The Zhitong Finance App learned that at the press conference on Wednesday, Federal Reserve Chairman Powell explained in detail the current state of the US and global economy and the future direction of the Federal Reserve's monetary policy. Powell's statement showed that the Federal Reserve is cautious about upcoming economic challenges, while emphasizing the flexibility of monetary policy and continued concern for inflation.

Economic growth and inflation situation

Powell said at the press conference that although the US economy shows strong growth and low unemployment, central banks in other regions of the world may announce interest rate cuts earlier due to the slowdown in economic growth. He pointed out that compared with other countries, America's economic performance is stronger, which allows the Federal Reserve to maintain high interest rates for a longer period of time to continue to suppress inflation downward.

Powell emphasized the uncertainty of monetary policy in dealing with different economic situations, saying that future decisions will be extremely cautious and will be adjusted according to the actual performance of economic data. Furthermore, he mentioned that although many emerging market countries around the world have performed well in the past high interest rate cycle, this is partly due to improvements in the monetary policy framework and inflation reputation of these countries.

Inflation and consumer spending

Despite a 2.5% increase in personal consumption spending in the first quarter, Powell recognized that continued high inflation is burdening consumers, particularly low-income groups that are particularly sensitive to rising costs of living. He said that high inflation has eroded consumers' purchasing power, and the Federal Reserve is trying its best to reduce inflation by adjusting monetary policy to reduce this pressure.

There was no “stagflation”

Although the data shows that the US gross domestic product (GDP) is growing faster than expected, and the inflation rate is still higher than the 2% target set by the Federal Reserve, there are concerns in the market that the US economy may enter a period of “stagflation,” that is, a situation where high unemployment and high inflation coexist. Powell made it clear that there is currently no sign of “stagflation” in the Federal Reserve's forecast. “I really don't understand where this concern comes from,” Powell explained. He reviewed the remarkable “stagflation” period experienced by the US in the 70s of the last century. At that time, the unemployment rate hovered around 10%, while the inflation rate was in the high single digits. In comparison, he pointed out that the current economic situation is fundamentally different: “Today's economy is in a different position.” He added that despite the challenges, US GDP is growing steadily, while the inflation rate is kept below 3%.

The job market and interest rate decisions

Regarding the job market, Powell pointed out that the US labor market performed strongly in the first quarter, but this does not mean that the Federal Reserve will completely rule out the possibility of future interest rate cuts. He mentioned that unless we see a “significant and noticeable” slowdown in the labor market, it is unlikely that we will respond simply because of a slight increase in unemployment.

Furthermore, Powell also responded to questions about the possibility that the Federal Reserve will cut interest rates in the election year. He reiterated that the Fed's policy decisions are based on economic considerations rather than political factors. He stressed that it is the responsibility of the Federal Reserve to make the most appropriate decisions based on economic conditions, without being affected by political events.

Balance sheet policy adjustments

Regarding balance sheet adjustments, Powell announced that starting in June, the Federal Reserve will slow down the pace of balance sheet reduction to avoid fluctuations and pressures similar to those seen in September 2019 in the financial market (at that time, the repurchase rate hit more than 10%, far higher than the usual 2%). This decision reflects the Federal Reserve's strategy of gradually adjusting its policy, with the intention of achieving the final asset size target more smoothly. Since June 2022, the Federal Reserve's monthly uninvested treasury bonds have reached $60 billion. However, starting June 1, this amount will be adjusted to a maximum of $25 billion per month. Furthermore, although the Federal Reserve will continue to allow $35 billion of monthly mortgage-backed securities (MBS) not to be invested at maturity, principal payments above that amount will be reinvested in treasury bonds rather than MBS. Powell stressed that this strategy is consistent with the Federal Reserve's long-standing preference, that is, to gradually transition to holding mainly treasury bonds. He pointed out that the Federal Reserve's balance sheet peaked at nearly $9 trillion in 2022 and fell to around $7.4 trillion last week.