10 things Jerome Powell said about the US economic outlook

WHAT HAS CHANGED IN THE US MONETARY POLICY STORY?

When the Fed announced the unemployment data for July at 4.3%, it had set off alarm bells. There were concerns that the US may be actually staring at a hard landing of the economy. For the last 2 years, since the rate cuts had started, there had been persistent fears that too much of monetary tightness would eventually lead to a slowdown in growth. Not only did the July unemployment touch 4.3%, but even the US GDP growth for Q1-2024 had fallen to a low of 1.3%. That led to the US cutting rates by a surprising 50 bps in the September policy and following it up with another 25 bps rate cut in the November policy. The Fed actually surprised the street by being more dovish than it was expected to be. However, there has been a subtle shift in the recent weeks.

For starters, the unemployment figure, which had soared to 4.3%, has since settled at a more moderate 4.1% with non-farm payroll additions also being robust. In addition, the second quarter final estimate came in much better at 3.0% and the first advance estimate for the Q3-2024 GDP had come in at 2.8%. Now, it looks like Q1 was more of an exception or aberration than the rule. The big question is whether the Fed will continue its aggressive rate cuts when it knows that the hard landing is not exactly a concern now? That issue was addressed in elaborate detail by the Fed Chair Jerome Powell. Addressing the World Affairs Council of the Federal Reserve Bank of Dallas; Powell outlined how the Fed reads the data and how the Fed may still prefer to front-end rate cuts in 2024, although 2025 may be a different story altogether. Here is a gist of what Powell said on economic outlook.

10 THINGS THAT POWELL SAID IN HIS SPEECH

In his speech at the World Affairs Council of the Federal Reserve bank of Dallas, Powell dwelt at length on macro data, concerns of hard landing, inflation narrative, and outlook for future monetary policy. Here are some key takeaways.

• Powell underlined the need to acknowledge that the US economy had successfully weathered the global pandemic and come out stronger. More Importantly, the US economy had made meaningful progress in achieving the dual-mandate goals of maximum employment and stable prices. The good thing is that even as inflation had been tamed over the last 2 years, the labour market remains in solid condition.
• Powell added that the recent signals from the US economy had not only been robust, but also among the best signals emanating from any major economy in the world. GDP growth for 2024 had averaged 3.0% and it was already averaging 2.5% in 2025, with the strong possibility that it may end up higher. Consumer spending had been robust on the back of a surge in disposable income and stable household balance sheets.
• The positive trends were not visible only on the consumer and household front. Even the business investments in equipment and intangibles had sharply accelerated over the last one year. The PMI also showed greater confidence in purchase managers to maintain larger inventory of finished goods and raw materials. On the downside, it must be mentioned that the activity in the housing sector continued to remain weak.
• With the pandemic flaws being addressed by economies across the globe, there had been evident improvements in the supply chains too. The labour force had expanded rapidly; both in terms of availability and skill sets, which had also resulted in a sharp improvement in US productivity. Productivity had grown more in the US in the 4 years post the pandemic, rather than in the 20 years before that. Productivity was the key.
• Labour markets in the US had been overheated with demand well in excess of supply. The policy actions in the last couple of years had eventually brought about better balance in the labour market in the US. Currently, the number of job openings are only slightly above the number of unemployed Americans seeking work. Wages were still increasing, but at a slower pace and even hiring had slowed, albeit not frozen.
• Let us turn to inflation. The improved balance between supply and demand of labour and inputs led to sharp cooling down of inflation. The PCE inflation is now just a stone’s throw from the 2% target. There are concerns like a relapse of core inflation, but that could be more due to the rapid unwinding of the supply chain constraints. That may be just about balancing out.
• What is relevant is that even core inflation would have been much lower if housing was excluded. However, the fall in core inflation may be done for now and, from hereon, it would be more in a range. The encouraging reality is that inflation is running much closer to the preferred 2% longer-run goal. However, getting to the 2% mark from here should be more of a statistical formality rather than being a policy challenge.
• In terms of monetary policy, the Fed cut rates by 50 bps in September and an additional 25 bps in November. There is one more policy statement to go in late December. As per the CME Fedwatch probabilities, the Fed may cut rates by another 25 bps in December, taking the total rate cut by the end of 2024 to 100 basis points. That is in line with what the Fed has also been talking about. However, the fact that the Fed has reduced the rate cut quantum from 50 bps to 25 bps is indicative of some sobering in dovishness.
• In his address to the World Affairs Council, Jerome Powell also expressed confidence that the US economy would be able to cut inflation to 2% gradually without any price surprises and without any growth surprises too. In short, strength in the economy and the labour market can be maintained.
• According to Powell, the risks to achieving employment and inflation goals were roughly in balance, as were the risks to both sides. Reducing the policy restraint too quickly would have possibly hindered progress on inflation. On the other hand, reducing policy restraint too slowly could would have unnecessarily weakened economic activity and employment. The data driven had maintained a delicate balance.

Clearly, the Fed may be justified in patting itself in the back for a job well done. There is clarity on 2024 monetary policy stance, but not so much about monetary policy in 2025.

POWELL EXPECTS NEUTRAL POLICY SETTING IN 2025

As Jerome Powell himself admitted in his speech; once the front-loading of rate cuts of 100 bps was done in 2024, it was very likely that the Fed would move towards a more neutral stance to its policy. Having said that, Powell or the FOMC has not committed to any pre-set path for rates; other than saying that it would be driven by data and data alone. In assessing data points, the Fed would stick to its twin objectives of price stability and full employment (defined as 3.5% unemployment). Any other objective would be subservient to these two objectives of monetary policy.

Powell acknowledges that the triggers for US monetary policy will not only come from within but also from outside. Fed cannot be immune to what other major central banks in the world are doing. Also, energy continues to be a key driver of inflation in the US and across the world and that has been an X-factor. In addition, the crisis in West Asia could only worsen the supply chain constraints and that could impose an additional cost in terms of core inflation. But, apart from these factors, there are political challenges too.

Trump and Powell have not been on the best of terms and Trump has not been a great supporter of using rates to drive growth. One thing is certain; we will live in interesting times in the next few months.