Original text organized and compiled by: Jin10 Data
In a speech early Thursday morning Beijing time, Federal Reserve Chairman Jerome Powell pointed out that the U.S. economy is experiencing a slowdown in growth, a slight increase in the unemployment rate, and inflation has risen but remains above the 2% target. He mentioned that the impacts of changes in trade, immigration, fiscal, and regulatory policies on the economy remain uncertain. To respond to economic changes, the Federal Reserve recently lowered the federal funds rate by 25 basis points to a range of 4%-4.25% in its latest meeting, emphasizing that policy will be flexibly adjusted based on data and economic outlook.
Full Text of Powell's Speech
Thank you. I am pleased to return to Rhode Island. The last time I had the opportunity to speak at the Greater Providence Chamber of Commerce was in the fall of 2019. At that time, I noted, "If the outlook changes materially, policy will change as well."
Who would have thought! Just a few months later, the COVID-19 pandemic broke out. The economy and our policies underwent a dramatic evolution that no one could have predicted. With coordinated actions from Congress, the government, and the private sector, the Federal Reserve's proactive response helped avoid historically severe downside risks to the economy.
The arrival of the COVID-19 pandemic came right after a decade of painful, slow recovery from the global financial crisis. These two successive global crises have left long-lasting scars that are difficult to heal. In democracies around the world, public trust in economic and political institutions has been challenged. In this era, we in public service must focus our efforts on fulfilling our critical mission amidst the stormy seas and strong headwinds.
During this turbulent period, central banks like the Federal Reserve had to devise innovative new policies aimed at achieving statutory goals during crises, rather than for everyday use. Despite facing two unique and extremely severe shocks, the performance of the U.S. economy has remained strong compared to other major developed economies, and in some cases, even better. As always, we must continually reflect on and learn the right lessons from these difficult times, a process that has actually been ongoing for over a decade.
Turning to the present, the U.S. economy is showing some resilience against the backdrop of significant changes in trade and immigration policies, as well as fiscal, regulatory, and geopolitical areas. These policies are still taking shape, and their long-term impacts will take time to manifest.
Economic Outlook
Recent data shows that the pace of economic growth has slowed. The unemployment rate remains low but has increased slightly. Job growth has decelerated, and the downside risks to employment have risen. At the same time, inflation has recently increased and remains at slightly elevated levels. In recent months, the balance of risks has clearly shifted, prompting us to adjust our policy stance closer to neutral in last week's meeting.
In the first half of this year, GDP grew by about 1.5%, down from 2.5% last year. The slowdown in growth primarily reflects a deceleration in consumer spending. Activity in the housing sector remains weak, but businesses have increased investment in equipment and intangible assets compared to last year. As noted in the September Beige Book, a report that gathers information from across the Federal Reserve System, businesses generally believe that uncertainty is suppressing their expectations. Consumer and business confidence indicators fell sharply in the spring but have since rebounded, although they remain below levels seen at the beginning of the year.
In the labor market, both labor supply and demand have noticeably slowed—a rare and challenging development. In this lackluster and somewhat weak labor market, the downside risks to employment have increased. The unemployment rate rose slightly to 4.3% in August but has generally remained low over the past year. In the summer months, job growth significantly slowed, with employers adding an average of only 29,000 jobs per month over the past three months. The current pace of job creation appears to be below the "flat" level needed to keep the unemployment rate stable. However, several other labor market indicators remain broadly stable. For example, the ratio of job openings to unemployed persons remains close to 1, and various job vacancy indicators and initial claims for unemployment insurance have shown roughly sideways trends.
Inflation has significantly retreated from its peak in 2022 but remains above our long-term target of 2%. The latest data shows that for the 12 months ending in August, PCE overall prices rose by 2.7%, higher than the 2.3% expected in August 2024. Excluding volatile categories like food and energy, core PCE prices rose by 2.9% last month, also above the level from a year ago. Prices of goods, which fell last year, have turned to push inflation higher this year. Recent data and surveys indicate that these price increases primarily reflect higher tariffs rather than broader price pressures. Inflation in the services sector continues to decline, including housing. Influenced by tariff news, short-term inflation expectations have generally risen this year. However, most long-term inflation expectation indicators remain aligned with our 2% target after about a year.
The significant changes in trade, immigration, fiscal, and regulatory policies' impacts on the overall economy remain to be seen. A reasonable baseline expectation is that the impact of tariffs on inflation will be relatively short-lived, representing a one-time increase in price levels. "One-time" does not mean "immediately fully reflected." The increase in tariffs may take some time to transmit through the supply chain. Therefore, this one-time increase in price levels may manifest over several quarters and be reflected as higher inflation during that period.
However, the uncertainty surrounding inflation trends remains high. We will carefully assess and manage the risks of higher and more persistent inflation. We will ensure that this one-time price increase does not evolve into a persistent inflation problem.
Monetary Policy
In the short term, the risks of inflation are tilted to the upside, while the risks to employment are tilted to the downside—this is a challenging situation. The dual risks mean that there is no risk-free path. If we were to ease policy too aggressively, we might leave inflation management incomplete, necessitating a reversal of policy to fully restore inflation to 2%. If we maintain a tight policy for too long, the labor market may experience unnecessary weakness. When our goals present such tension, our framework requires us to seek balance at both ends of our dual mandate.
The increased risks to employment have altered the risk balance in achieving our goals. Therefore, at our last meeting, we deemed it necessary to move further toward a neutral policy stance, lowering the target range for the federal funds rate by 25 basis points to 4% to 4.25%. I believe this policy rate remains slightly restrictive but allows us to better respond to potential economic developments.
Our policy is not preset. We will continue to determine the appropriate policy stance based on the latest data, changes in the outlook, and the balance of risks. We are always committed to supporting maximum employment and sustainably bringing inflation back to the 2% target. We are keenly aware that the effectiveness of achieving these goals affects all Americans. We understand that our actions will impact communities, families, and businesses across the nation.
Thank you again for inviting me here. I look forward to the discussion ahead.
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