The extremely rare economic situation has led to significant divergence in Federal Reserve interest rate predictions, with the transmission of tariffs to inflation occurring more slowly and to a lesser extent than expected.
Written by: Zhao Yuhe, Li Dan
Source: Wall Street Insights
Summary of Key Points from Powell's September 17 Press Conference:
- Monetary Policy: Today's action is a type of rate cut for risk management. There is not much support within the FOMC for a 50 basis point rate cut.
- Dot Plot: The extremely rare economic situation has led to significant divergence in Federal Reserve interest rate predictions.
- Labor Market: Revised employment data indicates that the labor market is no longer as solid. The unemployment rate remains low but has risen; the growth in employment has slowed, and the downside risks have increased, with labor market indicators suggesting that the downside risks are substantial. Artificial Intelligence (AI) may be one reason for the slowdown in hiring.
- Inflation: The transmission mechanism of tariff inflation has slowed, and the impact is smaller. The likelihood of "tariff inflation stubbornly persisting" has decreased. The U.S. PCE inflation rate is expected to rise by 2.7% year-on-year in August, with core PCE expected to rise by 2.9% year-on-year. It is anticipated that the service sector will continue to exhibit anti-inflation phenomena. Long-term inflation expectations remain rock solid.
- Federal Reserve Independence: The Federal Reserve is firmly committed to maintaining its independence. It would be inappropriate to discuss the lawsuit between Fed Governor Cook and President Trump; there will be no comments on criticisms from Treasury Secretary Basant, nor will there be commitments to internal audits as he called for, but it is suggested that the Fed may further reduce its workforce. The FOMC remains united in pursuing its dual mandate.
- Tariffs: Tariffs contribute 0.3-0.4 percentage points to core PCE inflation data.
On Wednesday, September 17, Eastern Time, the Federal Reserve announced after the FOMC meeting that the target range for the federal funds rate was lowered from 4.25% to 4.5% to 4.00% to 4.25%, a decrease of 25 basis points.
This marks the first rate cut decision in six FOMC meetings since the beginning of the year. Fed Chair Powell stated at the press conference that although the unemployment rate remains low, it has slightly increased, new job creation has decreased, and the downside risks to employment are also increasing. Meanwhile, inflation has recently risen and remains slightly above normal levels. The Fed also decided to continue reducing the size of its securities holdings.
In the Q&A session, he stated that there is not much support within the FOMC for a 50 basis point rate cut.
You can think of today's (easing) action as a type of risk management rate cut.
Powell mentioned in his opening remarks that recent data shows that the growth of U.S. economic activity has slowed. In the first half of this year, the U.S. GDP growth rate was about 1.5%, down from 2.5% last year, with this decline primarily due to a slowdown in consumer spending. In contrast, business investment in equipment and intangible assets has increased compared to last year. The housing market remains weak.
In the economic forecast summary released by the Fed, the median expectation among FOMC members is for GDP to grow by 1.6% this year and 1.8% next year, slightly higher than the June forecast.
Regarding the labor market, Powell stated that the unemployment rate rose to 4.3% in August, but the change is not significant compared to the past year, remaining at a relatively low level. In the last three months, the creation of non-farm jobs has significantly slowed, averaging only 29,000 new jobs per month. This slowdown is largely due to a deceleration in labor supply growth, attributed to reduced immigration and a declining labor participation rate.
However, he also noted that labor demand has weakened, and the current number of new jobs appears to be below the "equilibrium level" needed to maintain a stable unemployment rate. Powell stated that while wage growth still exceeds inflation, it has been consistently slowing.
Overall, both supply and demand in the current labor market are slowing, which is uncommon. In this less active and somewhat weak labor market, the downside risks to employment have increased.
The median forecast from the FOMC indicates that the unemployment rate will reach 4.5% by the end of this year, followed by a slight decline.
On inflation, Powell stated that the inflation rate has significantly decreased since its mid-2022 peak but remains above the Fed's long-term target of 2%. Based on estimates from the Consumer Price Index (CPI) and other data, the overall Personal Consumption Expenditures (PCE) price index rose by 2.7% over the 12 months ending in August; the core PCE, excluding food and energy, rose by 2.9%.
He indicated that these readings are slightly higher than at the beginning of the year, primarily due to a rebound in goods price inflation. In contrast, service price inflation has continued to slow. Short-term inflation indicators have shown volatility, partly influenced by tariffs.
Over the next year or so, most long-term inflation expectation indicators still align with the Fed's 2% target. The median forecast from FOMC members indicates an overall inflation rate of 3.0% this year, dropping to 2.6% by 2026 and 2.1% by 2027.
Powell stated that changes in U.S. government policy are ongoing, and their impact on the economy remains unclear. Higher tariffs have begun to push up prices in certain categories of goods, but their overall impact on economic activity and inflation is yet to be observed.
He said a reasonable basic judgment is that the impact of tariffs on inflation is only temporary, leading to a short-term rise in price levels. However, there is also the possibility that the inflation impact could be more persistent, and it is the Fed's responsibility to ensure that one-time price increases do not evolve into a sustained inflation problem.
In the short term, inflation risks are tilted upward, while employment risks are tilted downward, presenting a challenging situation. When our goals conflict, our policy framework requires trade-offs between the dual mandates.
Due to the increased downside risks to employment, the policy balance has shifted. Therefore, we believe it is appropriate to make a decision at this meeting that moves closer to a "neutral" policy stance.
In this Economic Forecast Summary, FOMC members wrote down their personal judgments on the path of the federal funds rate, based on what they each believe to be the most likely economic scenario. The median indicates that 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 stated that these personal forecasts carry uncertainty and do not represent the committee's plans or decisions:
Our policy is not a preset path.
Below are the Q&A session highlights from Powell's press conference:
Q1: You welcomed new Fed Board member Steven Myron today, but he still retains his White House position. This is the first time in decades that a Fed governor has direct ties to the White House. Does this undermine the Fed's ability to maintain political independence in its daily affairs? Additionally, how will you maintain public trust in the Fed's political neutrality in this situation?
Powell: We did welcome a new committee member today, as we always do. The committee remains united in pursuing its dual mandate goals. We are firmly committed to maintaining our independence. Beyond that, I have no more to share.
Q2: You and other Fed officials often discuss the impact of tariffs on inflation, but many businesses now seem to absorb the tariff costs themselves, suggesting that tariffs may more significantly affect the labor market and other economic areas. Do you believe that the current weakness in the labor market may be related to tariffs rather than inflation?
Powell: That is entirely possible. We have seen rising goods prices leading to increased inflation—most of this year's inflation rise has been driven by goods prices. While the current impact is not significant, we expect these effects to continue to unfold over the remainder of this year and into next year.
As for the labor market, it may also be affected, but I believe the primary reason is still changes in immigration. Labor supply has clearly decreased, with almost no growth. At the same time, labor demand has also significantly declined.
What we are seeing now is what I call a "strange balance"—usually, balance is a good thing, but this time it is a balance caused by clear declines in both supply and demand. Particularly, the demand decline is greater, which is also one reason we see the unemployment rate rising.
Q3: How should we interpret today's rate cut? Is the committee "hedging" against potential weakness in the labor market, or do you believe that the dynamics of economic downturn are already occurring? Why are your rate predictions more inclined toward cuts than three months ago, while the unemployment rate forecast has not changed much?
Powell: You can view this rate cut as a type of "risk management rate cut."
If you look at our published economic forecasts (SEP), the predictions for GDP growth this year and next year have actually been slightly raised, while inflation and unemployment rates have remained almost unchanged.
So what has changed? It is our assessment of the risks in the labor market that has undergone a significant shift. At the last meeting, we were seeing 150,000 new jobs per month; now, looking at the revised data and the latest figures, the situation is quite different.
I am not saying we should overly rely on non-farm employment data, but this is one of many indicators we see showing that the labor market is clearly cooling. Therefore, we must reflect this in our policy.
Q4: In the Economic Forecast Summary, the median forecast from committee members shows that inflation will be higher by the end of next year than previously expected, and that it will take until 2028 to return to the 2% target. Will initiating a series of rate cuts now increase the risk of inflationary pressure?
Powell: We fully understand and value this—we must be firmly committed to restoring the inflation rate to 2% on a sustainable basis. We will do so.
But at the same time, we must weigh the risks between the two goals. I believe that since April, the risk of persistent high inflation has decreased, partly because the labor market has softened and GDP growth has slowed.
So I would say that the risks regarding inflation are not as high as they were before. On the employment side, while the unemployment rate remains relatively low, we do see that downside risks are increasing.
Q6: You cut rates due to employment issues, but you also said that the problems in the labor market are more related to reduced immigration, which is not something that interest rates can influence. So why is this more important than inflation? After all, inflation is still nearly a percentage point above the target.
Powell: What I meant earlier is that the changes in the labor market are more related to changes in immigration rather than tariffs—I said that in response to that question. I am not saying that all the issues in the labor market stem from tariffs.
The reality is that labor supply has weakened due to reduced immigration, while labor demand has also significantly declined, and even at a faster rate. We know this because the unemployment rate is rising.
That is what I meant in my earlier statement.
Q7: Since 2015, the annual economic forecast summary has stated, "We will achieve the 2% inflation target in the next two years," but this has never been realized. This year, you again said it would take until 2028 to meet the target. Does this indicate that the 2% inflation target is unrealistic? Will the public still believe you?
Powell: You are correct that this year we predict it will take until 2028 to return to the 2% inflation target. But this is actually how the forecasting process works.
Within this framework, we need to outline a path for interest rates that we believe is most likely to bring inflation back to the 2% target, while also achieving maximum employment.
So it is more about technically outlining a policy path rather than how confident we are about the economic direction over the next three years. No one can accurately predict the economy three years out.
But the task of the forecast summary is to write down the policy combination that you believe will achieve the targets within that timeframe.
Q8: The latest inflation report shows that prices are still rising in many key spending categories for households. If these prices continue to rise, what will the Federal Reserve do?
Powell: Our expectation—you can see from our consistent statements this year—is that inflation will rise this year, primarily due to the impact of tariffs on goods prices. However, we predict that this increase will be a one-time price jump and will not evolve into a sustained inflation process.
This has always been our forecast. Almost all members' individual forecasts also reflect a similar view. But we certainly cannot just assume that this will come true—our job is to ensure that it really is just a one-time event and does not lead to persistent inflation; that is our responsibility.
Currently, we do see inflation continuing to rise, but the extent of the increase may not be as large as we expected a few months ago. This is because the transmission of tariffs to inflation is occurring more slowly and to a lesser extent than anticipated.
Additionally, the labor market is also showing signs of weakness, so we believe that the risk of inflation spiraling out of control has diminished.
That is why we believe it is time to acknowledge that the risks associated with another mandate—employment—are also increasing, and we should adjust towards a more neutral policy direction.
You asked, "What will we do?"—we will do what we need to do. But we have two statutory mandates, and we strive to find a balance between them. We have long used a framework that asks what to do when the two goals conflict because our tools cannot address both directions simultaneously. We ask ourselves: Which goal is further from being achieved? Which will take longer to realize? Then we weigh based on those judgments.
In the past, we clearly leaned towards preventing inflation because the inflation risk was higher at that time. But now we see that the labor market faces significant downside risks, so we are moving towards a more neutral policy direction.
Q9: How should ordinary families, especially young people looking for jobs, understand the current employment situation?
Powell: The current labor market is very unique. We do believe that it is appropriate to lower interest rates now and make policy more neutral, which will help improve the labor market to some extent.
We have noticed that marginalized groups in the labor market—such as recent college graduates and minorities—are indeed facing more difficulties in finding jobs. The current "job-finding rate" is very low, meaning that people are finding jobs much more slowly than in the past.
On the other hand, the layoff rate is also very low. This means we are in a state of "low hiring, low layoffs." What we are concerned about is that if layoffs start to increase, those who are unemployed will face an environment where "no one is hiring," which could quickly lead to a spike in the unemployment rate.
In a healthier economic environment, these individuals would be able to find jobs. But right now, hiring is very slow. We have become increasingly worried about this over the past few months. This is also an important reason why we believe it is necessary to start adjusting policy now and to treat our dual mandate more balanced.
Q10: In the past, you would use the term "policy recalibration" when cutting rates. But this time you did not say that. You also emphasized that "policy has no preset path." Does this mean you are intentionally avoiding the term "recalibration" this time? Are we now in a phase of "meeting-by-meeting decision-making and data analysis"? Are we in the process of returning to a neutral policy? Does the divergence in committee members' predictions also imply greater uncertainty in future policy paths?
Powell: I believe we are indeed in a phase of "meeting-by-meeting, real-time judgment," and we will closely monitor the data.
I also want to take this opportunity to talk about the Summary of Economic Projections (SEP). You should know that this forecast is based on the independent views of 19 committee members, each writing down what they believe to be the "most likely economic path" and the "corresponding most appropriate monetary policy path." We do not debate or force consensus on these forecasts; we simply compile them into a chart. Sometimes we discuss it, but ultimately, it is a collection of individual judgments.
We often say "policy has no preset path," and we genuinely mean it. Every decision we make is based on the latest data, changes in the economic outlook, and the balance of risks at that 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 the other 9 members believe there will be one rate cut or less, or even no further cuts at all.
So rather than viewing this as a definitive plan, I suggest you see it as a collection of "different possibilities and their probabilities." It is a distribution of possibilities, not a fixed timetable.
This is a very unique moment. Typically, when the labor market is weak, inflation is also low; concerns about inflation arise only when the labor market is strong. But now we face "dual risks": employment is under downward pressure, and inflation is not yet fully under control. This means we do not have a "risk-free" policy path.
For decision-makers, this is a very difficult situation. Therefore, it is understandable that there is significant divergence in predictions.
This is not just about differing judgments on the economic outlook; more importantly, it is about how to weigh the trade-offs when conflicts arise between the goals. Which goal should we be more concerned about?
In this unprecedented situation, it is natural to have prediction divergences. In fact, if you told me everyone had the same opinion, I would find that abnormal. We will sit down, discuss seriously, debate thoroughly, and then make decisions and take action. But you are right; the differences in predictions are significant, but this is understandable and acceptable in the current environment.
Q11: You have emphasized the importance of the Federal Reserve's independence for many years. However, there is now much speculation in the market about what President Trump intends for the Fed. In this context, what signs do you think the market should pay attention to in order to judge whether the Fed is still making decisions based on economic conditions rather than political factors? Do you think the lawsuit involving Fed Governor Lisa Cook also touches on the issue of the Fed's independence?
Powell: One of the core aspects of our Federal Reserve culture is that all decisions are based on data and never consider political factors. This is deeply ingrained within the Fed, and every employee believes in this.
You can see this from how we discuss policy, the content of officials' speeches, and the decisions we make: we are still adhering to this principle. That is what we do.
Regarding the issue of Lisa Cook, this is a court case, so I believe it is inappropriate to comment on it.
Q12: The preliminary benchmark revision from the U.S. Bureau of Labor Statistics shows that the number of new jobs has been revised down by 911,000. The June data revision even marked the first negative value since December 2020. In such an unstable data environment, how can the Federal Reserve rely on this data to make key interest rate decisions? If this benchmark revision continues to hold, it means that 51% of the originally estimated new jobs do not actually exist. This indicates that the labor market was much weaker than we thought at the beginning of this year. If you had known this at the time, would you have decided to cut rates earlier?
Powell: Regarding this benchmark revision, the outcome was almost exactly what we expected. It was indeed very close, which was surprising.
This is not the first time. In recent quarters, the employment data from the U.S. Bureau of Labor Statistics (BLS) has often shown "systematic overestimation," and they are well aware of this issue and have been working to correct it.
This is partly related to the low response rate of businesses in surveys, but more critically, it involves the so-called "birth-death model." Many jobs are created by new businesses, and the "birth and death" of these businesses is difficult to survey in real-time and can only be predicted using models.
Especially during periods of significant economic structural change, this predictive model becomes even harder to get right. So they are indeed making improvements and have made some progress.
But I want to say that the overall data is still "good enough" to support our decision-making. The data issues we are encountering mainly stem from the low response rate in surveys, which is a widespread issue in both government and private sector surveys.
We certainly hope for a higher response rate, as that would make the data more stable. To achieve this, it is crucial to ensure that the agencies responsible for data collection have sufficient resources. Ultimately, this is not a complex issue, but it does require investment.
One more point: the response rate for employment data at the time of initial release is indeed low. However, in the second and third months, we will continue to collect data, and at that point, the reliability of the data will significantly improve. So the issue is not that "we cannot obtain data," but rather that "we obtain it a bit later."
You know, our job is to "look forward," not "look back." We can only take the most appropriate action based on the current situation we see. And that is what we are doing today.
Q13: Some marginal indicators in the labor market suggest that a recession may have already begun. For example, the unemployment rate for African Americans exceeded 7% in August; average weekly working hours have decreased; college graduates are finding it harder to get jobs; and youth unemployment is also rising. In this context, why do you think that cutting rates by only 25 basis points will have an effect?
Powell: I did not say that I believe this 25 basis points will have a huge impact on the economy by itself. You need to understand it in the context of the entire interest rate path—market operations are based on expectations, and our market mechanisms operate around expectations. So I believe our policy path is indeed very important.
When we see signs like these, I think it is necessary to use our tools to support the labor market.
The phenomena I mentioned earlier—you see the rising unemployment rate among minorities, you see young people and those economically more vulnerable and sensitive to economic cycles being affected—this is also one of the reasons we see the labor market weakening, along with the overall decrease in new job creation.
I also want to point out the issue of labor force participation rate—the decline over the past year may be more cyclical rather than solely due to aging demographics. Putting all these factors together, we see that the labor market is softening, and we do not want it to continue to deteriorate, nor do we need it to continue to worsen.
So we are using policy tools to respond, starting with a 25 basis point rate cut. But the market has also been digesting the entire interest rate path. I am not "endorsing" the market pricing; I am just saying that what we are doing now is not just a one-time action.
Q14: The current structure of economic growth seems quite complex, with one side being corporate investment, particularly AI-driven investment, and the other side being consumption driven by high-income groups. Do you think this growth structure is unsustainable in the future?
Powell: I wouldn't say that. You are correct that we are indeed seeing unprecedented economic activity in AI infrastructure and corporate investment. I don't know how long this trend will last; no one knows.
As for consumption, you see that consumer spending data has far exceeded expectations, and this is indeed likely driven by high-income groups, with many examples and clues pointing to this. But regardless of who is spending, spending is spending. So I believe the economy is still moving forward.
Economic growth this year is likely to reach around 1.5% or higher, possibly even better. From the forecasts we see, there are indeed continuous upward adjustments.
In terms of the labor market, although there are downside risks, the unemployment rate remains low. That is our current assessment.
Q15: The Treasury Secretary recently stated that the Federal Reserve is facing issues of "functional expansion" and "institutional bloating." He now supports an independent review. Do you support such an independent review? Or are you willing to reform the Federal Reserve in certain aspects?
Powell: Of course, I will not comment on the statements of the Treasury Secretary or any other officials.
Regarding reforming the Federal Reserve—we have just completed a lengthy and, I believe, very successful update of our monetary policy framework.
I also want to say that there is a lot of behind-the-scenes work currently happening within the Federal Reserve. We are moving forward with a reduction of about 10% of the workforce across the entire Federal Reserve system, including the Board of Governors and the regional reserve banks.
This means that after completing this round of workforce reduction, the overall number of employees at the Federal Reserve will return to levels seen over a decade ago, meaning we will have zero growth in personnel numbers over the past decade. I believe we may continue to do more in the future.
So I can say that we are open to constructive criticism and any suggestions that help improve our work. We are always willing to try to do better.
Q16: There has been recent discussion suggesting that artificial intelligence has begun to impact the labor market—on one hand, there is a significant increase in productivity, while on the other hand, there is a decrease in labor demand. Do you agree with this statement? If this is true, what impact would it have on monetary policy formulation?
Powell: There is a lot of uncertainty in this area. My personal view—this is somewhat speculative—but I think many people agree that we are indeed starting to see some impacts, but this is not yet the main driving force.
This phenomenon may be more pronounced among recent graduates. It is indeed possible that some companies or institutions that would have hired college graduates are now using AI capabilities more than before, which may have affected job opportunities for young people to some extent.
But this is just part of the reason. Overall, job growth is indeed slowing, and economic growth is also declining. So it should be a combination of multiple factors.
AI may be one of those factors, but it is difficult to determine how significant its impact is.
Q17: What tariffs do you currently see direct evidence of their impact on inflation?
Powell: We can look at the broad category of goods. Last year, goods inflation was negative. If you look back over the past 25 years, it has actually been common for goods prices to decline—even as quality improves, prices often fall.
But now, over the past year, goods inflation has been about 1.2%. It doesn't sound high, but it is a significant change. Analysts have different views, but we believe that tariffs may have contributed about 0.3 to 0.4 percentage points to the current 2.9% inflation rate.
The current situation is that most tariffs are not borne by exporting countries but by intermediary businesses between exporters and consumers. In other words, if you are an importer reselling goods to retailers or using them to manufacture products, you are likely bearing most of the costs yourself and have not been able to pass all these costs onto consumers.
Most of these intermediary businesses have indicated that they "will definitely" pass these costs on in the future, but they have not done so yet.
So the price transmission to consumers is still very limited, occurring much more slowly and to a lesser extent than we expected. But based on the data we see, there is indeed a transmission effect of tariffs on inflation.
Q18: Can you share with us under what circumstances you would consider leaving the Federal Reserve before May of next year?
Powell: I have no new information to share today.
Q19: We often hear you say that you and your colleagues do not consider political factors when making decisions, but now you have a new colleague who comes from the political sphere and views everything through the lens of "which party benefits," and he is still serving in the White House. How should the public and the market interpret his remarks? For example, his predictions influenced the economic forecast summary (SEP) released today, particularly the median number of rate cuts this year, which changed because of his predictions. How would you respond to those trying to understand your remarks and policy intentions?
Powell: We have 19 FOMC participants, of which 12 have voting rights at any given time, as part of a rotation system, which you should be aware of.
So no single voting member can unilaterally change the outcome—the only way to influence the overall situation is to present a highly persuasive argument. And to do that, you must rely on strong data analysis and a deep understanding of the economy.
That is how the Federal Reserve meetings operate. This system is deeply embedded in the culture of the Federal Reserve and will not change because of one person's background.
Q20: Before this meeting, we heard many different voices, but today's meeting seems to be more unified than many expected. Can you talk about what factors led to such strong consensus? In the dot plot, we also saw significant divergence. Could you discuss these two aspects: what contributed to today's unanimous support for a rate cut, and what led to such large divergences regarding the future path?
Powell: I believe there is a fairly broad consensus regarding the assessment of the labor market situation.
For example, at the July meeting, we could still say that the labor market was robust and cite the figure of 150,000 new jobs added each month as support. But now, the new data we have received—not just non-farm data, but several other indicators—shows that the labor market is facing substantial downside risks.
I had also mentioned that we were aware of the risks back in July, but now, that risk has become a reality, and the situation is clearly more tense. I think this is widely accepted within the committee.
However, different members have different interpretations of this situation. Almost everyone supports today's rate cut, but some support further cuts while others do not, as reflected in the dot plot.
That is the situation. We take this work very seriously, and we constantly think and communicate about it. We have been discussing these issues internally, and then at the formal meeting, we lay all viewpoints on the table and ultimately make decisions.
You are right; the dot plot does show significant divergence. But I think, given the historically unusual situation we are facing, this divergence is not surprising at all.
But we also need to remember that the current unemployment rate is 4.3%, and economic growth is around 1.5%. So we are not in a state of "very poor economy." We have experienced more challenging times than this.
But from a monetary policy perspective, the current situation indeed makes it difficult to determine what to do. As I mentioned earlier, there is no "risk-free" path right now. No choice is "obvious." We must closely monitor inflation while not neglecting the goal of maximizing employment. These are our two equally important responsibilities.
It is precisely for this reason that there are different views on what to do. Nevertheless, we still reached a high level of consensus at this meeting and took action.
Q21: You just mentioned that the current number of new jobs is below the "minimum level required to maintain employment balance." I am curious, what does the Federal Reserve currently consider this "balance level" to be? You mentioned several times the downside risks in the labor market, but some economic activity and output indicators in the third quarter still look quite strong, such as robust personal consumption expenditures. How do you explain the contradiction between these two aspects? Is there a possibility of an "upside surprise" in the labor market?
Powell: There are many ways to calculate this figure, and none of them is perfect. But it is certain that it has decreased significantly. You could say that the current "balance level" is between 0 and 50,000 new jobs per month; you could be right or wrong because there are indeed many different estimation methods.
Whether it was previously 150,000 or 200,000—whatever the estimate was a few months ago, it has now been significantly revised down. This is because the number of people entering the labor market has clearly decreased.
We are now seeing almost no growth in the labor force. And for the past two to three years, labor supply has mainly relied on new entrants to the labor market, and that source has now dried up.
At the same time, labor demand has also significantly decreased. Interestingly, supply and demand are both declining "together" right now. However, we are indeed seeing the unemployment rate rising—just slightly exceeding the range maintained over the past year. A 4.3% unemployment rate is still low, but the rapid decline in both supply and demand has raised significant concerns.
If there is indeed such an upside risk, that would be great. We would very much like to see that happen. I don't think there is too much conflict between the two. It is certainly a good thing to see economic activity remain resilient. A large part of that still comes from consumption, and the data released earlier this week showed that consumption was much stronger than expected.
Additionally, we are now seeing another source of strong economic activity—corporate investment driven by AI.
So we will closely monitor all these areas. We have indeed raised the median economic growth forecast in the Summary of Economic Projections (SEP) from June to September. Meanwhile, the inflation and labor market forecasts have remained largely unchanged. The main reason we took action today was due to the observed increase in labor market risks.
Q22: Considering the cumulative impact of high interest rates on the housing market, I would like to ask you: Are you concerned that the current level of interest rates will exacerbate housing affordability issues? Could this further hinder family formation and wealth accumulation for certain 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 broke out, we lowered interest rates to zero, and the real estate industry expressed great gratitude for our actions at that time. They said that being able to survive during that time relied heavily on our significant rate cuts and credit support, which allowed them to continue financing operations. But this also means that when inflation rises and we raise interest rates, the housing industry will indeed be affected.
You are correct that interest rates have indeed fallen recently. While we do not directly set mortgage rates, our policies do influence them. A decrease in interest rates typically boosts housing demand and lowers financing costs for builders, thereby promoting new home supply.
These do help alleviate some issues. However, most analysts believe that for interest rate changes to have a significant impact on the housing market, they must be very substantial changes.
On the other hand, from a longer-term perspective, we are creating a strong and healthy economic environment by achieving maximum employment and price stability—which is also beneficial for the housing market.
But I want to emphasize one last point: we are currently facing a deeper issue that monetary policy cannot solve. That is the widespread housing shortage across the country.
In many parts of the United States, there is a severe shortage of housing supply. In metropolitan areas around Washington, for example, development is highly advanced, and developers can only expand further outward, which itself brings structural challenges.
Q23: I would like to follow up on this: In the last press conference after the release of the Summary of Economic Projections (SEP), you mentioned that committee members lacked confidence in their forecasts. Do you still think that way now?
Powell: Even in calm periods, forecasting is very difficult. As I have said before, economic forecasters are "the group with the most reason to be humble," but they themselves have little room for humility.
At this point, the difficulty of forecasting is greater than ever. So I think if you ask any forecaster whether they are confident in their predictions, I believe their honest answer would be: no.
Q24: If you have already started cutting rates, why continue to reduce the balance sheet? Why not simply pause the balance sheet reduction?
Powell: We are indeed significantly reducing the size of the balance sheet. You know, we are still in an "excess reserves" state, and we have previously stated that we would stop the balance sheet reduction when we are slightly above this level, and we are now very close to that position.
From a macro perspective, we believe that the balance sheet reduction does not have a significant impact. It is just a small amount operating within a large economy. The current scale of asset reduction is not large, so I do not believe it will have a macro-level impact on the overall economy at this stage.
Q25: Recently, the newly appointed Federal Reserve Governor Milan mentioned in his nomination hearing that the Federal Reserve actually has three missions, not just maximum employment and price stability, but also "maintaining moderate long-term interest rates." What do you mean by "moderate long-term interest rates"? How should we understand it? Especially when we see fluctuations in the ten-year Treasury yield, how do you consider this goal when 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 consider it a natural result of achieving low and stable inflation and maximum employment.
Therefore, we have not treated "moderate long-term interest rates" as an independent mission that requires separate action for a long time. In my view, we do not intend to, nor have we incorporated it into our policy-making framework in a different way.
Q26: We recently learned that the average FICO credit score in the U.S. has dropped by 2%, the largest decline since the Great Depression. At the same time, delinquency rates for personal loans and credit cards are also rising. Are you concerned about consumers' financial conditions? Do you think today's rate cut will help? Are you worried that the rate cut will overheat the financial markets or even fuel asset bubbles?
Powell: We are indeed aware of this issue. Delinquency rates are slowly rising, and we are closely monitoring it. As of now, the overall level has not reached a particularly concerning point.
Regarding the rate cut, I do not believe that a single rate cut will bring about significant improvement. But in the long term, our goal is to achieve a strong economy and labor market, along with a stable price environment, all of which will help improve consumers' financial conditions.
We are very focused on our two main goals: maximum employment and price stability. Our actions today are also judgments made around these two goals. Of course, we are also closely monitoring financial stability.
I would say that the current situation is "complex overall." Household asset conditions are generally good, and the banking system is robust. While we know that lower-income groups face greater pressure, from the perspective of financial system stability, we do not see systemic risks.
We do not set "correct" or "incorrect" standards for asset prices, but we are indeed monitoring whether there are structural vulnerabilities at a global level. As of now, we do not believe that structural risks are at a high level.
Q27: You have stated that the Federal Reserve cannot be complacent about inflation expectations. You also mentioned that short-term inflation expectations have risen. Could you elaborate on this part? Additionally, in the long term, do you see any controversies regarding the independence of the Federal Reserve or issues related to the fiscal deficit putting pressure on inflation expectations?
Powell: As you mentioned, short-term inflation expectations often respond to recent inflation data. That is to say, if inflation rises, expectations will also rise, while believing that inflation may take some time to fall back.
However, throughout this period, long-term inflation expectations—whether measured by the market's "breakeven rates" or almost all long-term survey results—have remained very stable, consistent with our 2% inflation target. Although recent data from the University of Michigan has deviated slightly, overall, long-term inflation expectations are very solid.
However, we do not take this lightly. We always assume that the actions of the Federal Reserve have a real impact on inflation expectations, and we must continuously reaffirm our commitment to the 2% inflation target through actions and communication. You will continue to hear us emphasize this point in the future.
Of course, this moment is indeed special because both of our goals—employment and inflation—are facing risks, so we must balance between the two. When both are at risk, our task is to weigh the trade-offs, which is precisely what we are striving to do now.
As for the latter part of your question—whether the debate over the independence of the Federal Reserve affects inflation expectations—I do not see market participants incorporating these factors into their interest rate expectations.
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