Powell: "Close to or has reached" the point of slowing down or pausing interest rate cuts, future rate cuts will require new progress on inflation (full text attached)

The Federal Reserve announced a 25 basis point rate cut on Wednesday, as expected by the market, but Fed officials significantly raised the median target range for future policy rates and also raised inflation expectations for next year and the year after. It is anticipated that there will only be two rate cuts next year. Powell stated that the decision to cut rates at this meeting was "relatively difficult," and that the risks the Fed faces in achieving its dual goals of controlling inflation and promoting employment are roughly balanced, with significant progress made in controlling inflation. Although rates have been cut by 100 basis points, they are still "significantly" suppressing economic activity, and the Fed is "on track to continue cutting rates." However, before further cuts, officials need to see more progress on inflation. Additionally, Powell mentioned that the new U.S. government's policies have not yet been officially introduced, but the Fed has done considerable preparatory work, allowing for a more careful and thoughtful assessment when specific policies are eventually seen, and to formulate appropriate policy responses. In his opening remarks, Powell stated that the U.S. economy appears to be performing strongly overall and has made significant progress toward the Fed's goals over the past two years. The labor market has cooled from its previously overheated state but remains robust. Inflation levels are closer to the Fed's long-term target of 2%. He stated that to better fulfill the Fed's dual mandate of supporting employment and controlling inflation, and to maintain economic stability, the Federal Open Market Committee decided to take further action by lowering the policy rate by 25 basis points to reduce the degree of policy restriction. Additionally, the Fed decided to continue reducing its securities holdings. Powell noted that recent indicators suggest that economic activity continues to expand at a steady pace. The annualized GDP growth rate for the U.S. in the third quarter was 2.8%, roughly the same as the growth rate in the second quarter. Consumer spending growth remains strong, and investment in equipment and tangible assets has increased. However, activity in the housing sector has shown weakness. Overall, improvements in supply conditions have supported the strong performance of the U.S. economy over the past year. In the Fed's Summary of Economic Projections (SEP), committee members generally expect GDP growth to remain robust in the coming years, with a median forecast of about 2%. Regarding the labor market, Powell stated that it remains robust. Over the past three months, the average number of new non-farm jobs added per month was 173,000, lower than the beginning of the year. Although the unemployment rate is higher than last year, the unemployment rate in November was 4.2%, still at a low level. Nominal wage growth has slowed over the past year, and the gap between job openings and the labor force has narrowed. Overall, a range of broad indicators shows that the current tightness in the labor market is lower than in 2019. The labor market is no longer a significant source of inflationary pressure. The median forecast for the unemployment rate at the end of this year in the SEP is 4.2%, and it is expected to be 4.3% in the coming years. As for inflation, Powell stated that inflation has significantly eased over the past two years but is still slightly above the Fed's long-term target of 2%. According to estimates based on the Consumer Price Index (CPI) and other data, the total PCE price rose by 2.5% year-on-year for the 12 months ending in November, while the core PCE price, excluding food and energy, rose by 2.8% Long-term inflation expectations seem to remain solid, as reflected in surveys of households, businesses, and forecasters, as well as financial market indicators. The median forecast for total PCE inflation this year in the SEP is 2.4%, and 2.5% for next year, slightly higher than the forecast in September. Thereafter, the median forecast declines to our 2% target. In summary, Powell believes that the risks of achieving employment and inflation targets are roughly balanced, and he is focused on the risks in the dual objectives of inflation and employment. He stated that the Federal Reserve has been adjusting policy to a more neutral stance to maintain a strong labor market and economy while laying the groundwork for further progress. With today's further rate cut, the Federal Reserve has lowered the policy rate by 100 basis points from its peak, and our policy stance is now clearly less restrictive. Therefore, we can be more cautious when considering further adjustments to the policy rate. We know that reducing policy restrictions too quickly or too much could hinder improvements in inflation. At the same time, reducing policy restrictions too slowly or too little could unnecessarily weaken economic activity and employment. When considering the magnitude and timing of additional adjustments to the federal funds rate target range, the Committee will assess the latest data, changes in the economic outlook, and the balance of risks. We have not set a fixed policy path. He introduced that in the SEP, participants recorded their individual assessments of the appropriate path for the federal funds rate, based on what they believe to be the most likely scenarios for the future. The median forecast shows that the appropriate level for the federal funds rate by the end of next year is 3.9%, and 3.4% by the end of 2026. These median forecasts are slightly higher than the September forecasts, consistent with higher inflation expectations. Powell said that if the economy remains strong and inflation does not continue to move toward the 2% target, the Federal Reserve may slow the pace of policy adjustments. If the labor market unexpectedly weakens or inflation declines faster than expected, the Federal Reserve could also ease policy more quickly. The Federal Reserve is prepared to address the risks and uncertainties faced in achieving its dual objectives. In addition, in terms of technical adjustments, the Federal Reserve has lowered the rate on overnight reverse repurchase agreements (RRP) to the lower bound of the target range, consistent with its typical configuration. Powell stated that these technical adjustments will not affect the stance of monetary policy. During the subsequent Q&A session, Powell stated that the decision to cut rates this month was a difficult choice. He said that although current policy is not as restrictive as before, the current rates still "significantly" suppress economic activity, and the Federal Reserve is "on a path of continuing to cut rates." However, he also mentioned that officials need to see more progress on inflation before taking additional rate cuts. Powell also responded to questions about the potential impact of the Trump administration's tariff policies on the Federal Reserve's decisions. He stated that some policymakers have begun to consider the potential effects of higher tariffs that Trump might implement if elected president. However, he emphasized that the impact of these policy proposals is still uncertain. The Federal Reserve is modeling and assessing Trump's proposals but has not incorporated them into its decision-making, as it is still unclear what specific form these policies will take "We have very little understanding of the actual policy," he said. "Therefore, it is still too early to draw any conclusions." Here is the full text of the Q&A session from Powell's press conference: Q1: Can you talk about why officials still consider rate cuts appropriate in light of the expectation that inflation will remain strong in 2025? Additionally, what is your current expectation for the timing of rate cuts? Is there a possibility of a rate cut in January, or is it more likely that there will be a pause next month? What conditions would trigger further rate cuts? Powell: Let me start by discussing why we decided to cut rates today, and then I'll address the 2025 issue. I want to say that today's decision was a difficult choice, but we ultimately believe it is the right decision because we think it is the best decision to achieve our dual mandate. We see the risks as two-sided: if we act too slowly, we will unnecessarily weaken activity in the labor market; if we act too quickly, we will unnecessarily impact our progress in reducing inflation. We decided to move forward with further rate cuts after weighing these factors. First, while the downside risks facing the economy seem to have diminished, the labor market is looser than before the pandemic and is clearly cooling further. However, so far, this cooling has been gradual and orderly. We believe that inflation can be brought down to 2% without further cooling in the labor market. The current number of new jobs is significantly below the level needed to keep the unemployment rate stable. The job finding rate is very low and declining. Additionally, some indicators (such as labor and business surveys) broadly show that the labor market is cooler than in 2019, although the current cooling is still gradual. We will continue to monitor this. Regarding inflation, we believe the trend is generally in line with expectations. We have made significant progress, with the estimated core inflation rate for the 12 months ending in November at 2.8%, a significant decline from the peak of 5.6%. However, the 12-month inflation rate has recently remained flat, as the impact of last year's low base is gradually fading. Housing costs are now steadily declining, although at a slower pace than expected. We have also seen higher volatility in non-market services and goods prices recently. Therefore, I want to emphasize that our decision today is consistent with the wording of "magnitude and timing of adjustments" in the post-meeting statement, indicating that we are already or soon will be approaching a point suitable for slowing further adjustments. I believe that the pace of rate cuts next year will mainly reflect this year's higher inflation readings and our adjustments to inflation expectations. You can see in the Summary of Economic Projections (SEP) that we believe the risks and uncertainties surrounding inflation have increased. However, we still believe we are on track to continue cutting rates. I think our rate cuts next year will not be influenced by today's content but will respond to actual data. This is the committee's general view on appropriate actions. Regarding the conditions for further rate cuts, we have lowered the policy rate by 100 basis points and are now significantly close to the neutral rate. At around 4.3%, we believe the policy remains significantly restrictive. As for whether to cut rates further, we will focus on further improvements in inflation and the continued strong performance of the labor market As long as the economy and labor market remain robust, we can be more cautious when considering further interest rate cuts. The economic forecast summary for December shows a median prediction of two rate cuts next year, a decrease from the four rate cuts predicted in September. Q2: The current situation seems similar to the transition period of the Trump administration in 2016, when the FOMC adopted a slightly tightening policy partly based on expectations of changes in fiscal policy stance. Part of it was based on dynamic adjustments to data, and another part was based on expectations of fiscal policy. So how does this situation compare? How much is based on newly released data, and how much considers the potential for inflationary fiscal policy next year? Did the results of the U.S. elections drive higher inflationary risks? Powell: First, we believe the current economic situation is very good, and the policy situation is also very good. Let's remember that the economy grew by 2.5% this year, inflation fell from 5.6% to 2.6%, and overall inflation on a 12-month basis is 2.5%. So, our starting point is actually quite good. But what has driven the slowdown in the path of interest rate cuts? First, stronger growth, right? So far, the economic growth rate for the second half of 2024 is faster than we expected. Growth next year is also expected to be higher than our September forecast. The unemployment rate is lower, and in the Summary of Economic Projections (SEP), you will see that participants believe the downside risks and uncertainties are lower compared to September. This represents stronger economic performance. Secondly, inflation is higher, as we mentioned earlier. Inflation this year has been higher than expected, and the inflation forecast for next year is also higher. I would also point out that we are now closer to the neutral interest rate, which is another reason to be cautious. There is currently uncertainty surrounding inflation, and this uncertainty has actually increased. Specifically, some committee members have begun to incorporate some economic effects of policies into their forecasts in a very preliminary way and pointed this out in meetings. Some members indicated they did not do this, while others did not specify whether they considered policy factors. Therefore, there are various viewpoints within the committee. However, some members do view policy uncertainty as one of the reasons for their increased inflation uncertainty forecasts. Regarding uncertainty, this is quite common-sense logic: When the path is unclear, you slow down. It's similar to driving in foggy weather or walking into a dark room filled with furniture; you would slow down. This may have influenced the judgment of some members. But as I said, there is a wide range of views within the committee. The presidential election is not the only factor driving inflation expectations. This year's inflation forecast is about 0.5 percentage points higher than in September. Inflation data for September and October both exceeded expectations. As I mentioned, the inflation data for November returned to normal, but overall, our inflation forecast as we approach the end of the year has been disrupted. This is clearly an important factor influencing people's thinking. I can tell you that the election may be the single largest factor because inflation data again failed to meet expectations. Although inflation will remain between 2% and 3%, well below previous levels, we do hope to see greater progress In considering further interest rate cuts, we will closely monitor the progress of inflation. The inflation data over the past 12 months has remained flat, partly due to very low inflation estimates for the fourth quarter of 2023. Nevertheless, as we move forward, we hope to see further declines in inflation while maintaining a robust labor market. Q3: In September 2018, the Federal Reserve discussed a policy to ignore the impact of new tariffs as long as they were one-time charges. Can you comment on whether this analysis is still valid and your other views on tariffs? In the recent fluctuations in inflation, consumers have seen prices rise, and businesses have found they can raise prices for a certain period. Does this make it riskier to ignore tariff risks? Powell: I think the alternative scenario analysis in the Teal Book (policy memo) from September 2018 is a good starting point. I would say that while this analysis is six years old, it still raises the right questions that we need to consider. In this analysis, there are two scenario simulations, one that ignores the impact of tariffs and one that does not. Some statements in the "ignore tariffs" section consider situations where it may be appropriate to overlook inflation, as well as some situations where it is not appropriate. In any case, this is not a question we need to face currently. We do not know when we will encounter this issue. What the committee is currently discussing is the policy path and rethinking how tariff-driven inflation may affect the economy and how to think about these issues. We have done quite a bit of preparatory work, which allows us to conduct a more careful and thoughtful assessment when we finally see specific policies and formulate appropriate policy responses. Most importantly, this is also a key point mentioned in the alternative scenarios: there are many factors that influence how tariffs transmit to consumer inflation. How significant will this impact be? How long will it last? We know almost nothing about the actual policies right now, making it difficult to draw any conclusions. We do not know which goods will be subject to tariffs, which countries will be affected, how long the tariffs will last, or their scale. We also do not know if there will be retaliatory tariffs, nor do we know how these factors will transmit to consumer prices. I would not say that the last round of inflation can serve as a reference model. We have just gone through a period of high inflation and have just passed that phase. This is a difference from before. We need to take our time and not rush to conclusions. Before we see actual policies and how they are implemented, we need to analyze step by step very carefully. The stage we are in now is similar to other forecasting institutions, in that we are thinking about these issues but will not attempt to draw clear answers in the short term. Q4: Today's participants have revised the core PCE inflation expectations for 2025 upward to a range of 2.5% to 2.7%, with most committee members believing that inflation risks are tilted to the upside in the coming months. If inflation only drops from 2.8% to 2.5%-2.7%, what would prompt the committee to continue cutting rates in such a scenario? Given the wording and data of this statement, some may speculate that this will be the last rate cut for quite some time; is this a mistaken judgment? Powell: Our forecast is that core inflation will drop to 2.5% next year. This would be a significant progress. The pace of inflation decline has slowed, and I think this reflects our position that we want to see substantial progress. However, bringing inflation down to this level is itself a meaningful progress. Although it has not yet reached the 2% target, it will be better compared to this year. The inflation level this year may be around 2.8% or 2.9%. Therefore, this would be a meaningful improvement. At the same time, we also need to consider the labor market. Although our forecasts indicate that the labor market is in good shape, we also note that it is gradually cooling down. So far, this cooling has been gradual and orderly, but it is also something we need to closely monitor. As for whether this is the last rate cut, this is absolutely not a decision we have made. The wording of "magnitude and timing of adjustments" is meant to clarify that if the economy develops as expected, we are currently at a stage where we can appropriately slow down the pace of rate cuts. "Magnitude of adjustments" refers to how much we can still lower the policy interest rate while ensuring we reach a neutral stance. Clearly, the policy interest rate has already been lowered by 100 basis points, so the room for further adjustments is significantly reduced, which is the issue of "magnitude of adjustments." At the same time, we will continue to observe further progress in inflation and the strong performance of the labor market to decide on further rate cuts. "Timing" indicates that if the economy develops as expected, we are already or close to a level where it is appropriate to slow down the pace of adjustments. So, this is what we are referring to. We are not trying to make decisions about long-term policy, but rather trying to remain rational in our policymaking. I also want to emphasize that the current policy uncertainty is simply because we expect significant policy changes. This is not particularly unusual. I think we need to see what these changes are and observe their impact. Once the policy changes are clear, we will have a clearer judgment. Q5: Even though we have cut rates by 100 basis points this year, we have not seen much change in mortgage, auto loan rates, or credit card rates. You mentioned that current policy remains quite restrictive, but the market seems to be "pushing back" against you. Is there a higher possibility of economic slowdown risk than you expected? You mentioned that one of the conditions for rate cuts is "confidence in the decline of inflation." Are you confident in the decline of inflation? Or is there still uncertainty? Powell: The rates you mentioned are primarily long-term rates, which are indeed influenced to some extent by Federal Reserve policy, but they are also affected by many other factors. As you know, long-term rates have actually risen quite a bit since September, and these rates have a more direct impact on mortgage rates, etc., than short-term rates. We will pay attention to these situations, but we are more focused on the overall financial environment and what is actually happening in the economy. What we are seeing now is that most forecasters have been predicting an economic slowdown for a long time, but this has not happened. We are now entering a new year, and the economic growth rate looks like it may reach around 2.5%. The growth levels in the second and third quarters are basically consistent. The U.S. economy is performing very well, significantly better than other major global economies Moreover, there is no reason to believe that the likelihood of an economic recession is higher than usual. Overall, our economic outlook is quite optimistic. However, we must continue to maintain a restrictive policy to ensure that the inflation rate is reduced to 2%. At the same time, we will also pay attention to the labor market. We need to keep the labor market close to its current state. The unemployment rate is currently very close to the natural unemployment rate. Although job growth is slightly below the level needed to keep the unemployment rate unchanged, it is still close to the target. This is the goal our policy is trying to achieve. "Confidence" is the benchmark we set when raising interest rates. We have made significant progress. Core inflation has fallen significantly to just above 2%, and overall inflation is even lower, currently at 2.5% or below. Therefore, I can say that I am confident in the significant decline in inflation and also confident in the logic behind the decline in inflation. The reason I say this is that some key inflation indicators are developing as expected. First is housing services inflation, which is an area we are very concerned about. Housing services inflation is indeed gradually declining, although it is happening somewhat slower than we expected two years ago, the downward trend is very stable. This is mainly because new leases are gradually balancing out past rent increases, and the rent levels for new tenants are gradually aligning with the market. This process is proceeding as expected. Commodity inflation is another important part, which has now returned to pre-pandemic levels. There have been several months this year where commodity inflation fluctuated due to factors like used cars, but overall, it should stabilize at pre-pandemic levels. The remaining part is non-housing services inflation, especially market-based non-housing services inflation, which is also in good shape. Non-market services inflation is mainly estimated rather than directly measured, so it does not actually reflect the tightness of the economy. For example, financial services inflation is more related to asset prices, which does not directly reflect the tightness of economic activity. Overall, the logic of declining inflation remains solid. Especially in the labor market, all indicators now show that the labor market has cooled compared to 2019, when the inflation rate was below 2%. This indicates that the labor market is not the main source of current inflationary pressures. Of course, in certain regions or specific occupational fields, labor may still be tight, but overall, the labor market has not had a significant impact on inflation. Therefore, the main logic of inflation is that we are gradually digesting the huge economic shocks of 2021 and 2022. For example, the price increases in housing services and insurance are now gradually being reflected. This is real inflation. Therefore, we and most forecasters still believe that we are moving towards the 2% target. This may still take one to two years, but I am confident that we are on the right path, and our policies will do everything possible to ensure that this goal is achieved. Q6: The current unemployment rate is close to the level when the rate was cut by 50 basis points in September. Job growth is concentrated in a few industries. Now the committee seems inclined not to cut rates at the next meeting. Does this mean that the committee's assessment of labor market risks has changed? Is it because concerns about the labor market have diminished? Or is it because we now need to consider potential upside risks more? If the current view is that there is no need to further weaken the labor market, then what can prevent this from happening? Powell: The current unemployment rate is the same as in July, at 4.2%. Although there have been fluctuations during this period, it has now returned to the level of July. Job growth has decreased compared to before, but it remains stable and has not shown a downward trend. The current level of job growth is below what is needed to keep the unemployment rate unchanged, but the gap is not large. If our judgment of the "equilibrium point" is accurate, and job growth continues at the current level, the unemployment rate may decrease by about 0.1 percentage points every two months. However, we cannot be completely certain about the accuracy of this prediction. We do believe that the labor market is gradually cooling from many indicators. We are closely monitoring this trend. The pace of cooling is neither fast nor showing concerning signs. I would like to point out that FOMC participants believe that the risks and uncertainties in the labor market have improved compared to before, due to factors such as the unemployment rate remaining stable. Nevertheless, we will continue to closely monitor changes in the labor market. We do not believe that further weakening of the labor market is necessary to achieve the 2% inflation target, not to say that weakening is completely undesirable. We just think it is unnecessary in the current situation. If inflation fluctuates by 0.1 percentage points every few months, we will have to weigh this phenomenon against the fact that the 12-month inflation rate has been fluctuating sideways in recent months. We have now entered a phase where we believe the risks in both employment and inflation are roughly balanced. Previously, we focused mainly on inflation issues, and now we have reached a stage where we need to weigh both risks simultaneously. This is our current way of thinking. Q7: I noticed that you did not use the term "recalibration" today. I would like to ask, has the recalibration phase ended? How do you define this new phase? Are the criteria for adjusting interest rates different or higher compared to before? To what extent will you or the FOMC ignore some of the higher numbers in recent inflation data? For example, car prices may rise due to hurricanes, and egg prices may rise due to avian flu, etc. How do you view the downward trend in future housing inflation, as mentioned in recent reports? Powell: We have not yet renamed this phase, but perhaps we will do so in the future. However, I can say that we have indeed entered a new phase. As I mentioned, this is mainly because we have lowered the policy interest rate by 100 basis points, and we are now closer to the neutral rate. Nevertheless, we still believe that the current level of interest rates is largely restrictive. I think from now on, we need to be more cautious and observe the progress of inflation. By lowering interest rates by 100 basis points, we have provided significant support for economic activity. This is a good thing, and I support this decision, believing it is the right decision. From now on, we are in a phase where risks are basically balanced, and we need to see progress on the inflation front. This is our current way of thinking. It can be said that this is indeed a new phase We acted quickly before and reached our current level, but from now on, our actions will be slower, which is consistent with the content of the Summary of Economic Projections (SEP). We have been cautious not to exclude certain data just because we dislike it. But we also need to ask ourselves, what about those lower monthly data? For example, the core PCE for November could be a very low month, with many estimates showing it might be in the mid-single digits percentage. Therefore, we are trying to look at more than just two or three months of data. Our stance should not change because of good or bad data over two or three months. We have seen a long string of trends indicating that inflation is gradually declining. As I mentioned, the total inflation rate over 12 months is 2.5%, and the core inflation rate is 2.8%. Compared to before, this is a significant improvement, but we still have work to do. This is our current view. We believe that policy still needs to remain restrictive to complete this work. Q8: The financial markets have performed strongly this year. Is the FOMC satisfied with the current financial conditions, or do you think this could pose a risk to achieving inflation targets? Given the strong performance of certain assets, do you think the U.S. government should establish a Bitcoin reserve? Powell: We will closely monitor financial market conditions, which is part of our job. But we mainly focus on the performance of our target variables and the impact of our policies on the economy. Over the past year, and even in the past few years, we have seen inflation decline significantly. The labor market has also cooled considerably. This indicates that our policies are restrictive. Additionally, we will directly observe those economic areas sensitive to interest rates, such as the housing market. Housing activity is very sluggish, largely due to our policies. Therefore, we believe our policies are working and having the desired impact on our target variables. As you know, many factors can influence changes in financial conditions, and these are not entirely within our control. But we have seen the impact of policy on target variables and areas where we want to see changes, indicating that the policy is working. The Federal Reserve cannot hold Bitcoin. The Federal Reserve Act specifies the types of assets we can hold, and we are not currently seeking to amend this law. Such matters should be discussed by Congress, but we do not intend to seek a legal amendment. Q9: I would like to know if you feel satisfied with 2024? Are you confident that we have avoided the economic recession that was once thought to be inevitable a few years ago? You mentioned that the unemployment rate is still very low. However, the employment rate is declining quite rapidly. The core employment rate recently dropped by 0.5 percentage points. Do you think the downward momentum in the labor market may be stronger than what is reflected by the unemployment rate alone? Powell: I think it is clear that we have avoided a recession. I believe economic growth this year is robust, and indeed it is. We think private demand (PDF) is the best indicator, and it looks like it is growing at about 3% this year. That is a very good number. The U.S. economy is performing exceptionally well. In the international meetings I attended, this has been an important topic, namely how well the U.S. economy is performing. If you look around the world, you will find that many regions are experiencing slow economic growth and are still struggling with inflation Therefore, I am very satisfied with the current economic situation and performance, and I hope to maintain this momentum. I do not believe that the downward momentum in the labor market is stronger. Overall, the labor participation rate remains very high. The current state of the labor market is characterized by a low hiring rate. If you have a job, you are doing well. Layoffs are very rare, and people are not losing their jobs in abnormally high numbers. However, if you are looking for a job, the hiring rate is low. This indicates a decrease in demand. The hiring rate has indeed declined. Therefore, we will pay attention to such signs, which are clearly signals of further slowing in the labor market. What I did not mention earlier is that I believe we can see the labor market gradually slowing down. However, this is not the situation we need to see to achieve our 2% inflation target. This is also part of the reason why we decided to take action today to further lower interest rates. Looking at it from a broader perspective, the unemployment rate remains very low. Moreover, the labor participation rate is high. Wages are at a healthy and increasingly sustainable level. Therefore, the state of the labor market is good, and we hope to maintain this state. Q10: Do you think it is possible to keep the labor market in the strong state you described without further lowering interest rates? In other words, do you still believe the labor market needs support to prevent further cooling? Powell: We cannot have absolute certainty about this. What I would say is that we believe the current policy balances the risks. We believe that the risks are roughly balanced between our dual objectives. We also believe that the state of the labor market is robust. When I say the labor market is slowing or cooling, it is a very gradual process. For example, job creation is still significantly positive. If there is anything special about wages, it is that they are still slightly above the sustainable level when productivity returns to its long-term trend. If we take into account the recent high productivity data, wage levels have actually reached a sustainable level relative to the 2% inflation target. Therefore, I do not want to overemphasize the downside risks of the labor market, as the downside risks have clearly diminished. Nevertheless, the labor market is an important part of our dual objectives, and we will keep a close eye on it. It is worth noting that the labor market is indeed gradually cooling down. This cooling is gradual and orderly. This is our current view of the labor market, which is also why we will keep a close watch on it. Q11: As you pointed out, the Federal Reserve predicts that inflation will be higher next year, and high prices are still a burden for many families. Why do you think inflation is proving more difficult to alleviate than expected? What do you think will be the biggest economic challenge facing the next government? Powell: This question could have a long answer. But simply put, inflation is indeed more stubborn than we expected. I think if we go back two or three years, many people thought that reaching our current situation might require going through a deep recession and high unemployment. But that has not been the case. The path of declining inflation has actually been much better than many predicted. We have successfully kept the unemployment rate basically at its long-term natural level, while core PCE inflation has fallen from 5.6% a year ago to 2.8% This is already a pretty good result. So, why hasn't inflation decreased further? One reason is a technical issue related to the way housing services prices are calculated. This process is slower to reflect market rents and is far below our expectations from two years ago. This is part of the reason. Of course, there are other factors as well. But I think what people are really feeling now is the impact of high prices, rather than high inflation. We are very aware that prices have risen significantly over the past period, and people are indeed feeling this pressure, especially in areas like food, transportation, and home heating. This inflationary surge has brought tremendous pain, and this phenomenon has occurred almost synchronously around the globe, with all developed economies experiencing the same situation. Now, although inflation itself has significantly decreased, people still feel the impact of high prices, which is their real experience. The best thing we can do for them is to stabilize inflation back to target levels and keep it there. This way, the public can achieve real wage growth, meaning their wages and income grow faster than inflation year after year. This will restore people's confidence in the economy. This is our goal, and it is what we are striving to achieve. I am very satisfied with the current state of the economy. I am very optimistic about the economic outlook. We are currently in a very good position, and our policies are also in a very good place. I expect next year to be another good year. Q12: You mentioned that we are now closer to the neutral interest rate. So, what do you and the FOMC believe this neutral interest rate specifically is? I've heard estimates ranging from 2.9% to 4%. The market hopes to have a clearer understanding of the target range in a year or 18 months, as it currently seems very broad. Powell: Let me say a few words first. First, what we write in the Summary of Economic Projections (SEP) is the longer-run neutral rate. This refers to the neutral rate when supply and demand are balanced, the entire economy is in equilibrium, and there are no external shocks affecting it. However, that is not the current situation. Therefore, when we at the Federal Reserve formulate monetary policy, this is not what we focus on. So, we cannot simply equate the numbers we write in long-term projections with the level that current policy should achieve. At any given point in time, the economy is affected by various shocks. Therefore, when we analyze in real-time, we observe the actual effects of policy, especially how it drives the economy toward the goals of maximum employment and price stability. It is important to distinguish that some factors have a lasting but not permanent impact on the economy, while permanent impacts will be reflected in the long-term neutral rate. Those factors that are lasting but will fade over time may influence the appropriate neutral policy stance in the short term. Therefore, we have been assessing these impacts and trying to find the right direction. To be honest, we do not know exactly where the neutral rate is. But as I like to say, we judge it by its "effects." What we can say for sure is that we are currently closer to this neutral point—about 100 basis points closer than before There are many estimates regarding the specific value of the neutral interest rate, and we know we are closer to our target. I believe we are currently in a good position, but from now on, this enters a new phase, and we will be more cautious when further lowering interest rates. There are countless models for estimating the neutral interest rate, including empirical models, theoretical models, and so on. These models provide a variety of answers, with no real certainty. In fact, it is good to clearly understand that we do not exactly know its precise location, as this prevents us from blindly believing that any model or estimate is completely correct. We need to remain open to the constantly changing empirical data and adjust based on its impact on the economic outlook. The complexity of this task lies in the fact that the Federal Reserve's policies typically have long and uncertain lags. Nevertheless, this is our responsibility. Therefore, I believe it is appropriate to proceed cautiously when we are already about 100 basis points closer than the neutral interest rate. At the same time, the current economic situation seems good, and these interest rate cuts will certainly support economic activity and the labor market. Meanwhile, since our policies still have significant restrictions, we are still able to make progress in curbing inflation. Q13: Are you saying that even if overall inflation rises, the progress in core PCE is still seen as a sign of inflation improvement? Since forecasts indicate that such a situation will occur, what is causing this phenomenon? Why do you believe core PCE will decline while overall inflation may rise? Will geopolitical risks have an impact on this? Powell: I think you know that our overall goal is overall inflation (headline inflation), because that is what people actually feel. What people feel is inflation, including food and energy costs, rather than core inflation. Therefore, the overall target is overall inflation. But as we know, overall inflation includes price fluctuations in energy and food, which may fluctuate for reasons unrelated to the level of economic stress, and thus are not good predictors of future inflation. In fact, core inflation is a better predictor of future inflation than overall inflation. Therefore, we focus on core inflation because it better reflects the potential future inflation situation and provides a better indicator of inflationary pressures. This is indeed somewhat complex, but ultimately, our goal is overall inflation, not core inflation. Overall inflation may be influenced by energy and food prices, so overall inflation forecasts may be related to energy price forecasts. Core inflation—if you observe the trend of one-year core inflation—will be more driven by factors such as the level of economic stress. So the two may develop in different directions. As you know, for most of this year, overall inflation has been lower than core inflation because energy prices have been declining, which is good for the public. However, energy prices may decline or rise, and this does not tell us anything about the level of economic stress. We are closely monitoring geopolitical risks. But so far, these risks have not had a truly significant impact on the U.S. economy. One major factor we will be watching is oil prices, as we are discussing the situations in the Middle East and Ukraine Oil prices are an important statistical indicator for measuring the potential issues arising from global turmoil, but due to global supply conditions, oil prices have been declining. Therefore, the United States is currently not feeling the impact of geopolitical turmoil. However, of course, we are in a period of heightened geopolitical risk, which remains a risk worth noting. Q14: Wage growth has now exceeded inflation, which has not been the case for some time. Of course, this is also part of the reason why Americans have not felt much economic relief from prices. But with inflation rising again, how concerned are you that progress in narrowing this gap may disappear? You previously predicted that the inflation target of 2% could be reached by 2026, but it has now been postponed to 2027. Are you confident that this target will not be delayed further? Powell: Yes, so regarding inflation, we will not overreact to a few months of high readings or a few months of low readings. Previously, we had four months of good data, and the data for September and October was higher, but the data for November was much lower. Therefore, I do not believe the public will see this as a signal of unexpected upward risk in inflation. I believe inflation has significantly decreased. What the public feels is that price levels have risen due to past inflation, which is true. Their feeling is correct. And it will take time to achieve a recovery in real wages. This requires a process that unfolds over several years, where your real income continues to grow, in other words, your wage growth significantly outpaces inflation. This is exactly the economic model we have now. We hope to maintain this model. This process may take several years, but that is the current situation. I do not believe that a few months of high inflation data really indicates the kind of risk you mentioned. When we talk about economic forecasts, whether it's a forecast for three years from now or two years from now, it involves a high degree of uncertainty, very high uncertainty. In that case, we cannot confidently predict how the economy will develop three years from now. So what we are doing is focusing on what is happening now and making predictions based on similar situations. We maintain a strong labor market, housing service inflation gradually declining, commodity inflation stabilizing, and non-market services returning to previous levels. All these things should gradually be realized over time. The combination of these factors is predictable, and there is ample reason to believe they will be realized. But the specific timing is very uncertain. Although we have made some progress in combating inflation, the progress has been slower than we expected, which is indeed a bit frustrating. However, we are still on the right track. I think if someone had told you two years ago that we would be at a 4.2% unemployment rate and a 2.8% inflation level, most people would have said, "I can accept that." This is a pretty good mid-term state. Although the task is not yet complete, we are satisfied with the stage we are currently in and the direction we are heading. Q15: You have mentioned several times that the inflation level has been fluctuating sideways, seemingly stabilizing around 2.5%. Do you think the Federal Reserve must accept this and acknowledge that it cannot achieve the 2% target? Can you rule out the possibility of interest rate hikes next year? Powell: No. We will not be satisfied with this. I believe we certainly have the full intention and expectation to sustainably restore inflation to the 2% target. I am confident about this. It has taken longer, but we are indeed making progress. We have made significant progress and will continue to work until inflation returns to 2%. This is our commitment to the public, and we are also firmly dedicated to achieving this goal. In this area, you cannot completely rule out or affirm anything. But raising interest rates next year does not seem to be a likely outcome. I believe the current interest rate level of 4.3% is a meaningful tightening policy. It is a well-calibrated interest rate level that allows us to continue making progress on inflation while maintaining a strong labor market