Good morning and Happy Holidays.
Federal Reserve Chair Jerome Powell yesterday delivered a speech that offered important insights into the current state of monetary policy, the economy, and the Fed's future plans. The central focus of the speech was the Fed's decision to cut interest rates by 25 basis points, bringing them down to the range of 4.25%–4.50%. This marks a total reduction of 1% from the recent peak, a clear signal that the Fed is scaling back its previously restrictive stance. However, Powell emphasized caution, comparing the current economic environment to driving in foggy conditions—a scenario that requires slower, more careful adjustments. Notably, the decision to cut rates wasn’t unanimous, with one dissenting voice reflecting a more divided Fed.
Powell acknowledged that the Fed has entered a new phase in its policy cycle. While rates are closer to a "neutral" level—where they neither stimulate nor slow the economy—the Fed still considers its stance restrictive. He admitted that identifying this elusive "neutral rate" is a challenge, given the wide range of estimates generated by various models. Essentially, the Fed is navigating in uncharted waters and proceeding with care.
Addressing the question of why the Fed is cutting rates despite inflation only modestly declining—from 2.8% in 2024 to a projected 2.4% in 2025—Powell explained that progress is being made and the cooling labor market also warrants attention. He pushed back against speculation that this might be the last rate cut for a while, emphasizing the Fed’s ongoing commitment to its dual mandate of inflation control and employment stability.
On the broader economy, Powell struck an optimistic tone. He highlighted the resilience of the U.S. economy compared to global peers, noting stronger-than-expected growth and continued consumer spending, despite weaknesses in the housing sector. He expressed confidence that 2025 will be a strong year for the economy, with downside risks becoming less pronounced.
While inflation remains somewhat elevated, Powell reaffirmed the Fed’s belief that it is on track to meet its 2% target over the next couple of years. The latest Summary of Economic Projections (SEP) reflects slightly higher inflation expectations, accompanied by higher anticipated Federal Funds Rates—3.9% in 2025 and 3.4% in 2026.
Labor market conditions were another key focus of the speech. While unemployment has risen slightly, Powell noted that the cooling process has been gradual, and the labor market remains relatively strong. Hiring has slowed, making it harder for people to find jobs, but the labor market is no longer creating the inflationary pressures seen immediately before the pandemic.
Powell was also asked about the potential inflationary impact of Trump-era tariffs and how the Fed might factor new fiscal policies into its plans. He was cautious in his response, suggesting that it might be appropriate to overlook temporary inflation spikes caused by tariffs but emphasizing the uncertainties surrounding future policy decisions.
Finally, Powell addressed a question about whether the Fed might consider holding Bitcoin as a strategic reserve. He dismissed the idea outright, pointing out that the Fed is not legally allowed to hold Bitcoin and has no intention of pursuing changes to that law.
Overall, Powell's remarks painted a picture of a cautious but optimistic Fed, navigating a complex economic landscape with care. The speech underscored the Fed’s commitment to balancing inflation control with economic growth while adapting to evolving conditions and uncertainties.
Alexandros Tavlaridis
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