Powell: Another rate cut in December is not a foregone conclusion, there are significant divisions within the committee, the job market continues to cool, and there is short-term upward pressure on inflation (full text attached)

Some FOMC members believe it is time to pause. Powell said that higher tariffs are driving up prices in certain categories of goods, leading to an increase in overall inflation.

Written by: Zhao Yuhe

Source: Wallstreetcn

Key points from Powell's October press conference:

1. Policy rate outlook: Another rate cut by the Federal Reserve in December is not a foregone conclusion. There was significant disagreement today. Some FOMC members believe it is time to pause.

2. Balance sheet: No decision was made today regarding the composition of the balance sheet. Adjusting the balance sheet is a long-term process and will be gradual. The aim is to move toward holding assets with shorter durations.

3. Labor market: Due to restrictive policy, the labor market is still cooling. There is no evidence that labor market weakness has intensified, and job vacancies indicate the market has remained stable over the past four weeks. Labor supply has dropped dramatically, impacting the labor market. The Fed closely monitors layoff decisions.

4. Inflation: September CPI was milder than expected. Service inflation excluding the housing market has shown a unilateral trend. Core PCE excluding tariffs may be at 2.3% or 2.4%. So far, non-tariff inflation has not deviated far from the 2% inflation target. The baseline forecast is that the US will see some additional tariff-driven inflation.

5. Government shutdown: Private sector data disclosures cannot replace government statistics (such as from the Bureau of Labor Statistics, BLS). It is conceivable that a Trump administration shutdown would affect the December FOMC monetary policy meeting.

On Wednesday Eastern Time, the Federal Reserve announced at the FOMC that it would lower the target range for the federal funds rate from 4.00%-4.25% to 3.75%-4.00%, and decided to end balance sheet reduction starting December 1. This marks the first consecutive rate cut at two FOMC meetings in a year. Fed Chair Powell stated at the post-meeting press conference that another rate cut in December is not a foregone conclusion.

In his opening remarks at the press conference, Powell said that despite delays in the release of some important federal government data due to the US government shutdown, the public and private sector data currently available to the Fed indicate that there has been little change in the outlook for employment and inflation since the September meeting.

The labor market appears to be gradually cooling, and inflation remains slightly elevated.

Powell said that current indicators show economic activity is expanding at a moderate pace. GDP grew by 1.6% in the first half of this year, lower than last year's 2.4%.

Data released before the government shutdown suggest that economic activity may be slightly better than expected, mainly reflecting stronger consumer spending.

Business investment in equipment and intangible assets continues to grow, while housing market activity remains weak. A prolonged federal government shutdown will drag on economic activity, but these effects should reverse after the shutdown ends.

Regarding the labor market, Powell said that as of August, the unemployment rate remained relatively low. Employment growth has slowed significantly since the beginning of the year, much of which may be due to a decline in labor force growth, including reduced immigration and falling labor force participation, though labor demand has also clearly weakened.

Although official employment data for September was delayed, existing evidence shows that layoffs and hiring remain at low levels; households' perception of job opportunities and businesses' perception of hiring difficulties are both declining.

In this lackluster and somewhat weak labor market, downside risks to employment have increased in recent months.

Tariffs are driving up some goods prices; a December rate cut is not a foregone conclusion

On inflation, Powell said that inflation has fallen significantly from its mid-2022 highs, but remains slightly above the Fed's long-term 2% target. Based on CPI estimates, over the 12 months ending in September, overall PCE prices rose 2.8%; excluding food and energy, core PCE prices also rose 2.8%.

These readings are higher than earlier this year, mainly due to a rebound in goods inflation. In contrast, service sector inflation appears to continue declining. Influenced by tariff news, short-term inflation expectations have generally risen this year, as reflected in both market and survey indicators.

However, after one to two years, most long-term inflation expectation indicators remain consistent with our 2% inflation target.

Powell said that higher tariffs are driving up prices in certain categories of goods, leading to an increase in overall inflation.

A reasonable baseline judgment is that these inflationary effects will be relatively short-lived—a one-time upward shift in price levels. But it is also possible that the inflationary impact will be more persistent, which is a risk we need to assess and manage.

He stated that in the short term, inflation risks are tilted to the upside, while employment risks are tilted to the downside, making this a challenging situation. As downside risks to employment have increased in recent months, the risk balance has shifted.

With today's rate decision, we are in a favorable position to respond promptly to potential economic changes. We will continue to determine the appropriate stance of monetary policy based on the latest data, changes in the economic outlook, and risk balance. We still face two-way risks.

Powell revealed that during this meeting, there were clear differences among committee members on what action to take in December.

A rate cut at the December meeting is not a foregone conclusion—far from it. There is no preset policy path.

Ending balance sheet reduction from December 1

In addition, the FOMC decided to end balance sheet reduction starting December 1. Powell said the Fed's long-standing plan has been to stop balance sheet reduction when reserve levels are slightly above what the Fed considers to meet the "ample reserves" standard. There are now clear signs that the Fed has reached this standard.

Powell said that in the money market, repo rates have risen relative to the Fed's administered rates, with more pronounced pressures on specific dates, and usage of the Standing Repo Facility (SRF) has increased.

Additionally, the effective federal funds rate has also begun to rise relative to the interest rate on excess reserves. These situations are consistent with our previous expectations for what would occur as the balance sheet shrinks, and thus support our decision to stop balance sheet reduction today.

During the past three and a half years of balance sheet reduction, the Fed's securities holdings have decreased by $2.2 trillion. As a share of nominal GDP, the balance sheet has fallen from 35% to about 21%.

He stated that starting in December, the Fed will enter the next phase of normalization, maintaining the balance sheet size at a stable level for a period of time. Meanwhile, as other non-reserve liabilities (such as currency in circulation) continue to grow, reserve balances will continue to decline gradually.

The Fed will continue to allow agency securities (such as MBS) to roll off the balance sheet at maturity and reinvest the proceeds into short-term US Treasuries, further shifting the portfolio toward a structure dominated by Treasuries. This reinvestment strategy will also help bring the weighted average maturity of our portfolio closer to that of the outstanding Treasury market, further advancing the normalization of the balance sheet structure.

The following is a transcript of the Q&A session from Powell's press conference:

Q1: The market currently almost takes your next meeting's rate cut as a given. Are you uneasy about this market pricing? You and some colleagues last month, and again today, described the decision-making framework as "risk management." How do you judge when you have "bought enough insurance"? Do you need to see an improved outlook before stopping? Or will it be like last year, with small adjustments over a longer period, taking it step by step?

Powell: As I just said, whether to cut rates further at the December meeting is not a foregone conclusion. So, I think the market needs to take that into account.

I want to emphasize: there are 19 participants on the committee, all working very hard, and during periods when there is a conflict between our two goals, there will be very strong differences of opinion. As I mentioned, there were clearly different views at today's meeting. The conclusion is: we have not made a decision for December. We will judge based on data, the impact on the outlook, and the risk balance. That's all I can say for now.

My way of thinking is this: for a long time, our risks were clearly skewed toward inflation being too high. But things have changed. Especially after the July meeting, we saw downward revisions to employment growth, and the labor market picture changed, showing that downside risks to employment are greater than we previously thought. This means that policy—which we previously maintained at what I call a "slightly" restrictive level (others might call it "moderately" restrictive)—needs to move toward neutral over time.

If the risks to both goals are roughly equal, with one side calling for rate hikes and the other for rate cuts, then policy should be roughly neutral to balance the two. In this sense, this is risk management. Today's decision logic is similar. As for the future, it will be another situation.

Q2: You just emphasized that there is no conclusion yet on the December discussion and outcome. What were the views in the meeting? For example, was there discussion of the sharp increase in current AI-related investment, and the issue of stock market gains and increased household wealth driven by the AI concept? Regarding balance sheet reduction, how much of the current pressure in funding markets is due to the Treasury's recent large issuance of short-term debt?

Powell: I wouldn't say these factors played a role in all committee members' assessments of the economic outlook, nor would I say it was a main factor in anyone's judgment.

Let me explain it this way: the current situation is that inflation risks are tilted to the upside, while employment risks are tilted to the downside. We only have one tool (interest rates), and we cannot precisely address both risks in opposite directions at the same time. So you can't solve both simultaneously.

In addition, committee members have different forecasts for the outlook; some expect inflation or employment to improve faster or slower; risk preferences also differ, with some more concerned about inflation overshooting and others more worried about insufficient employment. Combining these, you get divergence.

You can sense these differences from the latest Summary of Economic Projections (SCP) and public speeches between meetings. The views are very diverse, and these were reflected in the clear differences at today's meeting. I mentioned this in my remarks as well.

This is also why I emphasize that we have not made a decision for December. I have often said in the past that the Fed does not make decisions in advance, and today I want to add: the market should not take a December rate cut as a given—the reality is quite the opposite.

Regarding balance sheet reduction, we have observed repo rates and federal funds rates rising, which is exactly the signal we expected to see before and after reaching the "ample reserves" standard. We have previously said that when we feel reserve levels are slightly above "ample," we will stop balance sheet reduction. After that, as other non-reserve liabilities grow (such as currency in circulation), reserve balances will continue to decline.

In recent times, money market conditions have gradually tightened. Especially in the past three weeks or so, the degree of tension has increased significantly, so we judged that the conditions for stopping balance sheet reduction have been met.

In addition, the current pace of balance sheet reduction is already very slow, and our balance sheet size has been reduced by about half. Further reduction is not very meaningful, as reserves themselves will continue to decline.

Therefore, the committee supports announcing today that balance sheet reduction will stop from December 1. The December 1 date gives the market some time to adjust.

Q3: One of your main reasons for cutting rates now is concern about downside risks in the labor market. But if these risks ultimately do not materialize, and the labor market remains stable or even improves slightly, will you reassess how low rates need to go? Would you then be more concerned about inflation and "second-round effects" from tariffs? If the government shutdown lasts longer and key economic data are missing, will it be harder to judge the labor market due to lack of data, thus affecting the December policy decision?

Powell: In principle, if the data show the labor market strengthening, or at least stabilizing, that would certainly affect our future policy judgments.

We will continue to get some data, such as initial jobless claims from the states, which still show the labor market holding steady. We will also see job vacancy data, various survey data, and the Beige Book.

At present, there is no sign of rising initial claims or a significant drop in job vacancies, which suggests the labor market may continue to cool very slowly, but not beyond that. This gives us some confidence.

(Despite the government shutdown), we will still get some data on the labor market, inflation, and economic activity, as well as information from the Beige Book. Although the details may not be sufficient, if the economy changes significantly, I think we can still sense it from these data.

As for how this will affect December, it's hard to judge now—there are still six weeks until the meeting. If there is high uncertainty, that itself may be a reason to take more cautious action. But we need to wait and see how things develop.

Q4: Was this decision a "reluctant compromise"? Or was there fierce tug-of-war over the direction?

Powell: The "tug-of-war" I mentioned refers to the outlook for December, not this decision itself. There were two dissenting votes in today's vote: one wanted a 50 basis point cut, one wanted no cut. The decision for a 25 basis point cut was strongly supported.

The "clear divergence" is mainly about the future path: what to do next. Some members noted the recent strength in economic activity, with many forecasting agencies raising growth forecasts for this year and next, some by a significant margin.

At the same time, we see the labor market—not completely stable, but not showing significant deterioration, and possibly continuing to cool very slowly. Different members have different expectations for the economic outlook and different risk preferences. You can sense the divergence within the committee from their recent speeches, which is why I emphasize that no decision has been made for December.

Q5: Now that you have stopped balance sheet reduction, will you have to resume asset purchases next year? Otherwise, the balance sheet as a share of GDP will continue to fall, constituting further tightening?

Powell: Your understanding is correct. From December 1, we will freeze the balance sheet size. As agency mortgage-backed securities (MBS) mature, we will reinvest the proceeds into short-term Treasury bills, increasing the share of Treasuries in the balance sheet and shortening the duration.

With the balance sheet size frozen, non-reserve liabilities (such as currency in circulation) will continue to grow naturally, so reserve balances will continue to decline, and reserves are the part we need to keep at "ample" levels. This decline in reserves will continue for a while, but not for too long.

Eventually, at some point, we will need to allow reserve balances to gradually grow again to match the expansion of the banking system and the economy, so at some stage in the future, reserves will be increased again.

In addition, although we did not make a decision on this today, we did discuss the structure of the balance sheet. Currently, our asset duration is significantly longer than the average duration of Treasuries in the market. We hope to gradually shorten the duration, making the balance sheet structure closer to the duration distribution of the Treasury market. This process will be very slow and take a long time, and will not cause significant market volatility, but that is the direction of future adjustment.

Q6: How do officials interpret the latest CPI report? Some components were below expectations, but core inflation remains at 3%. What new insights do you have about inflation drivers from the current data? Also, where do you think the Fed is more likely to make a mistake—on employment or inflation? What measures can you take to address stubborn service sector inflation, especially if labor supply may be constrained?

Powell: Regarding the September CPI report, we have not yet received the subsequent PPI data, which is important for estimating the PCE inflation we focus on. Even so, we can roughly assess the direction, and there may be minor revisions after the PPI comes out.

Overall, the inflation data was slightly softer than expected. We usually look at inflation in three parts:

First, goods prices are rising, mainly driven by tariffs. Compared to the long-term trend of mild goods deflation in the past, tariff-driven goods price increases are now pushing up overall inflation.

Second, housing services inflation is falling and is expected to continue falling. If you remember a year or two ago, everyone thought it would fall, but it didn't happen for a long time. Now it has been falling for a while, and we expect it to continue.

Third, services inflation excluding housing (i.e., core services) has been basically flat in recent months. A significant portion of this is "non-market services," whose price changes do not well reflect how tight the economy is, so their signal value is limited.

In summary, a few points:

First, if you exclude the impact of tariffs, current inflation is actually not far from our 2% target. Estimates vary slightly, but if core PCE is 2.8%, excluding tariffs it's about 2.3% to 2.4%, which is not far from the target.

Second, tariff-driven inflation should be one-off in the baseline scenario, though it may continue to push up inflation in the short term. One thing we've been very focused on this year is ensuring it doesn't turn into persistent inflation, and carefully assessing which channels could turn a "one-off" into "stubborn inflation."

One possibility is an extremely tight labor market, but we don't see that now; another is rising inflation expectations, but we don't see that either. So we remain highly vigilant, rather than assuming tariff inflation is necessarily one-off. We fully understand this is a risk that needs close monitoring and eventual management.

Within service sector inflation, the part that hasn't fallen as we would like is mainly "non-market services" within "non-housing core services." We expect this part to gradually decline; it largely reflects "mark-to-market" income in financial services, which is related to stock market gains rather than actual payments.

In addition, I think current policy remains "modestly restrictive," which should help the economy cool gradually and is one reason the labor market is cooling very slowly. Slightly restrictive monetary policy itself helps drive service inflation down gradually.

I want to emphasize that we are fully committed to bringing inflation back to 2%. You can see from long-term inflation expectations and market pricing that the policy commitment remains highly credible, and there should be no doubt about our eventual achievement of the target.

Q7: There is currently a large-scale construction boom in AI infrastructure. Does this investment boom mean that rates are not actually that tight? If you cut rates further now, could it boost investment and even create asset bubbles? How does the Fed view this? You mentioned that in the absence of government data, there are still some data to monitor inflation and growth trends. We know more about employment, but in the absence of official data, what indicators will you rely on to track inflation?

Powell: You're right, there is a lot of data center construction and related investment happening across the US and globally. Large US companies are investing heavily in researching how AI will affect their businesses, and AI will rely on and run in these data centers, so this is very important.

But I don't think this kind of data center investment is particularly sensitive to interest rates. It's more based on a long-term judgment—that this is an area where future investment will be huge and can boost productivity. As for the ultimate effect of these investments, we don't know, but compared to other industries, I think their sensitivity to interest rates is not high.

(Regarding economic data), we look at many sources, but it's important to stress that these data cannot replace official government data. For example: online price data from PriceStats, Adobe, etc.; for wages, we look at ADP data; for spending—we also have various alternative data.

In addition, the Beige Book will also provide information and will be released as usual in this cycle. These data cannot replace government data, but they give us a rough sense of the situation. If there are major changes in the economy, I think we can pick up signals from these data. But during periods of missing official data, we really can't make very detailed, granular judgments as usual.

Q8: I'd like you to elaborate on your earlier point: that missing data due to a government shutdown would make December action more difficult, or even make you more cautious. If you have to rely more on private data of lower quality than official data, or on your own surveys and the Beige Book, are you worried about ending up making policy decisions based on "fragmentary anecdotes"?

Powell: This is a temporary situation. Our job is to collect all the data and information we can find and assess it carefully. We will do that; that's our responsibility.

You asked whether the shutdown would affect the December decision? I'm not saying it definitely will, but it's possible. In other words, if you're driving in heavy fog, you slow down. Whether that will happen, I can't say now, but it's entirely possible.

If data resumes publication, that's great; but if data are still missing, then taking more cautious action may be the reasonable choice. I'm not making a commitment, just saying: there is indeed a possibility—that when visibility is poor, you choose to "go slower."

Q9: We've recently seen large companies like Amazon announce layoffs. Did these signs enter your discussion today? The tension between the labor market and economic growth seems to be starting to tilt against employment. Second, concerns about a "K-shaped economy"—for example, signs that health insurance costs for low-income families may rise sharply—are these also considered in policy?

Powell: We are watching these situations very closely.

First, on layoffs, you're right, quite a few companies have announced reduced hiring or even layoffs. Many companies mention AI and the changes it brings. We are very focused on this, as it could indeed affect employment growth. However, we have not yet seen this clearly reflected in initial jobless claims data—which is not surprising, as the data usually lags, but we are monitoring very closely.

As for the "K-shaped economy," it's similar. If you listen to corporate earnings calls, especially those of large consumer-facing companies, many are describing the same phenomenon: the economy is diverging, low-income groups are under pressure, cutting spending, and turning to cheaper goods; while high-income and high-wealth groups' spending remains strong. We have collected a lot of anecdotal information on this.

We believe this phenomenon is real.

Q10: You said "a further rate cut in December is not a foregone conclusion, far from it." If the reason for not cutting in December is not missing data, what other factors might make you reluctant to cut? In other words, if it's not due to lack of data, what are the concerns? Since you said the committee's divisions are mainly about the future rate path, do these divisions stem more from concerns about inflation, employment, or deeper policy philosophy?

Powell: From the committee's perspective, we have already cut rates by a total of 150 basis points this year, and the current rate range is 3% to 4%, which is where many estimates of the neutral rate fall. Current rates are roughly near neutral and above the median estimate of committee members.

Of course, some members believe the neutral rate is higher; these views can be discussed, as the neutral rate itself cannot be directly observed.

For some committee members, now may be the time to pause and observe—to see if there really is downside risk to employment, and to see if the recent pickup in economic growth is real and sustainable.

Usually, the labor market reflects the true momentum of the economy better than spending data. But this time, signs of employment slowing make interpretation more complicated. We have already cut rates by an additional 50 basis points over the past two meetings, and some members think we should "pause first"; others want to continue cutting. That's why I say there are "clear divisions."

Every member of the committee is committed to doing the right thing to achieve our policy goals. Part of the division comes from different economic forecasts, but a large part also comes from different risk preferences—this is normal for every Fed.

Different people have different risk tolerances, which naturally leads to different views. You should have sensed this from recent public speeches by committee members.

Now, we have cut rates twice in a row, and are about 150 basis points closer to "neutral." There are more and more voices saying we should at least "wait a cycle and see," observe before deciding. It's that simple and transparent.

You have already seen this division in the September economic projections (SEP) and public speeches by committee members. I can also tell you that these views will be reflected in the meeting minutes. What I'm saying now is what actually happened at today's meeting.

Q11: How would you explain the current weakening of the labor market? What effect will this rate cut have on improving employment prospects?

Powell: I think there are two main reasons for the weakening labor market.

First, labor supply has fallen sharply, for two reasons: one is a decline in labor force participation (which has cyclical factors), and the other is reduced immigration—a major policy change that began under the previous administration and accelerated under the current one. So a large part of the reason is supply-side. In addition, labor demand has also declined.

A falling unemployment rate means the drop in labor demand is slightly larger than the drop in supply. Overall, the current situation is mainly due to supply-side changes, which is a judgment I and many others agree with.

So, what can the Fed's tools do? Our tools mainly affect demand.

In the current situation, if you adjust for employment (considering possible "overestimation of employment growth" in the statistics), net new jobs are basically close to zero. If this continues long-term, it's hard to call it "maximum sustainable employment"—it's an unhealthy "balance."

Therefore, I and many members of the committee believe that in the past two meetings, supporting demand with rate cuts was appropriate. We have done so, and rates are now clearly less restrictive than before (though I wouldn't say they are accommodative), which should help prevent further deterioration in the labor market. But the situation is still complex.

Some believe the current problem is mainly supply-side, so monetary policy has limited effect; but others—including myself—believe demand still plays a role, so when we see risks, we should use policy tools to support employment.

Q12: You also mentioned that tariffs have caused a "one-off price increase." Will US consumers continue to feel tariff-driven price increases this year?

Powell: Our baseline expectation is that tariffs will continue to push up inflation for a while, as it takes time for tariffs to pass through the production chain to consumers.

The effects of tariffs implemented in previous months are now showing up. New tariffs took effect in February, March, April, and May, and these effects will continue for a while, possibly into next spring.

The magnitude of these effects is not large, probably pushing up inflation by 0.1 to 0.3 percentage points. Once all tariffs are in place, they will no longer continue to add to inflation, but will result in a one-time upward shift in price levels, after which inflation will fall back to the level excluding tariffs, which is currently not far from 2%.

But consumers don't care about this technical explanation; what they see is that prices are much higher than before. What really makes the public dissatisfied with inflation is the sharp price increases in 2021, 2022, and 2023. Even if the rate of increase slows now, prices are still much higher than three years ago, and people still feel the pressure. As real incomes rise, the situation will gradually improve, but it will take time.

Q13: Are you concerned about current stock market valuations? As you know, rate cuts push up asset prices. So how do you balance "rate cuts to support employment" with "stimulating AI investment and even causing more layoffs"? Thousands of AI-related layoffs have been announced in recent weeks.

Powell: We don't focus on any particular asset price and say "that's unreasonable." That's not the Fed's job. We care about whether the financial system as a whole is sound and able to withstand shocks.

Banks are currently well capitalized; although low-income households are under pressure, overall household balance sheets remain relatively healthy and debt levels are manageable. Lower-end consumption has indeed slowed, but overall the situation is not particularly worrying.

Again, asset prices are determined by the market, not by the Fed.

I don't think interest rates are the key driver of data center investment. Companies are building data centers because they believe these investments have very good economic returns and high discounted cash flow values. This is not something that a "25 basis point" change can decide.

The Fed's job is to use its tools to support employment and maintain price stability. Rate cuts will marginally support demand and thus employment, which is why we are doing this.

Of course, whether it's a 25 or 50 basis point cut, it won't have a decisive effect immediately, but lower rates will support demand and hiring over time. Meanwhile, we must proceed cautiously, as we are very aware that inflation remains uncertain, so the rate cut path has always been "small steps, slow pace."

Q14: Regarding AI, a significant part of current economic growth seems to come from AI investment. If tech investment suddenly contracts, are you concerned about the impact on the overall economy? Do other sectors have enough resilience to support it? Especially, do you think there are lessons from the 1990s (the dot-com bubble) that can be applied to the current situation?

Powell: This time is different. Today, those high-valued tech companies have real profits, business models, and earnings support. If you look back at the 1990s "dot-com bubble," many were just concepts, not mature companies—it was clearly a bubble. (I'm not naming companies) But now these companies are profitable and have mature business models, so the nature is completely different.

Currently, equipment investment and investment related to data centers and AI are among the main drivers of economic growth.

At the same time, consumer spending is much larger than AI investment and has been stronger than many pessimistic forecasts this year. Consumers are still spending, perhaps mainly from high-income groups, but spending remains strong, and consumption's weight in the economy is much greater than AI-related investment.

In terms of growth contribution, AI is an important factor, but consumption is a bigger driver of the economy.

The main reason for the current slowdown in the labor market is a sharp decline in labor supply, mainly due to reduced immigration and a drop in labor force participation. This means less demand for new jobs, as there aren't enough new workers entering the market to absorb.

In other words, there just aren't as many new job seekers.

In addition, labor demand is also declining. The drop in labor force participation this time reflects weak demand more than just trend factors. So we do see the labor market weakening.

Economic growth is also slowing. Last year's growth was 2.4%, and we expect 1.6% this year. Without the impact of the government shutdown, it could have been a few basis points higher. There will be some rebound after the shutdown ends, but overall, the economy is still growing moderately.

Q15: I'd like you to talk in detail about how you think about monetary policy in the absence of data. Does this "data drought" make you more inclined to stick to the original path, or more cautious due to uncertainty?

Powell: We'll only know what to do when we actually face this situation—if it really happens. There could be two directions for interpreting this situation.

As I've mentioned several times before, if we really can't get enough information and can't judge clearly, and the economy still looks robust, stable, and unchanged, some will argue that when visibility is poor, you should slow down. I don't know how persuasive that view will be at the time, but someone will definitely advocate it.

Of course, others will argue the opposite: if nothing seems to have changed, just stick to the original plan. But the problem is, you may not really know if nothing has changed.

I don't know if we'll ultimately encounter this situation. I hope not, and hope data returns to normal by the December meeting, but in any case, we have to do our job.

Q16: A few years ago you said the overall capital level of the financial system was about right. Now the Fed is advancing a revision plan involving additional capital requirements for global systemically important banks (G-SIBs). Has this changed your view on capital levels? Do you plan to significantly lower capital levels in the system?

Powell: Discussions are ongoing among regulators, and I don't want to comment ahead of the outcome. I still believe, as I said in 2020, that at that time the system's capital level was about right. Since then, through various mechanisms, capital levels have risen further.

I look forward to these discussions continuing. The discussions are still at an early stage and there is no complete plan yet, so I don't have much to add now.

Q17: Is labor market weakness accelerating? If rate cuts cannot effectively ease further labor market slowdown, which groups face the greatest risk? When deciding to cut rates, do you consider low-income groups more, or those who may lose jobs due to automation? Is there a particular group you are especially concerned about?

Powell: We do not currently see signs of the kind of "accelerating labor market weakness" you mentioned. Admittedly, we have not received the September nonfarm payroll report, but we look at initial jobless claims, which remain stable. You can also look at the data—there have been no signs of deterioration in the past four weeks. Looking at job vacancy data from Indeed, it's also stable, with no sign that any part of the labor market or economy is deteriorating significantly.

But as I mentioned, you will see some large companies announce layoffs or say they will not expand headcount in the coming years. They may adjust staff structure, but don't need a larger workforce.

It's not yet apparent in the overall data, but net new jobs are very low, and the proportion of unemployed people finding new jobs is also low. Meanwhile, the unemployment rate remains low—4.3% is still a low level.

Our tools cannot provide targeted support for any specific group or income level. But I do believe that when the labor market is strong, ordinary people benefit the most.

We saw this during the long recovery after the global financial crisis. If the labor market is strong, low-income groups benefit the most. In the past two or three years, low-income groups saw the greatest income improvement, with positive demographics and employment trends at the time.

We're not in that stage now. A stronger labor market is the most important thing we can do for the public. That's half our job. The other half is maintaining price stability. Inflation hurts those on fixed incomes the most, so we must balance both.

Q18: The terms of the 12 regional Fed presidents will expire at the end of February next year. Can you disclose the timetable for the Board's review of these reappointments? Will we see all reappointed, or could there be changes? There have been dissenting votes in different directions at three consecutive FOMC meetings. Do you feel pressure when chairing these meetings? What does this division mean to you?

Powell: The relevant procedures will be carried out as required by law. By law, regional Fed presidents must be reviewed for reappointment every five years. This process is underway and will be completed in a timely manner. That's all I can say for now.

(As for dissenting votes in opposite directions), I don't see it that way, nor would I say it puts pressure on me. We have to face the situation at hand, which is indeed very challenging: unemployment at 4.3%, economic growth near 2%, overall not bad. But from a policy perspective, we face upside risks to inflation and downside risks to employment at the same time.

For the Fed, this is very difficult, because one risk points to rate cuts and the other to rate hikes, and we can't satisfy both at the same time, so we have to find a balance in the middle.

In this environment, it's natural to see different views among committee members, including on what action to take and at what pace. This is completely understandable. Committee members are extremely serious and hardworking, and want to make the best decisions for the American people, but have different judgments about "what is the right thing to do."

It's an honor to work with such dedicated people. I don't think it's unfair or frustrating. This is just a period when we have to make tough adjustments in real time. I think the actions we've taken this year are correct and prudent. We can't ignore the inflation problem or pretend it doesn't exist.

At the same time, since April, the risk of "persistently high inflation" has clearly declined. If it is appropriate to cut rates again in the future, we will do so.

Ultimately, we hope that when this cycle ends, the labor market will remain robust and inflation will fall to 3% and further toward 2%. We are doing our utmost to achieve this in a very complex environment.

Q19: Both regional and large banks have seen losses and delinquencies on loans. As Jamie Dimon said, "If you see one cockroach, there may be more." How do you view these loan losses? Do they pose a risk to the economy? Is this a warning sign?

Powell: We are watching credit conditions very closely. You're right, we've seen subprime defaults rising for some time. Recently, some subprime auto lenders have suffered large losses, some of which have appeared on bank balance sheets. We are monitoring this closely.

But at present, I don't think this is a broader debt risk issue. It does not appear to be spreading widely among financial institutions. But we will continue to monitor closely to ensure that remains the case.

Q20: The economy is now showing a "binary split": high-asset groups are still spending, while low-income groups are cutting back. How much of current consumption resilience depends on a strong stock market? Is the stock market to some extent propping up the economy?

Powell: The stock market does play a role, but remember: the more wealth you have, the lower the marginal propensity to consume from each additional unit of wealth. Once wealth reaches a certain level, the marginal propensity to consume drops sharply.

So, a stock market decline does affect consumption, but unless there is a very sharp drop, it won't cause a dramatic fall in consumption.

Low-income and low-asset groups have a much higher marginal propensity to consume; extra income or wealth is more likely to translate directly into consumption, but they don't have much stock market wealth.

So, the stock market is indeed one of the factors currently supporting consumption. If the stock market undergoes a major correction, you will see some weakening in consumption, but you shouldn't think that every dollar the stock market falls will reduce consumption by a dollar—that's not the case.