickly lead to a surge in unemployment.

In a healthier economy, these people would be able to find jobs. But right now, hiring is very slow. We've been increasingly concerned about this over the past few months. This is a key reason why we believe it's important to begin adjusting our policies and achieving a better balance between our dual mandates.

Q10: In the past, you've used the term "policy recalibration" when you've cut interest rates. This time, you didn't. You also emphasized that "policy has no preset path." Does this mean you're intentionally avoiding the term "recalibration" this time? Are we now in a "meet-by-meeting, data-by-data" phase? Are we in the process of returning to a neutral policy? Does the divergence in forecasts among members also indicate greater uncertainty about the future policy path?

POWELL: I think we're really in a meeting-by-meeting, real-time judgment phase, and we're watching the data very closely.

I'd also like to take this opportunity to discuss the Summary of Economic Projections (SEP). As you know, this is the 19-member committee's independent prediction of what they believe to be the "most likely economic path" and the corresponding "most appropriate path for monetary policy." We don't debate or force consensus on these forecasts; we simply compile them into a chart. We discuss them from time to time, but ultimately, they are a collection of individual judgments.

We often say that "policy has no preset path," and we truly mean it. Every decision we make is based on the latest data, changes in the economic outlook, and the balance of risks at the time.

You may have noticed that in the forecast summary, 10 members wrote that "there will be two or more rate cuts this year," while another 9 members believed that there would be one rate cut or fewer, or no rate cuts at all.

So, rather than thinking of this as a set of fixed plans, I suggest you think of it as a collection of different possibilities and their probabilities. It’s a set of distributions, not a fixed timeline.

This is a very unique moment. Normally, when the labor market is weak, inflation is also low; when the labor market is strong, inflation becomes a concern. But we are now facing a "two-way risk": downward pressure on employment, and inflation is not yet fully under control. This means that we do not have a "risk-free" policy path.

This is a very difficult situation for policymakers, so it is understandable that there are large divergences in forecasts.

This is not just a matter of different judgments on the economic outlook, but more importantly: when there is a conflict between goals, how should we balance them? Which goal should we worry more about?

In unprecedented circumstances like these, it's natural for forecasts to differ. In fact, if you told me we all had the same view, I'd find it unusual. We sit down, discuss and debate thoroughly, then make decisions and take action. You're right, there are significant differences in forecasts, but that's understandable and acceptable in this environment.

Q11: You've emphasized the importance of Federal Reserve independence for years. But now there's a lot of speculation in the market about President Trump's intentions for the Fed. In this context, what signs do you think the market should be watching for to determine if the Fed is still making decisions based on economic conditions rather than political factors? Do you believe the lawsuit against Federal Reserve Governor Lisa Cook raises questions about the independence of the Federal Reserve?

Powell: One of the core values of our Federal Reserve culture is that all decisions are based on data and political factors are never considered. This is deeply rooted in the Federal Reserve and every employee firmly believes in it.

You can see it in how we talk about policy, in the speeches our officials give, in the decisions we make: We still adhere to this principle. It's everything we do.

Regarding Lisa Cook's question: This is a court proceeding, so I don't think it's appropriate to comment on it.

Q12: The Bureau of Labor Statistics' preliminary benchmark revision shows a downward revision of 911,000 new jobs. The June data revision even turned negative for the first time since December 2020. Given this inherently unstable data, how can the Federal Reserve rely on it to make key interest rate decisions? If this benchmark revision holds, it means that 51% of the originally estimated new jobs didn't actually exist. This suggests that the job market was already much weaker than we thought at the beginning of the year. If you had known this at the time, would you have decided to cut interest rates earlier?

POWELL: Regarding this benchmark revision, it turned out pretty much as we expected. It was surprisingly close indeed.

This isn't the first time. In recent quarters, the U.S. Bureau of Labor Statistics (BLS) has frequently reported "systematic overestimation" of employment figures. They're well aware of this problem and have been working to correct it.

This is partly due to the low response rate from businesses, but more importantly, it stems from the so-called "birth-death model." Because many jobs are created by new businesses, the "birth and death" of these businesses is difficult to monitor in real time and can only be predicted using models.

Especially during periods of dramatic economic structural change, this forecasting model becomes even more difficult to accurately predict. Therefore, they are indeed improving and have made some progress.

But I would say that the overall data is still "good enough" to support our decision-making. The data problems we are currently facing are mainly due to the low survey response rate, which is actually a common problem in both government and private sector surveys.

We certainly hope for a higher response rate, so the data will be more stable. The key to achieving this is ensuring that the agencies responsible for collecting the data have adequate resources. Ultimately, this isn't a complex issue, but it does require investment.

Another point is that the response rate for the initial release of employment data is indeed low. However, we continue to collect data in the second and third months, and the reliability of the data improves significantly at that time. So the problem is not that we can't get the data, but that we get it a little late.

You know, our job is to look forward, not back. We can only take the most appropriate actions based on what we see at the moment. And today we did just that.

Q13: Some marginal indicators in the labor market suggest a recession may have already begun. For example, the African American unemployment rate exceeded 7% in August; average weekly work hours have declined; it's becoming more difficult for college graduates to find jobs; and youth unemployment is also rising. Against this backdrop, why do you think a 25 basis point rate cut would be effective now?

Powell: I'm not saying that I think 25 basis points, in and of itself, is going to have a huge impact on the economy. You have to understand it in the context of the overall path of interest rates—markets operate based on expectations, and our market mechanisms operate around expectations. So I think the path of our policy does matter.

When we see some signs like this, I think it's necessary for us to use the tools to support the labor market.

The phenomena that I just mentioned - you're seeing rising unemployment among minorities, you're seeing impacts on younger people, people who are more economically vulnerable, people who are more sensitive to economic cycles - that's one of the reasons why we're seeing a weakening labor market, and of course, a decline in overall job creation.

I would also point out that some of the decline in the labor force participation rate over the past year may be more cyclical than simply due to an aging population. Putting all of these factors together, we are seeing a weakening labor market, and we neither want nor need it to get worse.

So we're using policy tools to respond, starting with a 25 basis point rate cut. But the market is already pricing in the entire rate path. I'm not "endorsing" the market's pricing; I'm simply saying: what we're doing now isn't just a one-off.

Q14: The current economic growth structure appears complex, with corporate investment, particularly AI-driven investment, on the one hand, and consumption driven by high-income groups on the other. Do you believe this growth structure is unsustainable in the future?

POWELL: I wouldn't say that. You're right, we're seeing unprecedented economic activity in AI infrastructure and corporate investment. I don't know how long this will last. No one knows.

As for consumption, you're seeing consumer spending data that's far exceeded expectations, and that's certainly likely driven by higher-income groups, with many signs and clues pointing to that. But regardless of who's spending, spending is spending. So I think the economy is still moving forward.

Economic growth this year will probably reach 1.5% or higher, and it may be a little better. From the forecasts we have seen, there are indeed continuous upward revisions.

In terms of the labor market, although there are downside risks, the unemployment rate remains low. This is our current assessment.

Q15: The Treasury Secretary recently stated that the Federal Reserve faces problems of "expansion" and "burdened institutions." He now supports an independent review. Do you support such an independent review? Or are you willing to reform the Federal Reserve in some areas?

POWELL: Of course, I won't comment on the remarks made by the Treasury Secretary or any other official.

On reforming the Federal Reserve - we actually just completed a long and, I think, very successful process of updating our monetary policy framework.

I would also like to mention that there is a lot of work going on behind the scenes at the Federal Reserve System right now. We are in the process of reducing the staff of approximately 10% across the Federal Reserve System, including the Federal Reserve Board and the regional reserve banks.

This means that after completing this round of staff reductions, the overall number of employees at the Federal Reserve will return to the level of more than ten years ago, that is, we will have zero growth in staff numbers for more than ten years. I think we may continue to do more in the future.

So, I can say that we are open to constructive criticism and any suggestions that can help improve our work. We are always willing to try to make things better.

Q16: There has been some recent discussion that artificial intelligence is already impacting the labor market—both significantly increasing productivity and reducing labor demand. Do you agree with this? If so, what implications does it have for monetary policy?

POWELL: There's a lot of uncertainty about this. My personal view—and this is somewhat speculative—but I think a lot of people share that, is that we're starting to see some impact, but it's not the primary driver yet.

This phenomenon is particularly pronounced among recent graduates. It's possible that some companies or institutions that previously hired college graduates are now more capable of using AI than before, which may have affected young people's job opportunities to some extent.

But that's only part of the story. Overall, job growth is indeed slowing, and economic growth is also slowing. So it's probably a combination of factors.

AI may be a factor, but it's hard to tell how big its impact will be.

Q 17: What direct evidence do you see currently of the impact of tariffs on inflation?

Powell: We can look at commodities as a broad category. Last year, commodity inflation was negative. If you look back over the past 25 years, falling commodity prices have been the norm—even as quality improves, prices tend to fall.

But now, goods inflation has been around 1.2% over the past year. That doesn't sound high, but it's a significant change. Analysts have different views, but we think tariffs may have contributed around 0.3 to 0.4 percentage points to the current 2.9% inflation rate.

Currently, most tariffs are borne not by the exporting country but by the intermediaries between the exporter and the consumer. This means that if you are an importer who resells the goods to retailers or uses them in manufacturing products, you are likely to bear most of the costs yourself and have not yet passed them all on to consumers.

Most of these intermediaries said they would "definitely" pass on these costs in the future, but they have not yet done so.

Therefore, price transmission to consumers remains very limited, much slower and smaller than we expected. However, based on the data we have seen, tariffs do have a transmission effect on inflation.

Q 18: Can you share with us under what circumstances would you consider leaving the Federal Reserve before May of next year?

Powell: I don't have anything new to share today.

Q19: We've often heard you say that you and your colleagues don't consider politics when making decisions. But now you have a new colleague who comes from a political background and sees everything through the lens of what's best for his party, and he's still in the White House. How should the public and the markets interpret his comments? For example, his forecast influenced the Summary of Economic Projections (SEP) released today, particularly the median number of interest rate cuts this year, which changed because of his inclusion. How would you respond to the markets and the public trying to understand your comments and policy intentions?

Powell: We have 19 FOMC participants, 12 of whom have voting rights at any given time, and that's part of the rotation system, which you should be aware of.

So no single voting committee member can unilaterally change the outcome—the only way to potentially influence the outcome is to present a compelling argument, which relies on strong data analysis and a deep understanding of the economy.

This is how the Fed meetings work. This system is deeply embedded in the Fed's culture and will not change based on a person's background.

Q20: We heard a lot of different voices before this meeting, but today's meeting seemed more unanimous than many expected. Could you discuss the factors that led to such strong consensus? We also saw significant divergence in the dot plot. Could you please discuss both the factors that led to today's unanimous support for a rate cut and the divergence on the subsequent path?

POWELL: I think there's a pretty broad consensus on the state of the labor market.

For example, at the July meeting, we could still say that the labor market was in solid shape, citing figures like 150,000 new jobs per month as support. But now we have new data, not just the non-farm payroll data, but also multiple other indicators, that show that the labor market is facing substantial downside risks.

I also said at the time that we were aware of the risk back in July, but now that it has materialized, the situation is clearly more tense. I think that was widely accepted within the committee.

However, different members have different understandings of this situation. Almost everyone supports today's rate cut, but some support further rate cuts, while others do not, as can be seen from the dot plot.

That's how it works. We all take this work very seriously, constantly thinking about and communicating with each other on a daily basis. We discuss these issues internally, and then in formal meetings, we put all our perspectives on the table and ultimately make decisions.

You're right that the dot plot shows a lot of divergence, but I think that's not surprising given the historically unusual situation we face.

But we also have to remember that unemployment is 4.3% and economic growth is around 1.5%. So we're not in a "bad economy" situation right now. We've been through more challenging times before.

But from a monetary policy perspective, the current situation presents a difficult challenge. As I've said before, there is no "risk-free" path. No choice is "obvious." We must closely monitor inflation, while also not losing sight of our goal of maximum employment. These are two equally important responsibilities.

Because of this, everyone had different opinions on what to do. But despite this, we still reached a high degree of consensus in this meeting and took action.

Q21: You mentioned earlier that current job creation is below the "minimum level necessary to maintain balanced employment." I'm curious, what is the Fed's current estimate of this "balanced level"? You mentioned several times the downside risks to the job market, but some economic activity and output indicators in the third quarter, such as strong personal consumption expenditures, still appear strong. How do you explain this discrepancy? Is there a risk of an "upward surprise" in the job market?

Powell: There are many ways to calculate this number, and none of them are perfect. But it's certainly come down significantly. You could say the 'equilibrium level' is somewhere between 0 and 50,000 new additions per month, and you could be right or wrong because there are so many different ways to estimate it.

Whether it was 150,000, 200,000, whatever the estimate was a few months ago, it has now been revised down significantly because of the significant decrease in the number of people entering the labor force.

We are now seeing almost no growth in the labor force. In the past two or three years, the labor supply has been mainly supported by new entrants to the labor market, but now this source has been cut off.

At the same time, labor demand has also declined significantly. Interestingly, supply and demand are currently declining almost simultaneously. However, we are also seeing an increase in the unemployment rate—just slightly above the range it has maintained for the past year. While 4.3% unemployment is still low, the simultaneous rapid decline in both supply and demand has drawn significant attention.

If there are indeed such upside risks, that would be fantastic. We very much hope that this will happen. I don't see a huge conflict between the two. It's certainly good to see economic activity remain resilient. A lot of that is coming from consumption, and data released earlier this week showed that consumption was much stronger than expected.

In addition, we are now seeing another strong source of economic activity: AI-driven business investment.

So, we'll be closely monitoring all of these areas. We did raise our median growth forecast for this year in the Summary of Projections (SEP) between June and September. Meanwhile, our inflation and labor market forecasts remained largely unchanged. The actions we are taking today are primarily driven by the shifting risks we see in the labor market.

Q22: Considering the cumulative impact of high interest rates on the housing market, I would like to ask you: Are you concerned that current interest rates will exacerbate housing affordability issues? Will this further hinder household formation and wealth accumulation for some groups?

Powell: The housing market is very sensitive to interest rates and is one of the core areas of monetary policy.

Remember when the COVID-19 pandemic hit, we cut interest rates to zero, and the real estate industry expressed immense gratitude for our actions. They said they were able to survive that time only because we cut interest rates significantly and provided credit support, allowing them to finance their operations. But this also meant that when inflation rose and we raised interest rates, the housing industry was indeed affected.

You're right that interest rates have declined recently. While we don't directly set mortgage rates, our policies influence them. Falling interest rates generally boost housing demand and reduce financing costs for builders, which in turn boosts the supply of new homes.

While these measures have helped alleviate some of the problems, most analysts believe that interest rate changes would have to be very large to have a significant impact on the housing market.

On the other hand, over the longer term, we are building a strong, healthy economy by achieving maximum employment and price stability – which is also good for the housing market.

But I want to emphasize one final point: We are facing a deeper problem that cannot be solved by monetary policy: a nationwide housing shortage.

In many parts of the United States, housing is severely undersupplied. Areas like the Washington, D.C., metropolitan area are already highly developed, forcing developers to expand further and further outward, which in itself presents structural challenges.

Q23: I would like to follow up with a question: At the press conference after the last release of the Summary of Economic Projections (SEP), you said that committee members had "lack of confidence" in their own forecasts. Do you still feel that way?

Powell: Even in calm times, forecasting is very difficult. As I have said before, economic forecasters are "the group with the most reason to be humble," but they don't have much room for humility themselves.

Predictions are harder to come by now than ever before, so I think if you ask any forecaster if they are confident in their predictions, I think their honest answer would be no.

Q24: If you have already started cutting interest rates, why do you continue to shrink your balance sheet? Why not just pause the reduction of your balance sheet?

POWELL: We are indeed reducing the size of our balance sheet significantly. You know, we are still in the position of excess reserves, and we have said before that we would stop shrinking our balance sheet at a level slightly above that, and we are very close to that level now.

From a macro perspective, we believe the balance sheet reduction has no significant impact. These are small amounts operating within a large economy. The current scale of asset reduction is not significant, so I do not believe it will have a macro-level impact on the overall economy at this stage.

Q25: During his confirmation hearing, new Federal Reserve Governor Milan mentioned that the Fed actually has three missions: not only maximum employment and price stability, but also "maintaining moderate long-term interest rates." What does "moderate long-term interest rates" mean? How should we understand it? Especially given the volatility of the 10-year Treasury yield, how do you consider this goal in formulating monetary policy?

Powell: We have always viewed maximum employment and price stability as our dual mandate. As for moderate long-term interest rates, we generally view them as a natural consequence of achieving low and stable inflation and maximum employment.

So, it's been a long time since we've considered "moderate long-term interest rates" a standalone mandate that requires separate action. In my view, we have no intention of, and are not currently integrating it into our policymaking framework in any different way.

Q26: We recently learned that the average FICO credit score in the United States has dropped by 2%, the largest drop since the Great Depression. At the same time, delinquency rates on personal loans and credit cards are also rising. Are you concerned about consumers' financial health? Do you think today's interest rate cut will help? Are you worried that a rate cut will overheat financial markets and even fuel asset bubbles?

Powell: We are certainly aware of this issue. Default rates are indeed slowly rising, and we are monitoring them closely. At this point, the overall level is not yet particularly worrying.

As for rate cuts, I don't think a single rate cut will lead to a significant improvement, but over the long term, our goal is to achieve a strong economy and labor market, which, combined with a stable price environment, will help improve consumers' financial situation.

We are laser-focused on our two main goals: maximum employment and price stability. Our actions today are informed by our judgment regarding these two objectives. Of course, we are also closely monitoring financial stability.

I would describe the current situation as a mixed bag. Household assets are generally strong, and the banking system is robust. While we know that lower-income groups are facing greater pressure, we do not see systemic risks from a financial system stability perspective.

We don't set "right" or "wrong" standards for asset prices, but we do monitor whether there are structural vulnerabilities at a global level. At this point, we do not believe that structural risks are elevated.

Q27: You've said the Fed can't take inflation expectations lightly. You also mentioned that short-term inflation expectations have risen. Could you elaborate on this? Also, in the long term, do you see the debate over Fed independence or the fiscal deficit weighing on inflation expectations?

POWELL: As you said, short-term inflation expectations tend to react to recent inflation data. That is, if inflation rises, expectations tend to rise, along with the belief that it may take some time for inflation to fall back.

But throughout this period, longer-term inflation expectations—both the market's "breakeven rate" and nearly all long-term polls—have remained remarkably stable, consistent with our 2 percent inflation objective. While the recent University of Michigan survey has shown a slight deviation, overall, longer-term inflation expectations have been remarkably well-established.

But we are not complacent. We continue to assume that the Fed's actions have a real impact on inflation expectations, and we must continually reaffirm our commitment to our 2% inflation target through our actions and communications. You will continue to hear us emphasize this.

Of course, this moment is unique because both of our goals—employment and inflation—are at risk, so we have to balance them. When both are at risk, our task is to make those trade-offs, and that's what we're trying to do.

As for the second part of your question - does the debate over Fed independence affect inflation expectations? I don't see market participants factoring that into their interest rate expectations.

Original link