Takeaways from the FED's MPC speech Sep 24'

Federal Reserve Chair Jerome Powell addressed the current economic conditions, monetary policy decisions, and future outlook. He emphasized the Fed's commitment to its dual mandate of maximizing employment and stabilizing prices, noting significant progress over the past two years.

The Federal Reserve, in a strategic shift, has decided to lower interest rates by half a percentage point. This move, announced on September 18, 2024, marks a significant departure from its previous aggressive stance aimed at curbing soaring inflation. The decision reflects a growing confidence in the economy's resilience and the Fed's ability to navigate the delicate balance between maintaining maximum employment and achieving stable prices.

Key takeaways from the announcement

• Economic Progress: The U.S. economy has shown remarkable strength, with GDP growth averaging 2.2% in the first half of 2024 and consumer spending remaining robust.
• Inflationary Easing: Inflation has significantly eased from its peak, with the Consumer Price Index (CPI) falling to an estimated 2.2% in August.
• Policy Adjustment: The Fed's decision to reduce interest rates is a strategic recalibration aimed at supporting continued economic growth and ensuring inflation remains sustainably at 2%.
• Labor Market Dynamics: While the labor market has cooled from its overheated state, the unemployment rate remains low at 4.2%.
• Future Outlook: The Fed's projections indicate a continued easing of inflation and a slight increase in the unemployment rate in the coming months.

The Fed's rationale for this decision is rooted in its dual mandate: promoting maximum employment and stable prices. By carefully assessing economic indicators and the evolving outlook, the central bank has determined that the risks to achieving both goals are now roughly balanced.

The rate cut is a strategic move to:

• Maintain economic momentum: By lowering interest rates, the Fed aims to stimulate economic activity and prevent a sudden slowdown.
• Support job growth: A more accommodative monetary policy can encourage businesses to invest and hire more workers.
• Ensure inflation remains anchored: The Fed remains committed to its 2% inflation target and believes that a gradual reduction in interest rates will help keep inflation expectations in check.

However, the Fed acknowledges the potential risks associated with this decision. Reducing interest rates too quickly could reignite inflationary pressures, while moving too slowly could weaken economic activity and employment. The central bank has emphasized that its future decisions will be data-driven and will take into account the evolving economic landscape.

In conclusion, the Federal Reserve's decision to lower interest rates represents a carefully calibrated approach to maintaining economic stability and achieving its dual mandate goals. By balancing the need for continued growth with the imperative to control inflation, the Fed is demonstrating its commitment to serving the best interests of the American people.

Conference Details:

1. Decision on the 50-basis-point rate hike

Topic asked: What drove the decision for a 50-basis-point rate hike, and will there be more in the future?

Response: The decision was driven by recent data, including employment and inflation reports, as well as anecdotal evidence. Despite concerns about labor market strength, the hike was deemed necessary for the economy. Future hikes will depend on incoming data, evolving economic conditions, and risk balance.

2. Future rate hike guidance

Topic asked: How can future rate decisions, such as 25 or 50 basis points, be predicted?

Response: Decisions will be made on a meeting-by-meeting basis, considering incoming data and the evolving economic outlook. The Summary of Economic Projections (SEP) provides a baseline but does not signal urgency. The Fed is open to speeding up, slowing down, or pausing, depending on the economy's evolution.

3. Projections of future restrictive rates

Topic asked: Will rates remain restrictive throughout the next year, and could that weaken the labor market?

Response: Fed officials expect rates to remain above the long-run neutral rate for the next year. However, these estimates vary widely, and adjustments will be made based on economic reactions. The Fed aims to find a balance that maintains progress in reducing inflation and stabilizing unemployment. The recalibration of policy will proceed at the appropriate pace.

4. Decision-making process and dissent within the committee

Topic asked: Was there dissent in the decision, and how close was it?

Response: There was healthy discussion with a diversity of views, but broad support for the 50-basis-point decision. Despite one dissenting vote from a governor (the first since 2005), all 19 participants in the SEP predicted multiple cuts for the year, showing a high degree of consensus on the overall direction.

5. Future rate cut pacing and expectations

Topic asked: Will rate cuts follow a specific pattern next year, such as every other meeting?

Response: While future pacing of rate cuts was not explicitly confirmed, Powell indicated the committee would remain flexible, adjusting their decisions based on economic conditions, allowing for more gradual or frequent changes if needed.

6. Federal Reserve's gradual approach to policy adjustment

Topic asked: Is the Fed rushing into policy decisions

Response: The Fed is not in a rush to make significant adjustments. They are confident in their actions and will proceed cautiously, evaluating conditions on a meeting-by-meeting basis. Their focus is on ensuring inflation trends sustainably towards 2%.

7. Unemployment forecast at 4.4% and stabilization

Topic asked: Why does the Fed project unemployment to rise to 4.4% but remain stable afterward?

Response: Chair Powell emphasizes the current strength of the U.S. economy, including the labor market. He indicates that while unemployment may rise, the overall economic conditions remain solid, with steady growth and declining inflation. The Fed aims to maintain this stability.

8. Clarification on the nature of rate cuts

Topic asked: Is the recent rate cut a reaction to revised employment data or a sign of an accelerated policy stance?

Response: Powell rejects the idea that the Fed is playing catch-up. He attributes the cut to the confidence built by previous patience in reducing the rate. The Fed is recalibrating policy to a neutral level based on economic developments but will adjust speed as necessary.

9. Balance sheet runoff and interest rate cuts coexist

Topic asked: Does the larger rate cut imply changes to the Fed's balance sheet policy?

Response: Powell clarifies that despite the rate cuts, the balance sheet will continue to shrink, particularly in reserves through the Overnight Reverse Repurchase Agreement (RRP). The Fed sees these actions as part of the normalization process, and both can proceed simultaneously.

10. Labor market normalization vs. potential concerns

Topic asked: Is the rising unemployment rate just labor market normalization, or is there a deeper concern?

Response: Powell suggests that the rise in unemployment reflects a normalizing labor market, especially as labor supply improves. He downplays the risk of significant deterioration in labor market conditions, even with restrictive policies in place.

11. Labor market conditions have cooled but remain strong

Topic asked: State of the labor market.

Response: Despite cooling conditions, the labor market is close to maximum employment, similar to levels in 2018-2019. The Federal Reserve will monitor job creation closely to support the economy's growth.

12. No signs of rising layoffs; the Fed’s preemptive approach

Topic asked: Potential rise in layoffs and the Fed's response.

Response: The Fed is not seeing rising layoffs or claims. By cutting interest rates preemptively, the Fed aims to avoid reacting too late to an economic downturn. The policy will adapt based on data at each meeting.

13. Potential 200 basis points interest rate cuts expected by the end of next year

Topic asked: Fed's plan regarding interest rate cuts to maintain the labor market.

Response: The Fed expects up to 200 basis points cuts by 2025 to maintain employment at a manageable level. If labor conditions worsen unexpectedly, faster cuts will be considered. Inflation is expected to gradually reach 2%.

14. No need for further loosening in the labor market

Topic asked: Sensitivity to the labor market and inflation control.

Response: The Fed believes it can achieve 2% inflation without further softening the labor market. Its goal is price stability without significant unemployment rises, showing commitment to managing both inflation and employment risks.

15. Key employment metrics: Unemployment at 4.2% and strong participation rates

Topic asked: Specific data driving the Fed’s labor market analysis.

Response: The unemployment rate of 4.2% is healthy, with high labor force participation adjusted for demographics. Wage growth is moderating, vacancies per unemployed are still solid, and quits have normalized. Overall, the labor market remains strong but bears monitoring as downside employment risks have increased.

16. Risks to employment growing as inflation risks decline

Topic asked: What is changing in the labor market.

Response: The inflation risks have reduced, while the risks to employment have increased. The Fed has been patient with rate cuts, creating room to balance its goals of stable prices and employment.

17. What to expect before the next meeting

Topic asked: Fed's plan before the next decision.

Response: The Fed expects to gain further insights into labor conditions and inflation, which will inform the size of potential cuts at the next meeting.

18. Data-Driven Decision Making in Monetary Policy

Topic asked: What factors will the FED consider before the next meeting?

Response: The FED will monitor incoming data such as labor reports and inflation trends to determine if policy adjustments are necessary for achieving long-term economic goals.

19. Job Creation and Labor Market Tightness

Topic asked: Are recent job creation levels concerning? Will further labor market cooling lead to job losses?

Response: The current job creation of 100,000 jobs per month is not alarming, as it depends on labor market inflows, such as immigration. The FED acknowledges that job openings can continue to decline without raising unemployment significantly, but further reductions may start leading to higher job losses.

20. Federal Funds Rate and Future Trends

Topic asked: Is the FED likely to return to an era of near-zero interest rates?

Response: The era of negative rates and ultra-low interest rates is unlikely to return. The neutral rate is likely higher than in the past, though the exact rate remains uncertain.

21. Rate Cut Timing and Political Influence

Topic asked: How does the FED respond to criticism that a pre-election rate cut could have political motivations?

Response: The FED always bases its decisions solely on what benefits the economy, and not on political factors. Decisions are made with long-term economic health in mind, and impacts typically occur with a time lag.

22. Messaging Behind Rate Cut

Topic asked: What message does the FED want to convey to American consumers with this rate cut?

Response: The U.S. economy is strong, and the rate cut is meant to maintain that strength. Inflation is moving toward the 2% target, and the labor market remains healthy. The intention is to transition from high rates, used to curb inflation, to more normal levels.

23. Victory over Inflation

Topic asked: Has the FED decisively won the fight against inflation?

Response: The FED is cautiously optimistic, with inflation coming down closer to the 2% objective, but a full declaration of victory is premature as they continue monitoring economic conditions.

24. Inflation Goal and Progress

Topic asked: Is inflation near the Fed’s 2% target?

Response: Inflation is progressing towards 2%, but the Fed is not declaring "mission accomplished." It needs to be at or near 2% for a sustained period, although there has been encouraging progress.

25. Housing Inflation's Impact

Topic asked: Can inflation reach 2% given persistent housing inflation?

Response: Housing inflation remains a drag, particularly due to leases and Owners' Equivalent Rent (OER), but market rents are moving in a positive direction. Housing inflation will take longer to reflect in overall inflation, but there’s confidence it will eventually align.

26. Housing Market and Rate Cuts

Topic asked: Could cutting rates increase housing demand and prices?

Response: Lower rates could stimulate housing activity, but it's unclear if it would drastically increase demand. The housing supply is the main issue, which is outside of the Fed’s control. Normalizing interest rates will help, but supply constraints need government intervention.

27. Monetary Policy Lags and Unemployment

Topic asked: How does the timing of policy adjustments relate to keeping unemployment low?

Response: The economy is growing steadily, and the Fed’s actions are timely. The 50 basis point move shows commitment to prevent falling behind in controlling inflation. The decision would have been the same even with earlier employment data.

28. Mortgage Rates Outlook

Topic asked: How will mortgage rates change in the next year?

Response: Mortgage rates depend on economic performance. The Fed is moving from restrictive to neutral policy, which will take time. Rate changes will follow the broader economic forecast, but exact predictions are hard to make.

29. High Home Prices and Public Frustration

Topic asked: What’s the message to households frustrated with high home prices?

Response: High rates are part of combating inflation, and while the process is painful, restoring price stability benefits everyone. The goal is for people to stop worrying about inflation, which is the long-term outcome the Fed is working toward.

30. Rate Decisions and Market Reactions

Topic asked: Did market expectations of a lower probability for a 50 basis point cut influence the decision?

Response: The Fed makes decisions based on what is best for the economy at the time, regardless of market pricing or expectations.

31. Focus on Labor Market Data

Topic asked: Does the Fed focus more on the unemployment rate due to unreliable payroll data?

Response: The Fed still considers all labor data, adjusting for discrepancies like payroll revisions. There is no single metric that determines policy; each meeting reviews all available data.

32. Independence of the Fed

Topic asked: Should a sitting president influence the Fed’s interest rate decisions?

Response: The Fed is designed to be independent to prevent monetary policy from being politically influenced. Independent central banks lead to lower inflation, and this model serves all Americans.

33. Regulatory Developments and Basel III

Topic asked: Are you aligned with Vice Chair Barr on changes to Basel III regulations?

Response: Powell deferred the regulatory question but showed alignment with Vice Chair Barr's approach to the Basel III framework.