Powell "manage expectations": The Fed is not in a hurry and should not think that a 50 basis point rate cut is a new rhythm.

On Wednesday, September 18th, after the Federal Reserve cut interest rates by a significant 50 basis points, exceeding traditional expectations, Federal Reserve Chairman Powell held a highly anticipated press conference. Due to his statement that the Fed was not in a rush to cut rates and warning against viewing the significant rate cut as a future regular occurrence, the hawkish tone in his remarks caused the three major US stock indexes to turn from gains to losses. US bond yields also erased their post-Fed decision decline and started to rise again, while gold spiked before falling back. How to understand the significant rate cut? It's not a new regular pace for the future, the Fed isn't in a hurry to cut rates, and it doesn't mean that the risk of recession is high. One of the most frequently asked questions to Powell during the press conference was about why the Fed made a significant rate cut and whether it was an acknowledgment that they should have cut rates back in July but fell behind the curve, emphasizing the high risks of a US economic downturn. Powell admitted, "It's possible that we could have cut rates back in July, but we didn't actually do it." However, he denied that the Fed had waited too long to cut rates and didn't believe this action was lagging behind the yield curve. This rate cut is actually a reflection of the Fed's commitment to not falling behind the economic situation. His reasoning was that, in light of the outlook, despite other major central banks around the world cutting rates earlier, the Fed was "very patient, waiting the whole time" with monetary policy, and this patience paid off, making the Fed believe that inflation would continue to fall back to 2%: "This supports the forceful action we're taking today. I don't think anyone should take this as, 'Oh, this is the new speed.'" In other words, Powell's point was that investors shouldn't assume that a 50 basis point rate cut is the new normal pace for the future, and the Fed won't continue cutting rates at this speed, cooling down some overly enthusiastic and aggressive market expectations. Some analysts also note that Powell referred to the rate cut in his remarks as a "recalibration" of Fed policy, which means there is no commitment to taking similar aggressive actions at every future meeting. Additionally, Powell explicitly stated that the Fed's Summary of Economic Projections (SEP) doesn't indicate any urgency for rate cuts, "central bank forecasts do not signal urgency action," and that the rate cut process will evolve over time, with the Fed making decisions at each meeting: "Data will drive monetary policy choices, and rate cuts will accelerate, decelerate, or pause as needed." Powell stated that the Fed's current goal is to maintain a cooling inflation rate while ensuring that the unemployment rate doesn't rise, and investors should view the significant 50 basis point rate cut as a sign of the Fed's "strong commitment" to achieving these goals: "We are trying to achieve a situation where we restore price stability but don't bring about the kind of uptick in unemployment that is sometimes associated with disinflation." When discussing the economy, Powell repeatedly emphasized that the US economic situation is fundamentally sound, with no signs of worsening risk of economic downturn: "You see economic growth holding steady, inflation coming down, and the labor market still at a very stable level, so I really haven't seen (an increase in the possibility of economic decline) in this case." Prior to Powell's press conference, as the Fed's decision to initiate the current cycle with a significant rate cut led traders to increase their bets on the magnitude of accommodation, this had pushed US bond yields and the US dollar lower in the short term. Traders were betting that the Fed could cut rates by a total of around 123 basis points by the end of 2024, higher than the roughly 112 basis points before the decision was announced. Powell assesses the US economy: Downside risks to employment intensify, upside inflation risks recede, the fight against inflation has not yet been won. Powell stated that the US economy overall is strong, and the labor market is stable. The Fed hopes to maintain this state and will uphold its commitment to maintaining economic strength, as "when the labor market performs strongly, that's when you're supporting employment." He also acknowledged that the current US job market has cooled significantly from its previous overheated state and continues to cool, with the unemployment rate rising while still low. Inflation has eased significantly but remains above the target. "The downside risks to employment have intensified, and the upside risks to inflation have receded." He commended the progress in cooling inflation, saying that long-term inflation expectations seem well anchored, and he expects the August PCE Personal Consumption Expenditures Price Index to further decrease from 2.5% to 2.2%, although this data won't be released until the end of September: "The Fed's patient approach over the past year has paid off. Inflation is now closer to our target, and our confidence in inflation steadily moving towards 2% has increased." During the Q&A session, he emphasized that the inflation issue is not entirely resolved, but the Fed is encouraged by the progress made, as "inflation pressures have noticeably diminished." Housing inflation is one of the dragging factors, and the Fed cannot solve the real problem of inadequate housing supply. When evaluating the labor market, Powell mentioned that while labor market conditions are close to full employment status, the slowdown in job growth over the past few months is "worth noting," and the Fed is paying attention to the signs. The Quarterly Census of Employment and Wages (QCEW) report suggests that job numbers may be revised downward. The Fed's policy actions have a lagged effect on economic conditions. However, he also stated that there hasn't been an increase in unemployment claims or layoff numbers, nor has he heard of such things from various companies. There is no need to overly relax the labor market to suppress inflation. Many indicators show that the labor market remains strong, with the unemployment rate at the low end of the 4%-5% range, indicating a good employment situation. Immigration issues have also raised the US unemployment rate: "We have two more (nonfarm) employment reports to watch before the next FOMC monetary policy meeting. If the labor market unexpectedly slows down, (the Fed) can react. We won't wait for this situation (unexpected slowdown in the labor market) because the time to support the labor market is when it is still strong." Overall, Powell believes that "our recalibration of the policy stance will help maintain a strong economy and labor market and continue to drive inflation further down as we transition to a more neutral stance." He also said that the Fed will not return to the era of ultra-low interest rates, that neutral interest rates may be raised, and the central bankIndependence helps to curb inflation.Powell said that the Federal Reserve is not considering stopping the pace of slowing the balance sheet, and today's decision to cut rates significantly had one dissenting vote, but also "after repeated discussions, it has received wide support from Fed officials," and "there are various opinions, and in fact, there is also a lot of consensus." He believes that the interest rate expectations for 2024's "dot plot" show that there has been a significant change in the stance of Fed officials since June, and there is still a wide range of uncertainty in the assessment of the neutral rate, but "we will not go back to an era of super low interest rates": "Intuitively, most people, or many people, will acknowledge that we may not return to the era where tens of trillions of dollars of sovereign bonds trade at negative interest rates, or where long-term bonds trade at negative interest rates. The future neutral rate may be much higher than it was at that time." With the November U.S. presidential election looming, Republican candidate Trump had previously claimed that he should have a say in Fed monetary decisions, to which Powell repeatedly emphasized the importance of the central bank's independence, stating that it could better support the economy and curb inflation. Some analysts point out that the next Fed interest rate decision will come after the election day, and the current Fed rate cut action's impact on the election outcome is unknown for now, but the rate cut has sparked a common response from both parties in the U.S. and will continue to be a topic of discussion in the coming period. Earlier, Democratic Senator Warren said that the Fed's significant rate cut action means that Fed Chairman Powell has waited too long on easing issues, and the Fed needs to continue cutting rates. In addition, Powell also mentioned today that it is difficult to judge how much mortgage rates will continue to decrease, which will depend on economic conditions. The housing supply issue needs to be addressed jointly by the market and the government. The Fed's idea is that all U.S. financial regulatory agencies will come together to propose relevant proposals for feedback and aim to reach a consensus in the first half of next year. The changes to the banking capital regime are the result of negotiations between all parties, and he supports the existing reform plan, trying to finalize it by 2025. The Fed will hold its next monetary policy meeting on November 6-7, and December 17-18 is the last meeting of the year. The "dot plot" reflecting Fed officials' interest rate views shows that 19 FOMC members (including voting members and non-voting members) expect the federal funds target rate to reach 4.4% by the end of the year, equivalent to the target range of 4.25% to 4.5%, meaning there is still 50 basis points of rate cut space. The dot plot also shows that by 2025, the Fed expects rates to drop to 3.4%, which means a further 100 basis point rate cut next year. By 2026, it is expected that rates will drop to 2.9%, equivalent to a further 50 basis points rate cut that year.