During his speech in Dallas, Texas, on Thursday, Federal Reserve chair Jerome Powell said that the central bank is not in a hurry to cut interest rates given the strength of the U.S. economy. “Looking back, the U.S. economy has weathered a global pandemic and its aftermath and is now back to a good place,” he stated.
He explained that the labor market remains in solid condition. Inflation has eased substantially from its peak, and the Fed is on a sustainable path toward its 2 percent goal. Powell reiterated the Fed’s commitment to maintaining the economy’s strength by returning inflation to the goal while supporting maximum employment.
Economic growth strong
On economic growth, Powell noted that the economy’s recent performance has been “remarkably good, by far the best of any major economy in the world”. Economic output grew by more than 3 percent last year and is expanding at a 2.5 percent rate so far this year.
Growth in consumer spending has remained strong, supported by increases in disposable income and solid household balance sheets. Meanwhile, business investment in equipment and intangibles has accelerated over the past year. In contrast, activity in the housing sector has been weak.
Improving supply conditions have supported this strong performance of the economy, Powell added. In addition, the labor force has expanded rapidly, and productivity has grown faster over the past five years than its pace in the two decades before the pandemic, increasing the productive capacity of the economy and allowing rapid economic growth without overheating.
“Given progress toward our inflation goal and the cooling of labor market conditions, last week my Federal Open Market Committee colleagues and I took another step in reducing the degree of policy restraint by lowering our policy interest rate 1/4 percentage point,” he added.
Labor market remains solid
“The labor market remains in solid condition, having cooled off from the significantly overheated conditions of a couple of years ago, and is now by many metrics back to more normal levels that are consistent with our employment mandate,” Powell added.
The number of job openings is now just slightly above the number of unemployed Americans seeking work. In addition, the rate at which workers quit their jobs is below the pre-pandemic pace, after touching historic highs two years ago. Wages are still increasing but at a more sustainable pace.
However, hiring has slowed from earlier in the year. The most recent jobs report for October reflected significant effects from hurricanes and labor strikes, making it difficult to get a clear signal. Finally, at 4.1 percent, the unemployment rate is notably higher than a year ago but has flattened out in recent months and remains historically low.
Read: Federal Reserve on track for two 25-basis-point interest rate cuts this year
Inflation cools
In addition, the labor market has cooled to the point where it is no longer a source of significant inflationary pressures. This cooling and the substantial improvement in broader supply conditions have brought inflation down significantly over the past two years from its mid-2022 peak above 7 percent. Core measures of goods and services inflation, excluding housing, fell rapidly over the past two years and have returned to rates closer to those consistent with the Fed’s goals.
“We see the risks to achieving our employment and inflation goals as being roughly in balance, and we are attentive to the risks to both sides. We know that reducing policy restraint too quickly could hinder progress on inflation. At the same time, reducing policy restraint too slowly could unduly weaken economic activity and employment,” he added.
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