In the Q&A session, Powell warned that stock market valuations are too high, leading to a sharp decline in the U.S. stock market.

Written by: Li Dan, Wall Street Insights

In his first public speech after the Federal Reserve announced interest rate cuts last week, Fed Chairman Powell continued to leave room for further rate cuts, as he did in last week's press conference, and hinted at a cautious approach to rate cuts in a challenging risk environment. During the Q&A session, Powell warned that stock market valuations are too high, triggering a decline in the U.S. stock market indices.

In his speech on Tuesday, the 23rd, Powell reiterated that the Fed's dual mandate—maximum employment and price stability—faces threats, and the risks on both sides mean there is no risk-free policy path. If the rate cuts are too large or too fast, it may not effectively control high inflation, allowing inflation to remain above the Fed's 2% target. Conversely, if monetary tightening lasts too long, it could unnecessarily drag down the labor market.

Powell pointed out, "In the short term, there are upside risks to inflation, while there are downside risks to employment—this is a challenging situation." In the context of a "lackluster and somewhat weak labor market," the risk of employment decline has increased. It was precisely because of the increased employment risk that the Fed decided to cut rates last week.

Regarding tariffs, Powell reiterated that the reasonable expectation is that tariffs will have a temporary impact on inflation, leading only to one-time price fluctuations. However, "one-time" fluctuations do not mean "immediate," and may last for several quarters. Powell still believes that the Fed must closely monitor the potential lasting impacts of tariffs, stating that it is essential to ensure that tariffs do not evolve into a persistent inflation problem.

Powell's speech did not reveal any information about whether he would support rate cuts at the next Fed monetary policy meeting in October.

David Russell, Global Head of Market Strategy at TradeStation, commented that Powell is laying the groundwork for expectations of rising inflation due to tariffs in the fourth quarter of this year. He is doing this to give himself room to maneuver in response to political pressure from the Trump administration while downplaying the impact of tariffs as temporary. He said:

"Powell does not want to offend the White House, but he will not yield either. He is leaving himself room to respond to potential inflation pressures in the future. Powell is not intentionally taking a hawkish stance, but he is trying to avoid strong demands for aggressive rate cuts."

"The New Fed News Agency": Powell Keeps the Door Open for Rate Cuts, Indirectly Responds to Bessent's Criticism

Nick Timiraos, a senior Fed reporter known as "The New Fed News Agency," commented that Powell's prepared speech essentially repeated what he said at last week's press conference on the day the Fed announced rate cuts. Relatively speaking, a highlight of this speech is that despite the rate cut last week, Powell interpreted that the policy rate "still has a moderate restrictive nature."

From Powell's judgment, Timiraos believes this means that if Fed officials continue to think that the recent weakness in the labor market outweighs the negative impact on the economy from rising inflation, there is still room for further rate cuts this year. He believes Powell's speech shows that he keeps the door open for future rate cuts.

U.S. Treasury Secretary Bessent criticized on the 5th of this month that the Fed has issues of institutional bloat and functional expansion, which he believes are the main reasons for the Trump administration's questioning of the Fed's independence. Timiraos pointed out that in this speech, Powell also indirectly responded to such criticisms from Bessent and others.

Powell reviewed how the 2008 financial crisis and the 2020 COVID-19 pandemic forced the Fed to take extraordinary measures to avoid a more severe economic crisis. His conclusion is:

"Despite experiencing two unprecedented shocks, the performance of the U.S. economy remains robust compared to other major developed economies, even surpassing them."

After Powell stated that stock valuations are "quite high," the three major stock indices fell to new daily lows.

In the Q&A session following his speech on Tuesday, Powell stated that the U.S. labor market can no longer be considered robust, and there is indeed a noticeable weakness in the labor market. The risks to financial stability have not increased. The banking sector's capital positions are sound, and households' financial conditions are good. The current risks to financial stability are not high.

Regarding tariffs, Powell stated that tariffs are not a significant inflation factor. The transmission mechanism of tariffs is not as pronounced as imagined. Most forecasts indicate that the transmission effects of tariffs will last until 2026.

Powell believes that certain asset prices are high relative to historical levels. From many indicators, stock market valuations are quite high.

When asked about the extent to which Fed officials are concerned about market prices and whether they are more tolerant of higher price levels, Powell stated:

"We will pay attention to overall financial conditions and consider whether our policies are influencing financial markets in the direction we expect. But you are right, from many indicators, such as stock prices, the current valuations are quite high."

Powell believes that corporate hesitation is due to uncertainty about what to do. The U.S. economy is in a state of low layoffs and low hiring activity. A low unemployment rate and a low-employment economy are challenging for young workers.

When discussing artificial intelligence (AI), Powell believes it is too early to judge the impact of AI. AI means that certain jobs will be eliminated. Research shows that AI is not a major reason for the slowdown in hiring. The slowdown in hiring is partly related to uncertainty in government public policy.

Powell also stated that the Fed's monetary decisions will not consider partisan politics. Many people do not believe this. Powell criticized those who think that certain Fed actions are politically motivated, calling their claims "baseless."

After Powell mentioned that the stock market is overvalued, the Dow Jones Industrial Average turned negative, and all three major U.S. stock indices subsequently turned negative, with the S&P and Nasdaq's declines widening. Shortly after Powell's speech ended, the three indices hit new daily lows, with the Nasdaq down nearly 1.1%, the S&P down over 0.7%, and the Dow down slightly over 100 points, a decline of more than 0.2%.

Full Text of Powell's "Economic Outlook" Speech

Below is the full text of Powell's speech titled "Economic Outlook":

(Federal Reserve) Chairman Jerome H. Powell delivered a speech at the Greater Providence Chamber of Commerce's 2025 Economic Outlook Luncheon in Warwick, Rhode Island.

Thank you all. I am pleased to be back in 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 said, "If the situation changes significantly, policies will adjust accordingly."

Who would have thought that just a few months later, the COVID-19 pandemic would break out? The economic situation and policies underwent unprecedented changes. While Congress, the government, and the private sector took a series of measures, the Fed's decisive response also helped avoid a historically rare severe economic shock.

The world has experienced a long and difficult economic recovery after the financial crisis, followed by the COVID-19 pandemic. These two global crises have left indelible scars on humanity, and their effects will last for a long time. In democracies around the world, public trust in economic and political institutions has also been challenged. Those of us in public service need to focus even more on fulfilling our responsibilities diligently in a tumultuous and unpredictable environment.

During this turbulent period, central banks like the Fed have had to innovate in their policies to address the challenges during the crisis rather than for routine economic management. Despite experiencing two unprecedented shocks, the performance of the U.S. economy remains robust compared to other major developed economies, even surpassing them. As in the past, we must continue to reflect on this difficult period and learn from it, a process that has been ongoing for over a decade.

Looking ahead, despite significant changes in trade, immigration, fiscal, regulatory, and geopolitical areas, the U.S. economy has shown strong resilience. These policies are still evolving, and their long-term impacts will take time to manifest.

Economic Outlook

Recent data indicate that economic growth is slowing. The unemployment rate, while low, has risen. Job growth has slowed, and the risks of employment decline have increased. At the same time, inflation has recently risen and remains at a high level. In recent months, the balance of risks has shifted significantly, prompting us to adjust our monetary policy stance to a more neutral position at last week's meeting.

In the first half of this year, GDP growth was about 1.5%, down from 2.5% last year. The slowdown in growth mainly reflects a deceleration in consumer spending. The real estate market remains weak, but business investment in equipment and intangible assets has grown faster than last year. As noted in the September Beige Book, which collects economic information from across the Fed's district, businesses still believe that uncertainty affects their future expectations. Consumer and business confidence indices fell sharply this spring; they have since rebounded but remain below early-year levels.

In the labor market, both labor supply and demand have significantly slowed—an unusual and challenging phenomenon. In such a lackluster and somewhat weak labor market, the risks of employment decline have increased. The unemployment rate rose slightly to 4.3% in August but has remained low over the past year. During the summer, job growth slowed significantly, averaging only 29,000 new jobs per month over the past three months. The current job growth seems to be below the "balance point" needed to maintain the unemployment rate. However, other labor market indicators remain generally stable. For example, the ratio of job vacancies to unemployed persons remains close to 1. Additionally, various measures of job vacancies and the number of initial unemployment claims have also remained roughly stable.

Inflation has significantly retreated from its highs in 2022 but remains above our long-term target of 2%. The latest data show that over the past 12 months ending in August, personal consumption expenditures (PCE) overall prices rose by 2.7%, up from 2.3% in August 2023. Excluding the more volatile food and energy prices, core PCE prices rose by 2.9% last month, also higher than the same period last year. After falling last year, commodity prices have begun to rise again, becoming a major driver of rising inflation. Existing data and surveys indicate that these price increases mainly reflect higher tariffs rather than broader price pressures. Inflation in the services sector, including housing prices, continues to decline. Influenced by tariff news, short-term inflation expectations have generally trended upward this year. However, looking ahead to the next year or so, most long-term inflation expectation indicators remain aligned with our 2% inflation target.

The overall impact of significant changes in trade, immigration, fiscal, and regulatory policies on the economy remains to be seen. The reasonable expectation is that the impact of tariffs on inflation will be temporary—just a one-time price fluctuation. "One-time" fluctuations do not mean "immediate." Tariff increases may take time to affect the entire supply chain. Therefore, a one-time increase in price levels may last for several quarters and lead to slightly higher inflation during that period.

However, the uncertainty surrounding inflation trends remains high. We will carefully assess and manage the risks of high inflation and persistent inflation. We will ensure that this price increase does not evolve into a persistent inflation problem.

Monetary Policy

Recent inflation risks are tilted upward, while employment risks are tilted downward—this is a challenging situation. The dual risks mean there is no risk-free path. If the easing of monetary policy is too aggressive, we may not be able to effectively control inflation and may need to adjust policies in the future to achieve the 2% inflation target. If monetary policy tightening lasts too long, the labor market may become unnecessarily weak. In this context of conflicting goals, the policy framework requires us to maintain balance in achieving our dual mandate.

The increased downside risk to employment has shifted the risk balance for achieving our goals. Therefore, at our last meeting, we decided to move further toward a more neutral policy stance, lowering the target range for the federal funds rate by 25 basis points to 4% to 4.25%. I believe the current policy stance remains moderately restrictive but allows us to better respond to changes in economic conditions.

Our policy is not on a preset path. We will continue to determine the appropriate policy stance based on the latest data, economic outlook, and risk balance. We are committed to supporting maximum employment and keeping inflation persistently at the 2% target level. Achieving these goals is crucial for all Americans. We are well aware that our policy actions will impact communities, families, and businesses across the country.

Thank you again for inviting me to today's meeting. I look forward to engaging in a deeper discussion with all of you.

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