Advertisement
Federal Reserve Chair Jerome Powell announced a significant policy adjustment during a press conference today, as the Federal Open Market Committee (FOMC) decided to lower the federal funds rate by half a percentage point. The target range now stands at 4.75% to 5%, signaling the Fed’s growing confidence in the resilience of the U.S. economy amid improving inflation trends.
Cooling Labor Market and Easing Inflation Powell highlighted the significant progress the economy has made toward the Fed’s dual mandate goals of maximum employment and price stability. He noted that inflation, which peaked at 7%, has now eased to 2.2% as of August 2024. The labor market, although still strong, has cooled from its overheated state, with job gains averaging 116,000 per month over the past quarter and the unemployment rate rising slightly to 4.2%.
“Our primary focus has been bringing down inflation,” Powell said, emphasizing that inflationary pressures have subsided, particularly as the Fed’s restrictive monetary policy helped balance supply and demand. “Inflation is now much closer to our objective,” he added, affirming that inflation is on track to sustainably return to the Fed’s 2% goal.
Economic Outlook and Fed’s Projections Powell provided an overview of recent economic data, reporting that the U.S. economy continues to grow at a steady pace, with a GDP expansion of 2.2% in the first half of the year. Consumer spending remains resilient, and business investment has rebounded after a sluggish 2023. However, the housing sector experienced a decline in the second quarter after strong growth earlier in the year.
Despite a cooling labor market, the Fed’s Summary of Economic Projections (SEP) suggests stable growth ahead. Committee members forecast GDP growth of 2% over the next few years, with inflation expected to remain near target. The median projection for total PCE inflation stands at 2.3% for this year, decreasing to 2% by 2026.
Policy Recalibration The Fed’s decision to lower the interest rate reflects its belief that the economy can sustain labor market strength while inflation continues to move toward target. Powell emphasized that the Fed remains flexible, stating, “We are not on any preset course. We will continue to make decisions meeting by meeting.”
However, Powell also stressed the importance of a balanced approach, acknowledging that reducing policy restraint too quickly could disrupt inflation progress, while moving too slowly could weaken economic activity and employment. The FOMC is prepared to adjust its policy stance based on evolving economic conditions.
Looking Ahead Looking forward, FOMC participants see further rate reductions on the horizon. The median forecast for the federal funds rate is 4.4% by the end of 2024, dropping to 3.4% by 2025, reflecting expectations for lower inflation and higher unemployment.
Powell concluded his remarks by reaffirming the Fed’s commitment to its dual mandate. “Our success in delivering on these goals matters to all Americans,” he said. “We at the Fed will do everything we can to achieve our maximum employment and price stability goals.”
The press conference underscored the Fed’s cautious optimism about the state of the U.S. economy, indicating that the central bank believes it has turned a corner in its fight against inflation, even as it remains vigilant about risks to both employment and price stability.