Federal Reserve chair Jerome Powell recently stated that the central bank will continue assessing data to determine the “pace and destination” of interest rates to account for inflation that has slowed notably in the past year and is nearing the U.S. central bank’s 2 percent target.
Powell’s comments came after the Fed cut interest rates by a quarter percentage point on Thursday to the 4.50-4.75 percent range.
“The economy is strong overall and has made significant progress toward our goals over the past two years. The labor market has cooled from its formerly overheated state and remains solid,” added Powell.
Inflations eases
U.S. inflation has eased substantially from a peak of 7 percent to 2.1 percent as of September. In his statement, Powell reiterated the Fed’s goal of maintaining economic growth by supporting maximum employment and returning inflation to the 2 percent goal when it comes to interest rates.
Total PCE prices rose 2.1 percent over the 12 months ending in September. Excluding the volatile food and energy categories, core PCE prices rose 2.7 percent. Overall, inflation has moved much closer to the 2 percent longer-run goal, but core inflation remains somewhat elevated.
“We continue to be confident that with an appropriate recalibration of our policy stance, strength in the economy and the labor market can be maintained, with inflation moving sustainably down to 2 percent,” he added. The Fed also decided to continue to reduce its securities holdings.
The interest rate cut came as recent indicators suggested sustainable economic growth. The U.S. gross domestic product rose at an annual rate of 2.8 percent in the third quarter, about the same pace as in the second quarter. Consumer spending remained resilient and “investment in equipment and intangibles has strengthened”, Powell added. However, the housing sector remained weak.
“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.
Labor market growth slows
Temporary factors impacted recent job growth in the U.S. following the Fed’s 50-basis-point interest rate cut in the previous meeting. Payroll job growth slowed from earlier in the year, averaging 104,000 per month over the past three months. “This figure would have been somewhat higher were it not for the effects of labor strikes and hurricanes on employment in October,” added Powell.
The unemployment rate is notably higher than it was a year ago but has edged down over the past three months and remains low at 4.1 percent in October. Nominal wage growth has also eased over the past year and the jobs-to-workers gap has narrowed.
“Overall, a broad set of indicators suggests that conditions in the labor market are now less tight than just before the pandemic in 2019. The labor market is not a source of significant inflationary pressures,” Powell added.
Powell concluded his comments by stating that if the economy remains strong and inflation is not sustainably moving toward 2 percent, the Fed can cut interest rates more slowly. However, if the labor market weakens unexpectedly or inflation falls more quickly than anticipated, the Fed can move more quickly.
Read: Federal Reserve on track for two 25-basis-point interest rate cuts this year
U.S. election impact
As policymakers braced for the new U.S. presidency, concerns over the complexity of the economic landscape rose. For his part, Powell said the results of Tuesday’s presidential election, which pave the way for potential policies including widespread deportation of immigrants, broad-based tariffs, and tax cuts, would have no “near-term” impact on U.S. monetary policy.
Powell added that as the new administration’s proposals take shape, the central bank would begin estimating the impact on its twin goals of stabilizing inflation and maximizing employment.
“It’s a process that takes some time. It’s all of the policy changes that are happening. What’s the net effect? The overall effect on the economy at a given time? That’s a process … we go through all the time with every administration,” Powell stated.
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