The labor market is cooling, but that's not causing concern for the Fed, and despite rising inflation forecasts, overall progress is steady. In his last policy decision before the second Trump administration, Fed Chairman Jerome Powell tried to make sense of conflicting stories and conflicting data. Amid all the uncertainty, the central banker offered a final word of caution: caution.
"When the path is unclear, you slow down a little bit, just like driving on a foggy night or walking into a dark room full of furniture," Powell said at a news conference Thursday. "You just slow down."
According to Powell, the narrative of declining inflation has actually not changed. Even if the Fed announces a third consecutive rate cut, with a total cut of a full percentage point this year, monetary policy remains restrictive. This is because officials still believe that inflation will continue to pose challenges during the next administration. Compared to previous forecasts, officials now predict that inflation will be above expectations by the end of this year and will continue to remain elevated next year.
Powell said, 'The situation remains that we are moving away from the significant shocks our economy suffered in 2021 and 2022.'
If price pressures remain stubborn, another aspect of the Federal Reserve's goals—the risk of deterioration in the labor market—seems to have faded, as does the risk of the labor market driving up prices. Powell stated that the labor market is in a desirable state, looser than before the pandemic, still cooling down but not enough to sound the alarm.
To this end, the Fed has actually lowered its unemployment rate forecast for the end of this year from 4.4% to 4.2%, and for the end of next year from 4.4% to 4.3%.
The initial market reaction was a pullback, leading U.S. stocks to experience the worst hour since the COVID crisis.
Fewer expectations for rate cuts mean that the federal funds rate will experience another year of 'higher for longer', which seems to overshadow Powell's cautiously optimistic remarks. But as Neil Dutta, head of macroeconomic research at Renaissance, pointed out, the Fed may lower the threshold for future rate cuts by raising inflation forecasts and lowering unemployment rate forecasts.
Trump's return is a huge policy unknown. New tariffs, retaliatory tariffs from other countries, and their impact on consumer prices will bring layers of uncertainty. But Powell stated that the Fed can take its time. After all, none of Trump's proposed plans have been implemented yet, and it's likely that some of those plans will never be implemented. Powell said, 'The outlook for our economy is quite bright, but we must persist.'
Article reposted from: Jinshi Data