Some members of the FOMC believe it is time to pause.
Written by: Zhao Yuhe
Source: Wall Street Insight
Summary of key points from Powell's October press conference:
Policy Rate Outlook: A rate cut by the Federal Reserve in December is not a foregone conclusion. There is significant disagreement today. Some members of the FOMC believe it is time to pause.
Balance Sheet: No decisions were made today regarding the composition of the balance sheet. The composition of the balance sheet is a long-term process and will be gradual. There is a desire to adjust towards a balance sheet with shorter duration assets.
Labor Market: Due to the restrictive nature of policy, the labor market is still cooling. There has been no indication that the weakness in the labor market is worsening; job vacancies indeed suggest stability in the market over the past four weeks. The supply of labor has dramatically decreased, impacting the labor market. The Federal Reserve closely monitors layoff decisions.
Inflation: The September CPI was more moderate than expected. Service inflation, excluding the housing market, has shown a one-sided trend. Core PCE, excluding tariffs, may be around 2.3% or 2.4%. So far, non-tariff inflation has not deviated from the 2% inflation target. The basic forecast is that the U.S. will see some additional tariff inflation.
Government Shutdown: Data disclosed by the private sector cannot replace the statistics from government departments (such as the Bureau of Labor Statistics). It is conceivable that a government shutdown under the Trump administration would affect the December FOMC monetary policy meeting.
On Wednesday Eastern Time, the Federal Reserve announced at the FOMC that it would lower the target range for the federal funds rate from 4.00% to 4.25% to 3.75% to 4.00%, and decided to end balance sheet reduction starting December 1. This marks the first time in a year that the Fed has cut rates in consecutive FOMC meetings. Fed Chair Powell stated at the post-meeting press conference that a rate cut in December is not a foregone conclusion.
In his opening remarks, Powell noted that although some important federal government data has been delayed due to the government shutdown, the public and private sector data currently available to the Fed indicate that there has not been much change in the employment and inflation outlook since the September meeting.
The labor market appears to be gradually cooling, and inflation remains slightly elevated.
Powell stated that existing indicators show that economic activity is expanding at a moderate pace. GDP grew by 1.6% in the first half of this year, down from 2.4% last year.
Data released before the government shutdown indicated that the growth rate of economic activity may be slightly better than expected, primarily reflecting stronger consumer spending.
Investment by businesses in equipment and intangible assets continues to grow, while activity in the housing market remains weak. The ongoing government shutdown will weigh on economic activity, but these effects should reverse once the shutdown ends.
Regarding the labor market, Powell mentioned that as of August, the unemployment rate remains relatively low. Job growth has noticeably slowed since the beginning of the year, with a significant portion of the slowdown likely due to a decline in labor force growth, caused by factors such as reduced immigration and a declining labor participation rate, although labor demand has also evidently weakened.
Despite the delay in the official employment data for September, existing evidence shows that layoffs and hiring remain at low levels; households' perceptions of job opportunities and businesses' perceptions of hiring difficulties are both continuing to decline.
In this lackluster and slightly weak labor market, the downside risks to employment have increased in recent months.
Tariffs are driving up prices for some goods, and a rate cut in December is not a foregone conclusion.
On inflation, Powell stated that inflation has significantly retreated from its mid-2022 highs but remains slightly above the Fed's long-term target of 2%. According to estimates based on the Consumer Price Index (CPI), overall PCE prices rose by 2.8% over the past 12 months as of September; core PCE prices, excluding food and energy, also rose by 2.8%.
These readings are higher than earlier this year, primarily due to a rebound in goods inflation. In contrast, service sector inflation seems to be continuing to decline. Influenced by tariff news, short-term inflation expectations have generally risen this year, as reflected in both market and survey indicators.
However, in the next one to two years, most long-term inflation expectation indicators remain consistent with our 2% inflation target.
Powell stated that higher tariffs are driving up prices in certain categories of goods, leading to an overall increase in inflation.
A reasonable baseline judgment is that these inflation impacts will be relatively short-lived—essentially a one-time price level increase. However, it is also possible that the inflation impacts could be more persistent, which is a risk we need to assess and manage.
He noted that in the short term, inflation risks are tilted to the upside, while employment risks are tilted to the downside, creating a challenging situation. As the downside risks to employment have increased in recent months, the balance of risks has shifted.
With today's rate decision, we are in a favorable position to respond promptly to potential economic changes. We will continue to determine the appropriate stance of monetary policy based on the latest data, changes in the economic outlook, and the balance of risks. We still face two-way risks.
Powell revealed that there was significant disagreement among committee members regarding how to act in December during the discussions at this meeting.
A rate cut in December is not a foregone conclusion, far from it. There is no preset path for policy.
Ending Balance Sheet Reduction on December 1
Additionally, the FOMC decided to end balance sheet reduction starting December 1. Powell stated that the Fed's long-standing plan has been to stop balance sheet reduction when reserve levels are slightly above what the Fed considers to be "ample reserves." There are now clear signs that the Fed has reached that standard.
Powell mentioned that in the money market, repo rates have risen relative to the Fed's administered rates, and there has been more noticeable pressure on specific dates, along with an increase in the use of the Standing Repo Facility (SRF).
Moreover, the effective federal funds rate has also begun to rise relative to the excess reserves rate. These situations align with our previous expectations that such conditions would arise as the balance sheet size decreases, thus supporting our decision to stop balance sheet reduction today.
During the past three and a half years of balance sheet reduction, the Fed's securities holdings have decreased by $2.2 trillion. As a percentage of nominal GDP, the balance sheet size has fallen from 35% to about 21%.
He stated that starting in December, the Fed will enter the next phase of its normalization plan, which is to maintain the balance sheet size stable for a period of time. At the same time, as other non-reserve liabilities (such as cash in circulation) continue to grow, reserve balances will gradually decline.
The Fed will continue to allow agency securities (such as MBS) to mature and will reinvest the proceeds into short-term U.S. Treasury securities to further drive the portfolio towards a structure dominated by U.S. Treasuries. This reinvestment strategy will also help bring our portfolio's weighted average maturity closer to the maturity structure of the Treasury market's outstanding stock, further advancing the normalization of the balance sheet structure.
Below is a transcript of the Q&A session from Powell's press conference:
Q1: The market currently views a rate cut at your next meeting as a foregone conclusion. Do you feel uneasy about this market pricing? You and some colleagues have described the decision-making framework as "risk management" last month and today. How do you judge that you have "bought enough insurance"? Do you need to see an improvement in the outlook before you pause? Or will it be like last year, with continued small adjustments over a longer period?
Powell: As I just mentioned, whether to further cut rates at the December meeting is not a foregone conclusion. So, I think the market needs to take that into account.
I want to emphasize that there are 19 participants in the committee, and everyone is working very hard. During this period of conflict between the two current goals, there will be very strong differences of opinion among the members. As I mentioned, there were clearly differing views at today's meeting. The conclusion is that we have not yet made a decision for December. We will assess based on data, the impact on the outlook, and the balance of risks; that is all I can say for now.
My way of thinking is this: for a long time, our risks have been clearly tilted towards inflation being too high. But the situation has changed. Especially after the July meeting, we have seen a downward revision in job growth, and the picture of the labor market has changed, showing that the downside risks to employment are greater than we originally anticipated. This means that policy—which we previously maintained at what I would call a "slightly" tight level (others might call it "moderately" tight)—needs to move towards a neutral stance over time.
If the risks to both goals are roughly equal, one calling for rate hikes and the other for cuts, then policy should be roughly at a neutral level to balance both. In this sense, it reflects risk management. Today's decision-making logic is similar. As for the future, it will be a different situation.
Q2: You just emphasized that discussions and conclusions regarding December are not yet finalized. What viewpoints were present in the meeting? For example, was there any discussion about the significant growth in AI-related investments currently, and the issues of stock market rises driven by the AI concept and increased household wealth? Regarding balance sheet reduction, how much of the current pressure in the funding market is due to the recent large issuance of short-term debt by the U.S. Treasury?
Powell: I wouldn't say these factors play a role in all committee members' assessments of the economic outlook, nor would I say they are the main factors in anyone's judgment.
I would explain it this way: the current situation is that inflation risks are tilted to the upside, while employment risks are tilted to the downside. We only have one tool (interest rates) and cannot "precisely balance" both opposing risks simultaneously. So you cannot address both at the same time.
Additionally, committee members have different forecasts for the outlook; some expect inflation or employment to improve faster or slower; everyone's risk preferences are also different, with some more concerned about inflation overshooting and others more worried about insufficient employment. Combining these factors leads to divergence.
You can feel these differences from the latest Summary of Economic Projections (SCP) and public speeches between meetings, where opinions are very diverse, and these were clearly reflected in today's meeting as differing opinions. I also mentioned this in my remarks.
This is also why I emphasize that we have not made a decision for December. I have often said that the Fed does not make decisions in advance, and today I want to add that the market should not treat a rate cut in December as a foregone conclusion—it is precisely not the case.
Regarding balance sheet reduction, we have observed that repo rates and federal funds rates are rising, which is exactly the signal we expected to see before and after reaching the "ample reserves" standard. We have previously stated that when we feel reserve levels are slightly above the "ample" standard, we will stop balance sheet reduction. Since then, as other non-reserve liabilities have grown (such as cash in circulation), reserve balances will continue to decline.
In recent times, conditions in the money market have gradually tightened. Particularly in the last three weeks or so, the degree of tension has noticeably increased, leading us to judge that we have reached the conditions to stop balance sheet reduction.
Furthermore, the current pace of balance sheet reduction has been very slow; our balance sheet size has been reduced by about half, and continuing to reduce it further would not be meaningful, as reserves themselves will continue to decline.
Therefore, the committee supports announcing the end of balance sheet reduction starting December 1. This date allows the market some time to adjust.
Q3: One of the main reasons for your current rate cut is the concern about downside risks in the labor market. However, if these risks do not materialize and the labor market remains stable or even slightly improves, will you reassess what level rates need to be cut to? At that point, will you be more concerned about inflation and the "second-round effects" of tariffs? If the government shutdown lasts longer and key economic data is missing, will it be harder for you to assess the labor market due to a lack of data, thus affecting your December policy decision?
Powell: In principle, if the data indicates that the labor market is strengthening or at least stabilizing, that would certainly influence our future policy judgments.
We will continue to receive some data, such as initial unemployment claims from various states, which still show that the labor market is maintaining its current state. We will also see job vacancy data, various survey data, and information from the Beige Book.
As of now, we do not see a significant rise in initial claims or a noticeable decline in job vacancies, which suggests that the labor market may continue to cool very slowly, but not beyond that level. This gives us some confidence.
(Despite the government shutdown), we will still receive some data on the labor market, inflation, and economic activity, as well as information from the Beige Book. Although the details may not be sufficient, I believe we can still sense significant changes in the economy from this data.
As for how this will affect December, it is difficult to judge at this point—there are still six weeks until the meeting. If there is a high degree of uncertainty, that in itself may support taking a more cautious approach. But we need to wait and see how things develop.
Q4: Was this decision a "reluctant approval"? Or was there intense tugging in terms of direction?
Powell: The "tugging" I mentioned refers to the outlook for December, not the decision itself. There were two dissenting votes in today's voting: one wanted a 50 basis point cut, and the other wanted no cut. The decision to cut by 25 basis points received strong support.
The "clear disagreement" mainly reflects the future path: what to do next. Some members noted the recent strengthening of economic activity, and many forecasting institutions are raising their growth expectations for this year and next, with some increases being quite significant.
At the same time, we see the labor market; I wouldn't say it is completely stable, but it has not shown significant deterioration and may continue to cool very slowly. Different members have different expectations for the economic outlook and varying risk preferences. You can sense the divergence of opinions within the committee by looking at their recent speeches, which is why I emphasize that we have not yet decided how to act in December.
Q5: Since you are now stopping balance sheet reduction, will you have to start increasing assets again next year? Otherwise, the proportion of the balance sheet size to GDP will continue to decline, which would constitute further tightening?
Powell: Your understanding is correct. Starting December 1, we will freeze the size of the balance sheet. As agency mortgage-backed securities (MBS) mature, we will reinvest the proceeds into short-term Treasury bills (T-bills), which will increase the proportion of U.S. Treasuries in the balance sheet and shorten the duration.
With the balance sheet size frozen, non-reserve liabilities (such as cash in circulation) will still naturally grow, so reserve balances will continue to decline, and reserves are the part we need to keep at "ample" levels. This continued decline in reserves will last for a while, but not too long.
Ultimately, at some point, we will need to gradually increase reserve balances again to match the expansion of the banking system and the economy, so at some future stage, reserves will be increased again.
Additionally, while we did not make a decision on this today, we did discuss the structure of the balance sheet. Currently, our asset duration is significantly longer than the average duration of Treasuries in the market, and we hope to gradually shorten the duration to bring the balance sheet structure closer to the duration distribution of the Treasury market. This process will be very slow and will take a long time, not causing significant volatility in the market, but that is the direction of future adjustments.
Q6: How do officials interpret the latest CPI report? Some components were below expectations, but core inflation remains at 3%. What new insights do you have regarding the drivers of inflation from the current data? Additionally, do you think the Fed is more likely to make a mistake regarding employment or inflation? What measures can you take to address stubborn service sector inflation, especially in the context of potentially limited labor supply?
Powell: Regarding the September CPI report, we have not yet received the subsequent PPI data, which is very important for estimating the PCE inflation we are more concerned about. However, even so, we can roughly assess its direction, and there may be slight adjustments after the PPI is released.
Overall, the inflation data is slightly softer than expected. We typically break down inflation into three parts:
First, commodity prices are rising, primarily driven by tariffs. Compared to the long-term trend of slight deflation in commodity prices, the price increases due to tariffs are pushing up overall inflation.
Second, housing services inflation is declining and is expected to continue to decline. If you remember a year or two ago, everyone thought it would decline, but it took a while to happen, and now it has been declining for some time, and we expect it to continue.
Third, service inflation excluding housing (i.e., core services) has been basically flat over the past few months. A significant portion of this category consists of "non-market services," whose price changes do not accurately reflect how tight the economy is, so the signal value is limited.
In summary, there are a few points:
First, if we exclude the impact of tariffs, current inflation is actually not far from our 2% target. Different estimates vary slightly, but if core PCE is at 2.8%, excluding tariffs, it is around 2.3% to 2.4%, which is not far from the target.
Second, the inflation caused by tariffs should be a one-time effect under baseline conditions, although it may continue to push inflation up in the short term. However, one key point we are very focused on this year is ensuring that it does not evolve into persistent inflation and carefully assessing which channels might turn a "one-time" effect into "persistent inflation."
One possibility is that the labor market is extremely tight, but we do not see that situation currently; another is that inflation expectations are rising, but we do not see that either. Therefore, we remain highly vigilant rather than assuming that tariff inflation is necessarily a one-time effect. We fully understand that this is a risk that needs to be closely monitored and ultimately managed.
In service sector inflation, the part that is not declining as we would like is mainly the "non-market services" within "non-housing core services." We expect this part to gradually decline, as it largely reflects income in financial services that is "market-valued rather than actually paid," related to the rise in the stock market.
Additionally, I believe current policy is still in a "modestly restrictive" state, which should help the economy gradually cool down and is one of the reasons for the very slow cooling of the labor market. A slightly restrictive monetary policy itself helps to push service inflation down gradually.
I want to emphasize that we are fully committed to bringing inflation back to 2%. You can see from long-term inflation expectations and market pricing that the policy commitment remains highly credible, and there should be no doubt about our ultimate achievement of the target.
Q7: Currently, AI infrastructure is experiencing a massive construction boom. Does this investment frenzy mean that interest rates are not actually that tight? If rates are further cut at this time, could it potentially drive up investment and even create asset bubbles? How does the Fed view this? You mentioned that in the absence of government data, there are still some data available to monitor inflation and growth trends. We are relatively clear on employment; in the absence of official data, what indicators will you rely on to track inflation?
Powell: You are correct; there is indeed a large-scale construction and related investment in data centers across the U.S. and globally. Large American companies are investing significant resources to study how AI affects their businesses, and AI will rely on and operate within these data centers, so this is a very important matter.
However, I do not believe that investments in data centers are particularly sensitive to interest rates. They are more based on a long-term judgment—that this is a field where future investments will be very large and capable of enhancing productivity. As for how effective these investments will ultimately be, we do not know, but compared to other industries, I believe they are not very sensitive to interest rates.
(Regarding economic data), we will look at many sources, but it is important to emphasize that these data cannot replace official government data. Just to give a few examples: online price data provided by PriceStats, Adobe, etc.; for wages, we will look at ADP data; for spending— I know you will ask next—we also have various alternative data.
Additionally, the Beige Book will also provide information, and it will be released as usual during this cycle. These data cannot replace government data, but they can give us a general sense of the situation. If there are significant changes in the economy, I believe we can capture signals from this data. However, during the absence of official data, we indeed cannot make very detailed, granular judgments as we usually would.
Q8: I would like you to further explain the point you mentioned earlier: the government shutdown leading to data shortages will make December actions more difficult and may even make you more cautious. If you have to rely more on private data of lower quality than official data, or on your own surveys, the Beige Book, and other information, are you concerned that you will ultimately fall into a situation of "making policy decisions based on fragmented anecdotes"?
Powell: This is a temporary situation. Our job is to collect all the data and information we can find and assess it carefully. We will do this; it is our responsibility.
You asked whether the shutdown will affect the December decision? I am not saying it definitely will, but there is indeed that possibility. In other words, if you are driving in heavy fog, you will slow down. Whether this situation will occur, I cannot judge right now, but it is entirely possible.
If the data resumes publication, that would be great; but if the data remains missing, then taking a more cautious approach may be a reasonable choice. I am not making a commitment; I am saying that there is indeed a possibility—when visibility is unclear, you will choose to "slow down."
Q9: We have recently seen major companies like Amazon announce layoffs. I would like to know if these signs were part of your discussion today? The tension between the labor market and economic growth seems to be starting to tilt unfavorably for employment. Secondly, are concerns about a "K-shaped economy"—for example, the potential significant rise in healthcare costs for low-income families—also being considered in policy deliberations?
Powell: We are closely monitoring these situations.
First, regarding layoffs, you are correct that many companies have announced reductions in hiring or even layoffs. Many companies are mentioning AI and the changes it brings. We are very concerned about this because it could indeed affect job growth. However, we have not yet seen a significant reflection of this in initial unemployment claims data—this is not surprising, as data typically lags behind, but we will monitor it very closely.
As for the "K-shaped economy," the situation is similar. If you listen to earnings calls from companies, especially large consumer-facing companies, many are reporting the same phenomenon: the economy is showing divergence, with low-income groups under pressure, reducing consumption, and turning to cheaper goods; while high-income and high-wealth groups continue to consume strongly. We have collected a lot of anecdotal information on this.
We believe this phenomenon is real.
Q10: You said, "A further rate cut in December is not a foregone conclusion, far from it." If the reason for not cutting rates in December is not due to a lack of data, what other factors might make you reluctant to cut rates? In other words, if it’s not due to a lack of data, what are the concerns? Since you mentioned that the divergence within the committee mainly focuses on the future path of interest rates, does this divergence stem more from concerns about inflation, concerns about employment, or deeper ideological differences in policy?
Powell: From the committee's perspective, we have already cut rates by a total of 150 basis points this year, and the current rate range is between 3% and 4%, while many estimates of the neutral rate are also in the 3%-4% range. The current rates are roughly near neutral levels and are above the median estimates of committee members.
Of course, some members believe the neutral rate is higher, and these views can be discussed, as the neutral rate itself cannot be directly observed.
For some members of the committee, it may be time to pause and observe—see if there really are downside risks in employment and whether the current observed economic growth rebound is real and sustainable.
Typically, the labor market reflects the true momentum of the economy better than spending data. However, the signs of a slowdown in employment this time make interpretation more complex. We have already cut rates by an additional 50 basis points in the last two meetings, and some members believe we should "pause for now"; others wish to continue cutting rates. This is why I mentioned that "there is a clear divergence."
Every member of the committee is committed to doing the right thing to achieve our policy goals. The divergence partly comes from different economic forecasts, but a significant portion also comes from different risk preferences—this is a normal phenomenon that has existed in previous Federal Reserves.
Different people have different tolerances for risk, which naturally leads to differing opinions. You should be able to sense this from the recent public speeches of committee members.
The current situation is that we have cut rates twice in a row, and we are now about 150 basis points closer to the "neutral level." There are increasingly more voices suggesting that we should at least "wait for a cycle" before making a decision. It is as simple and transparent as that.
You have already seen this divergence in the September Economic Projections (SEP) and in the public speeches of committee members. I can also tell you that these views will be reflected in the meeting minutes. What I am saying now is the reality of what happened in today’s meeting.
Q11: How would you explain the reasons for the current weakness in the labor market? What effect will this rate cut have on improving employment prospects?
Powell: I believe there are two main reasons for the weakness in the labor market.
First, there has been a significant decline in labor supply, which includes two aspects: one is the decline in labor force participation rate (which has cyclical factors), and the other is the reduction in immigration—this is a major policy change that started under the previous administration and has accelerated under the current administration. Therefore, a large part of the reason comes from the supply side. Additionally, labor demand has also decreased.
The decline in the unemployment rate means that the drop in labor demand is slightly greater than the drop in supply. Overall, the current situation is mainly driven by changes on the supply side, which is a judgment I share with many others.
So, what can the Federal Reserve's tools do? Our tools mainly affect demand.
In the current situation, if we adjust for employment (considering the possibility that statistics may "overestimate employment growth"), new job creation is essentially close to zero. If this zero growth persists long-term, it is hard to call it a "sustainable maximum employment state"; it represents an unhealthy "balance."
Therefore, many members of the committee and I believe that cutting rates in the last two meetings to support demand was the appropriate course of action. We have done so, and rates are significantly less tight than before (though I wouldn’t say they have turned accommodative), which should help prevent further deterioration in the labor market. However, the situation remains quite complex.
Some believe the current issues mainly stem from the supply side, and that monetary policy has limited effects; but others—including myself—believe that the demand side still plays a role, and therefore we should use policy tools to support employment when we see risks.
Q12: You also mentioned that tariffs have led to "one-time price increases." Will American consumers continue to feel the price increases caused by tariffs this year?
Powell: Our basic expectation is that tariffs will continue to push inflation up for a period of time, as tariffs take time to gradually transmit through the production chain to consumers.
The impacts of the tariffs implemented in recent months are now becoming evident. New tariffs took effect in February, March, April, and May, and these effects will persist for a while, possibly lasting until next spring.
These impacts are not large, likely pushing inflation up by about 0.1 to 0.3 percentage points. Once the tariffs are fully implemented, they will no longer continue to increase inflation but will instead lead to a one-time increase in price levels, after which inflation will revert to levels excluding tariffs, and the inflation excluding tariffs is currently not far from 2%.
However, consumers do not care about this technical explanation; they only see that prices are much higher than before. What truly makes the public dissatisfied with inflation are the significant price increases in 2021, 2022, and 2023. Even if the rate of increase has slowed now, prices are still much higher than three years ago, and people continue to feel pressure. As real incomes rise, the situation will gradually improve, but it will take time.
Q13: Are you concerned that the stock market is currently overvalued? You should also be aware that rate cuts will push up asset prices. So, how do you balance the contradiction between "cutting rates to support employment" and "stimulating AI investment that could even lead to more layoffs"? In recent weeks, thousands of layoffs related to AI have been announced.
Powell: We do not focus on any specific asset prices and say, "This is unreasonable." That is not the Federal Reserve's responsibility. We are concerned about whether the overall financial system is robust and can withstand shocks.
Currently, banks are well-capitalized; although low-income households are under pressure, overall, household balance sheets remain relatively healthy, and debt levels are manageable. Lower-end consumption has indeed slowed, but the overall situation is not particularly concerning.
Let me emphasize again that asset prices are determined by the market, not by the Federal Reserve.
I do not believe that interest rates are the key factor driving investment in data centers. The reason companies are building data centers is that they believe these investments have very good economic returns and high discounted cash flow values. This is not something that can be decided by "25 basis points."
The Federal Reserve's responsibility is to use tools to support employment and maintain price stability. Rate cuts will marginally support demand, thereby supporting employment, which is why we are doing this.
Of course, whether it is a cut of 25 basis points or 50 basis points, it will not have an immediate decisive effect, but lower rates will support demand and promote hiring over time. At the same time, we must proceed cautiously, as we are very aware that inflation still carries uncertainties, so the path of rate cuts has always been "small steps and slow progress."
Q14: Regarding AI, a significant portion of current economic growth seems to come from AI investment. If tech investment suddenly contracts, are you concerned about the overall impact on the economy? Do other sectors have enough resilience to support it? In particular, do you think lessons can be learned from the 1990s (the internet bubble period) to address the current situation?
Powell: This situation is different. The tech companies that are currently highly valued are genuinely profitable and have business models and profits to support them. If we look back at the "internet bubble" of the 1990s, many of those were just concepts rather than mature companies, which was a very clear bubble. (I won't name specific companies) but now these companies are profitable and have mature business models, so the nature is completely different.
Currently, equipment investment and investments related to data centers and AI are one of the important sources of economic growth.
At the same time, consumer spending is far higher than AI investment, and it has been stronger than many pessimistic forecasts this year. Consumers are still spending, although it may primarily come from high-income groups, but consumption remains strong, and consumption's weight in the economy far exceeds that of AI-related investments.
From the perspective of growth contribution, AI is an important factor, but consumption drives the economy more.
The main reason for the current slowdown in the labor market is the significant decline in labor supply, primarily due to reduced immigration and a decline in the labor force participation rate. This means that the demand for new job positions is decreasing because there are not enough new workers entering the market to absorb.
In other words, there are not as many new job seekers appearing.
Additionally, labor demand is also declining. The decline in the labor force participation rate more accurately reflects weak demand this time, rather than just trend factors. Therefore, we are indeed seeing a weakening labor market.
Economic growth is also slowing. Last year's growth rate was 2.4%, and we expect it to be 1.6% this year. Without the impact of the government shutdown, it could have been a few basis points higher. There will be a rebound after the shutdown ends, but overall, the economy is still growing moderately.
Q15: I would like you to elaborate on how you think about monetary policy in the absence of data. Does this "data drought" make you more inclined to stick to the original path, or does it make you more cautious due to uncertainty?
Powell: We will only know what to do when we actually face this situation—if it really happens. There may be two directions in interpreting this situation.
As I have mentioned several times before, if we indeed do not have enough information and cannot make clear judgments, while the economy appears to remain robust, stable, and without significant changes, some may propose the view that in unclear visibility, we should slow down our progress. I do not know how persuasive this view would be at that time, but there will certainly be people advocating for it.
Of course, there will also be those who propose the opposite view: since it seems that nothing has changed, we should proceed as planned. But the problem is that you may not know whether the situation has truly not changed.
I do not know if we will ultimately encounter this scenario. I hope we do not, and I hope that by the time of the December meeting, the data will return to normal, but in any case, we must do our job well.
Q16: A few years ago, you mentioned that the overall capital level of the financial system was roughly appropriate. Now the Federal Reserve is advancing a revision plan that involves additional capital requirements for globally systemically important banks (G-SIBs). Has this changed your view on capital levels? Do you plan to significantly lower the capital levels within the system?
Powell: Discussions are currently ongoing among regulators, and I do not want to comment prematurely on the outcomes of these discussions. I still believe, as I said in 2020, that the capital levels in the system were roughly appropriate at that time. Since then, through various mechanisms, capital levels have further increased.
I look forward to these discussions continuing. The discussions are still in the early stages, and a complete plan has not yet been formed, so I do not have much to add at this time.
Q17: Is the weakness in the labor market accelerating? If rate cuts cannot effectively alleviate the further slowdown in employment, which groups are at the greatest risk? When deciding to cut rates, do you consider more the low-income groups or those who may lose their jobs due to automation? Is there a specific group that you are particularly concerned about?
Powell: We do not currently see the kind of "accelerating weakness in the labor market" that you mentioned. Admittedly, we have not received the September non-farm payroll report, but we will look at initial unemployment claims, which remain stable. You can also look at related data; there have been no signs of deterioration over the past four weeks. Looking at job vacancy data from the job site Indeed, it is also stable and does not show any significant deterioration in the labor market or any part of the economy.
However, as I mentioned, you will see some large companies announcing layoffs or stating that they will not expand their total workforce in the coming years. They may adjust their workforce structure but do not need a larger employee base.
From the overall data, it is not very apparent yet, but new job creation is very low, and the proportion of unemployed individuals finding new jobs is also very low. Meanwhile, the unemployment rate remains very low—4.3% is still considered low.
Our tools cannot target support for any specific demographic or income level. However, I do believe that when the labor market is strong, the greatest beneficiaries are the general public.
We saw this during the long recovery process after the global financial crisis. When the labor market is strong, low-income groups benefit the most. Over the past two to three years, the income of low-income groups has improved significantly, and the demographic structure and employment trends at that time were very positive.
We are no longer in that phase. A stronger labor market is the most important thing we can do for the public. This is also half of our responsibility. Maintaining price stability is the other half. Inflation particularly harms those on fixed incomes, so we must balance both points.
Q18: The terms of 12 regional Federal Reserve Bank presidents will expire at the end of February next year. Can you share the timeline for the Board's review of these reappointment decisions? Will we see all reappointments, or could there be changes? There have been opposing votes in different directions in the last three consecutive FOMC meetings regarding interest rate decisions. Did you feel pressure while presiding over these meetings? What does this divergence mean to you?
Powell: The relevant procedures will be conducted as required by law. According to the law, regional Federal Reserve Bank presidents undergo a reappointment evaluation every five years. This process is currently underway, and we will complete it in a timely manner. That’s all I can say for now.
(As for the opposing votes in different directions), I do not view it that way, nor do I say it puts pressure on me. We must face the current situation, which is indeed very challenging: the unemployment rate is at 4.3%, economic growth is close to 2%, and the overall situation is not bad. However, from a policy perspective, we are simultaneously facing upward risks in inflation and downward risks in employment.
This is very difficult for the Fed because one risk points to rate cuts while the other points to rate hikes, and we cannot satisfy both directions at the same time; we can only seek a balance in between.
In this environment, it is natural to see differing opinions among committee members, including how to act and the pace of action. This is completely understandable. Committee members are extremely serious, diligent, and want to make the best decisions for the American people, but they will have different judgments on "what the right course of action is."
It is my honor to work with such dedicated individuals. I do not find this unfair or frustrating. This is simply a time when we must make difficult adjustments in a real-time environment. I believe the actions we have taken this year are correct and prudent. We cannot ignore the issue of inflation, nor can we pretend it does not exist.
At the same time, the risk of "persistently high inflation" has significantly decreased since April. If it is appropriate to cut rates again in the future, we will do so.
Ultimately, we hope that by the end of this cycle, the labor market remains robust, inflation falls to 3%, and further moves toward 2%. We are doing our utmost in a very complex environment to achieve this.
Q19: Both regional banks and large banks are experiencing losses and delinquencies on loans. As Jamie Dimon said, "If you see one cockroach, there may be more." How do you view these loan losses? Do they pose a risk to the economy? Is this a warning sign?
Powell: We have been closely monitoring credit conditions. You are correct that we have seen an increase in subprime defaults for some time. Recently, some subprime auto loan companies have reported significant losses, some of which are reflected on bank balance sheets. We are closely watching this situation.
However, at this point, I do not believe this is a broader debt risk issue. It does not seem to be spreading widely among financial institutions. But we will continue to monitor closely to ensure that this is indeed the case.
Q20: The economy is currently showing a "dual divergence": high-asset individuals are still spending, while low-income groups are cutting back on expenditures. To what extent is the current resilience in consumption dependent on strong stock market performance? Is the stock market supporting the economy to some extent?
Powell: The stock market does play a role, but it is important to remember: the more wealth one has, the lower the marginal utility of additional wealth in driving consumption. Once wealth reaches a certain level, the marginal propensity to consume declines significantly.
Therefore, a decline in the stock market will indeed affect consumption, but unless there is a very sharp drop in the stock market, it will not lead to a sharp decline in consumption.
Low-income and low-asset groups have a much higher marginal propensity to consume; any additional income or wealth they receive is more likely to be directly converted into consumption, but they do not have much wealth in the stock market.
So, the stock market is indeed one of the factors currently supporting consumption. If the stock market undergoes a significant adjustment, you will see some weakening in consumption, but it should not be assumed that every dollar the stock market drops will lead to a dollar decrease in consumption; that is not the case.
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