Key Takeaways
- Federal Reserve Chair Jerome Powell indicated that the recent 25 basis point rate cut was a "risk management" move, acknowledging a "challenging situation" with rising downside risks to employment despite persistent, albeit somewhat elevated, inflation.
- The U.S. economy is experiencing "slight growth" but "not rapidly," with consumer spending moderating and a "less dynamic" and "somewhat softer" labor market, where job gains have slowed significantly.
- Powell reiterated that tariff-related inflation is likely to be "short-term" and a "one-time shift in the price level," while long-term inflation expectations remain anchored near the Fed's 2% target.
- Iran's Supreme Leader Ayatollah Ali Khamenei stated that Iran "Do Not Need Nuclear Weapons, And Do Not Intend To Produce Them," a declaration made amidst renewed international scrutiny.
Federal Reserve Chair Jerome Powell delivered a cautious assessment of the U.S. economic outlook today, emphasizing a delicate balance between inflation risks and a softening labor market. Speaking at the Greater Providence Chamber of Commerce, Powell characterized the economy as experiencing "slight growth" but "not rapidly," with notable moderation in consumer spending and business uncertainty affecting future expectations.
Monetary Policy and Economic Headwinds
Powell's remarks follow the Federal Open Market Committee's (FOMC) decision last week to cut the federal funds rate by 25 basis points to a range of 4%-4.25%, the first reduction since December 2024. He described this move as a "risk management cut" and "another step toward a more neutral policy stance," necessitated by increased "downside risks to employment."
The labor market, according to Powell, is "less dynamic" and "somewhat softer," with an "unusual and challenging decline" in both worker supply and demand. The unemployment rate edged up to 4.3% in August, and payroll job gains have slowed significantly to an average of just 29,000 per month over the past three months. Powell noted that this slowdown is "much larger than assessed just a month ago" due to substantial downward revisions in earlier figures.
On inflation, Powell affirmed that while it has "increased and stays somewhat high" and "remains somewhat elevated" relative to the Fed's 2% target, most long-term inflation expectations remain "well anchored" near that goal. He projected that 12-month PCE inflation was likely 2.7% and Core PCE 2.3% in August, both rising from the prior year due to goods prices. Critically, Powell reiterated that "tariff-related inflation will likely be short-term" and a "one-time shift in the price level," with most goods price increases attributable to tariffs rather than broader price pressures. Disinflation in services, he added, continues.
The Fed Chair stressed that "two-sided risks mean there is no risk-free path" for monetary policy, emphasizing that the policy is "not on a preset course" and remains "modestly restrictive." The FOMC's latest projections imply additional 50 basis points of rate cuts in 2025, followed by 25 basis points in 2026 and another 25 basis points in 2027, though some Fed officials continue to diverge on the appropriate path for future easing.
Powell also indirectly addressed criticisms regarding the central bank's independence, asserting that the Fed remains "united in pursuing our mandate" and takes a "longer perspective" to serve the American people. He also highlighted a drop in public trust in economic and political institutions, urging officials to focus on key jobs.
Geopolitical Developments
In other global news, Iran's Supreme Leader Ayatollah Ali Khamenei declared that "We Do Not Need Nuclear Weapons, And Do Not Intend To Produce Them." This statement comes as Western powers consider reimposing United Nations sanctions amid concerns over Iran's nuclear program and recent calls from hardline Iranian lawmakers for a "change in the defence doctrine" to pursue nuclear weapons.
Meanwhile, US House Democrats are scheduled to meet on Monday in Washington D.C. to discuss government funding. This meeting precedes a critical deadline for government appropriations.
In the tech sector, Nvidia (NVDA) shares hit an all-time high yesterday on news of its partnership with OpenAI for data center buildouts, with Nvidia reportedly investing up to $100 billion in the ChatGPT developer.
Ed Liston is a senior contributing editor at TheStockMarketWatch.com. An active market watcher and investor, Ed guides an independent team of experienced analysts and writes for multiple stock trader publications.