FED Powell : Federal Reserve Weighs Risks and Goals Amid Changing Economic Landscape

FED Powell : Federal Reserve Weighs Risks and Goals Amid Changing Economic Landscape 

Moving Towards Better Equilibrium: Risks and Goals in Economic Policy

While inflation remains above 2%, it has notably decreased, signaling substantial easing. The economy has made significant strides in achieving its dual mandate over the past year. It is anticipated that policy restraints will begin to be dialed back at some point this year, with the policy rate likely reaching its peak for this cycle. However, the economic outlook remains uncertain, with ongoing progress towards a 2% inflation rate not assured. The Federal Reserve will carefully assess incoming data, evolving outlooks, and the balance of risks.

There are risks associated with both cutting rates too early and too rapidly, as well as doing so too late or too cautiously. Despite a relatively tight labor market, the Fed's restrictive stance is exerting downward pressure on economic activity and inflation. Labor demand continues to outstrip supply, although nominal wage growth has been slowing.

While the strength of the economy and labor market allows for careful and thoughtful approaches, more data is needed to gain confidence. The Fed aims to achieve a soft landing, maintaining attractive economic conditions. However, the pandemic may have permanently altered how inflation is targeted.

The Fed underscores the importance of getting policies right rather than acting hastily. Changes to Basel 3 proposals are expected, and decisions regarding capital rules remain pending. There is a need to monitor commercial real estate and acknowledge the risks posed by climate change. Clawbacks for executives of failed banks and robust rulemaking for executive compensation are being considered.

Immigration and labor force participation have contributed to economic growth, while challenges remain regarding artificial intelligence and liquidity rules. The fallout from current issues is expected to persist for several years. Inflation readings are being closely monitored, with a desire for more evidence before significant policy adjustments are made. Commercial real estate risks are manageable but vary across banks and locations.

The Fed is confident in achieving consensus on Basel 3, despite significant opposition. Adjustments to policy rates will depend on how the economy evolves, with preparations for potential surprises in the future. Overall, maintaining a 2% inflation rate remains a durable standard in the global economy.