As expected, the black swan is in someone's hands. It's a matter of words when they want to release it to bite people. Last night, as Powell made a statement to suppress interest rate cuts, Bitcoin plummeted and almost broke 86,000. Compared with the previous high of 93,000, it fell by almost 7,000 points! Friends who chased more than 90,000 will be uncomfortable again. So should we buy the bottom now? Don't forget the old saying - the master dies from buying the bottom. It's not fun to catch a flying knife. You still have to be cautious. Let's take a look at what Federal Reserve Chairman Powell said?
Powell: The economy is strong, the Fed does not need to rush to cut interest rates, and there is time to understand the impact of Trump's policies
Powell said that labor market indicators have returned to more normal levels consistent with the Fed's full employment goal; inflation will continue to decline toward the target 2%, although there will be occasional bumps; the interest rate path is not preset and depends on data and the economic outlook. If the data tells us to slow down rate cuts, slowing down would be a wise move; Congress generally believes that the independence of the Fed is very important, and it is too early to draw conclusions about the Trump administration's policies. The Fed will act cautiously until its policies are more certain; the impact of AI may come later and be greater than we expected.
After the Republicans took control of both houses of Congress and Trump will have greater power to implement policy plans next year, Federal Reserve Chairman Powell spoke for the first time, saying that the recent performance of the U.S. economy is "quite good," giving the Fed room to cut interest rates cautiously. There is no rush to cut interest rates, and the Fed has time to understand and assess the economic impact of future Trump's policies before responding.
On Thursday, November 14, local time, in a dialogue with local business leaders co-hosted by the Dallas Federal Reserve, Powell said that the current economic situation in the United States does not suggest that the Fed needs to cut interest rates in a hurry. Because the economy is performing strongly, the Fed can carefully consider its decision. The road to the Fed's inflation target of 2% is sometimes bumpy.
“The economy is not sending us any signals that we need to rush to cut rates. The strength of the economy that we are seeing right now gives us the ability to be cautious in making decisions.”
Given the plans proposed by Trump during his campaign, the market expects that the Trump administration will impose tariffs on foreign countries, deport illegal immigrants on a large scale, and cut taxes to increase the fiscal deficit, which are seen as measures to push up inflation. Therefore, after Trump's victory, the possibility that the Federal Reserve may slow down its interest rate cuts due to inflation risks has become a hot topic.
The U.S. CPI growth in October released on Wednesday was in line with market expectations. Wall Street analysts believe that the CPI data almost ensures that the Federal Reserve will continue to cut interest rates in December, but the market still needs to assess the impact of Trump's presidency on inflation, which may cause the Fed to slow down the pace of interest rate cuts next year.
Also on Wednesday, former U.S. Treasury Secretary Summers warned that if Trump sticks to his campaign promises, the United States will suffer a more severe inflation shock than in 2021. That could mean double-digit inflation, an "inflation crisis not seen in decades."
Summers accurately predicted the last round of inflation in the United States in 2021. At that time, he warned that the Biden administration's epidemic stimulus plan was inflationary and that the $1.9 trillion rescue plan would create excess demand and cause the economy to overheat. However, the Biden administration ignored his warnings, believing that inflation was only "temporary." Summers said he hoped Trump would learn from his lessons and adjust his plans to avoid causing inflation. If inflation eventually returns, the Fed will not tolerate it.
Labor market indicators are returning to more normal levels Inflation will continue to decline towards target The path of interest rates depends on data and the economic outlook
When assessing the economy on Thursday, Powell said the U.S. economic performance ranks among the best among major economies in the world.
Specifically in terms of employment, the growth of non-farm employment in the United States in October released earlier this month was disappointing, which Powell attributed mainly to hurricane damage in the southeast and employee strikes at large companies such as Boeing. He believes that the U.S. labor market is still in a "solid state." Judging from many indicators, it has returned to a "more normal" level consistent with the goal of full employment.
Powell noted that the unemployment rate had been rising but had leveled off in recent months and remained low by historical standards.
"Improved supply conditions have supported the economy's strong performance, with rapid labor force growth over the past five years and productivity growth exceeding the levels of the two decades before the pandemic, allowing the economy to grow rapidly without overheating."
At the same time, Powell said that as employment data gets closer to neutral levels, officials may consider slowing the pace of rate cuts. He said:
“If the data is telling us to slow down a little bit, then it seems like the smart thing to do is to slow down.”
On inflation, Powell noted that inflation has “broadly” improved, noting that Fed officials expect inflation to continue to fall back toward the Fed’s 2% target. He said:
"Inflation is moving closer to our 2 percent longer-run objective but has not yet reached it, and we are committed to that mission. With labor market conditions roughly balanced and inflation expectations well anchored, I expect inflation to continue to decline toward our 2 percent objective, albeit with occasional bumps."
Powell did not comment on the possibility of a rate cut at the Fed's monetary policy meeting next month. Futures market pricing on Thursday showed that traders expect the probability of a 25 basis point rate cut in December to be about 70%.
Powell reiterated that future Fed decisions depend on data and there is no preset path. He said, "The path of the policy rate will depend on incoming data and the evolution of the economic outlook," and said that the Fed "is moving policy toward a more neutral environment over time. But the path to achieve this goal is not predetermined."
Congress generally believes that Fed independence is very important and it is too early to draw conclusions about the Trump administration's policies
Regarding the impact of the election and other political aspects, Powell said in the conversation that he spent a lot of time in Congress, and members of Congress from both parties generally believed that an independent Federal Reserve is very important for the Federal Reserve to serve the public to the best of its ability. He said: "We are not perfect. Everyone makes mistakes, but if your people only focus on this task and don't get involved in politics, you will get the best results."
Last week, Powell downplayed the impact of the election on the FOMC policy at a press conference after the Fed meeting, saying that we need to wait and see. In a dialogue on Thursday, the host asked Powell, if the Fed staff is found to consider tax cuts as a reasonable assumption in the case that the Republicans will control both houses of Congress and the White House, will the Fed's decision makers be more confident about the economic outlook? Will the election results at least significantly reduce the downside risks to growth that the Fed assesses?
Powell responded: “I think it’s too early to tell.”
He explained that the job of the Fed staff is very flexible, which is to make assessments in real time, just like the capital markets. Fed policymakers will wait longer to see the actual effects, so it is certain that at the December FOMC meeting, the staff will present what the Fed knows. But the problem is that the Fed does not actually know what policies the government will implement. The Fed knows that policies in several areas will change, but it does not know how much the changes will be and the time frame of the changes.
As for fiscal policy, Powell said it would take a long time for Congress to pass a related bill. He believes that the election results may not have any economic impact this year, and the Fed has time to assess the net impact of policy changes on the economy before responding to them. He said: "I think we will be cautious in changing policy until we have much more certainty."
The impact of AI may come later and be greater than we expected
When talking about some of the reasons why productivity is above trend, Powell said that generative artificial intelligence (AI) will definitely have an impact on productivity. Generative AI is just getting started. Banks and other companies that deal with the Fed have not really deployed it yet, and they are very aware of the risks. And some credible organizations estimate that over time, generative AI will create an explosion of productivity growth, a substantial increase in productivity in the next decade. Of course, there are skeptics who think that the effect is exaggerated.
Powell then said that history always shows that where there is innovation there is technology. It will not appear in productivity statistics at all at first, and it will appear much later. Therefore, he believes that the impact of AI may come later than we expect, and the impact may be greater than expected. Because AI is indeed a series of extraordinary developments, and it is obviously able to replace a large number of jobs currently done by humans, including well-educated people.
As for monetary policy, Powell does not think AI will have an impact on monetary policy. He said that in the short term, the Fed is paying close attention to the labor force. Monetary policy is trying to drive the economy, trying to maintain full employment and price stability, trying to use the Fed's tools to do this. Two or three years later, what drives long-term productivity and what matters to the long-term outlook is not actually the tools in the hands of the Fed. For technological progress, the best the Fed can do is to create macroeconomic price stability, that is, price stability and a good, strong, stable labor market, so that people don't have to worry about volatile or high inflation.
The host mentioned that the financial institutions supervised by the Federal Reserve are also experimenting with new AI technologies. Considering that some systemic risks may have blind spots, will this increase the difficulty of supervision? Because AI is like a black box, many times, software engineers or other people who use it cannot explain how it makes decisions.
Powell replied that this does raise various questions. The good news from the regulator's perspective is that banks are very aware of this. He believes that people are very cautious about AI, at least in banks regulated by the Federal Reserve. They are very cautious and thoughtful about how to implement AI technology, have done a lot of work, and have not deployed AI in large quantities in their businesses.
Powell said everyone is trying to understand where AI technology is going, what its capabilities are, and what the risks are. If you don't know why AI makes these decisions, how do you deal with discriminatory results in lending, so this will be a challenge. But he said the Fed is well aware of this, and so are the banks.
The views expressed in this article represent only the author’s personal views and do not constitute investment advice. The author does not make any guarantees about the accuracy, completeness, or timeliness of the information in the article, nor is he liable for any losses arising from the use or reliance on the information in the article.
