Fed Cuts Rates for First Time in 9 Months as Powell Warns: “No Risk-Free Paths Now”

Policy Rate Decision [00:04]

• The Federal Open Market Committee decided to lower the policy interest rate by a quarter percentage point.
• The committee also decided to continue reducing its securities holdings.

This action was taken in support of goals and in light of a shift in the balance of risks.

In support of our goals and in light of the shift in the balance of risks today, the Federal Open Market Committee decided to lower our policy interest rate by a quarter percentage point.

Economic Developments: Growth and Spending [00:20]

• Recent indicators suggest that growth of economic activity has moderated.
• GDP growth was around 1.5% in the first half of the year, a decrease from 2.5% last year.
• This moderation in growth is largely attributed to a slowdown in consumer spending.
• In contrast, business investment in equipment and intangibles has picked up from last year's pace.
• Activity in the housing sector remains weak.

The economy is experiencing a moderation in overall growth, primarily driven by reduced consumer spending, although business investment shows some improvement.

Economic Projections and Labor Market [00:50]

• The median participant projects GDP to rise 1.6% this year and 1.8% next year, which is a slight increase from June projections.
• The unemployment rate edged up to 4.3% in August but remains at a relatively low level compared to the past year.
• Payroll job gains have slowed significantly to an average of 29,000 per month over the last 3 months.

Projections indicate modest GDP growth ahead, while the labor market shows signs of cooling with slower job creation.

In the labor market, the unemployment rate edged up to 4.3% in August, but remains little changed over the past year at a relatively low level.

Inflation Trends [01:20]

• Inflation has eased significantly from its highs in mid-2022 but remains somewhat elevated relative to the 2% longer-run goal.
• Total PCE prices rose 2.7% over the 12 months ending in August.
• Core PCE prices, excluding food and energy, rose 2.9% over the same period.

Inflation has decreased from its peak but is still above the target, with both overall and core price measures showing continued elevation.

Monetary Policy Stance and Future Path [01:47]

• The committee is well-positioned to respond in a timely way to potential economic developments.
• Future monetary policy stance will be determined by incoming data, the evolving outlook, and the balance of risks.
• FOMC participants' projections for the federal funds rate show a median of 3.6% at the end of this year, 3.4% in 2026, and 3.1% in 2027.
• This projected path is a quarter percentage point lower than what was projected in June.
• These individual forecasts are subject to uncertainty and do not represent a committee plan or decision.
• Policy is not on a preset course.

The committee is adaptable in its monetary policy approach, basing decisions on current data and future outlooks, with projections indicating a gradual decline in interest rates.

As is always the case, these individual forecasts are subject to uncertainty and they're not a committee plan or decision. Policy is not on a preset course.

Rationale for Policy Adjustment and Risks [02:44]

• There was no widespread support for a 50 basis point cut.
• The committee has previously enacted large rate hikes and cuts, typically when policy was significantly out of place.
• The current feeling is that policy has been appropriate so far this year.
• Waiting to observe the evolution of tariffs, inflation, and the labor market was the right decision.
• The current policy adjustment is a reaction to lower job creation and other evidence of labor market softening.
• Risks are perceived as moving towards balance.

The decision to adjust policy reflects a response to softening in the labor market, rather than a belief that policy was severely misaligned, acknowledging a shift in the balance of economic risks.

I think we've done very large rate hikes and very large rate cuts in the last 5 years. And you tend to do those at a time when when you feel that policy is out of place and needs to move quickly to a new place. That's not at all what what I feel certainly now.

Labor Market Cooling and Inflation Goals [03:31]

• The current economic picture shows a different set of risks to the labor market compared to previous periods.
• Job creation numbers have decreased significantly, indicating a cooling labor market.
• The committee remains fully committed to restoring 2% inflation on a sustained basis.
• The risks of higher and more persistent inflation have likely decreased since April.
• This decrease in inflation risk is partly due to the softening labor market and slowed GDP growth.
• The labor market is showing downside risks, despite still being at a relatively low unemployment rate.

The focus is on balancing the commitment to inflation goals with the reality of a cooling labor market, with risks to sustained inflation appearing to diminish.

At the same time, we've got to weigh the risks to the two goals. And I would say since really since April, I to me the risks of higher and more persistent inflation have probably become a little less.

Summary of Economic Projections (SEP) and Policy Flexibility [04:50]

• The committee operates on a meeting-by-meeting basis, closely examining incoming data.
• The SEP represents an accumulation of individual projections from 19 participants regarding the most likely economic path and appropriate monetary policy.
• Participants do not debate or agree on a collective path for the SEP; they simply write down their individual assessments.
• The committee emphasizes that it is not on a preset path and decisions are based on incoming data, the evolving outlook, and the balance of risks at the time of the decision.
• Ten participants projected two or more rate cuts for the remainder of the year, while nine projected fewer, and some projected no further cuts.
• The SEP should be viewed through the lens of probability and different possible outcomes, rather than certainty.

The committee stresses its flexibility in setting policy, with decisions driven by current economic conditions rather than a predetermined plan, and the SEP reflects a range of views on future policy.

So rather than looking at this as certainty I I would encourage people as always to look at the SCP as through through the lens of probability and and so there there are different possible outcomes and likelihoods rather than this one is certain and this one isn't happening.

Two-Sided Risks and Policymaker Challenges [06:10]

• Ordinarily, when the labor market is weak and inflation is low, caution about inflation is paramount; when the labor market is strong, that's when inflation concerns rise.
• The current situation presents two-sided risks, meaning there is no risk-free path.
• This creates a difficult situation for policymakers, leading to a range of views.
• The divergence in views stems not just from different economic forecasts but also from how to weigh the tension between the dual goals of price stability and maximum employment.
• The wide dispersion of views is understandable and natural in this highly unusual situation.

The current economic climate poses complex challenges with competing risks, leading to a diversity of opinions among policymakers regarding the appropriate balance between inflation control and labor market support.

So we have a situation where we have two-sided risk and that means there's no risk-free path and so it's quite a diff difficult uh situation for policy makers and I it's it's not at all surprising to me that you have a range of views.

Policy Tools and Market Expectations [07:15]

• The labor market is softening, and further softening is not desired.
• The committee uses its tools to manage the economy, starting with a 25 basis point rate cut.
• The market is also pricing in a rate path, but the speaker is not endorsing these market expectations.
• Policy decisions are not solely based on one action but on a broader strategy.

The committee is employing its available tools to address economic conditions, including a rate cut, while acknowledging that market expectations are not being officially sanctioned.

So we use our tools and you know we it starts with a 25 basis point uh rate cut but we you know the market's also pricing in a rate path. I'm not blessing what the market's doing at all.