On May 15 local time, Federal Reserve Chairman Powell attended the second Thomas Laubach Research Conference and delivered a speech. Powell said his overall policy-making framework is being adjusted to deal with significant changes in inflation and interest rate outlook after the epidemic in 2020.

Why adjust?

In his speech, Powell first reviewed the history of the Federal Reserve's "Consensus Statement".

Powell said that in 2012, the Federal Open Market Committee (FOMC) compiled the monetary policy framework for the first time, entitled the Statementon Longer-Long Term Goals and Monetary Policy Strategy, or the "Consensus Statement." The wording in the opening paragraph of the statement has never changed so far, showing the Fed’s commitment to fulfilling its congressional task and clearly explains what the Fed is doing and why. This clarity reduces uncertainty, improves monetary policy effectiveness, and enhances transparency and accountability.

In 2019, the Fed conducted its first public review of the consensus statement and said it would repeat such reviews about every five years. It is appropriate to reassess the structural characteristics of the economy and interact with the public, practitioners and scholars about the performance of the framework.

But Powell said the economic environment has changed significantly since 2020 and the Fed's assessment will reflect considerations of these changes. The Fed adopted the current framework five years ago and launched an assessment of the framework this year. But Powell believes that the assessment is unlikely to affect the way the Fed sets interest rates at present, and the Fed may complete the assessment and announce the results by August or September.

Powell further stated that after the epidemic in 2020, inflation-adjusted "real" interest rates rose, which may affect the constituent elements of the Fed's current framework.

"Higher real interest rates may reflect the possibility that inflation will be more unstable in the future than during the 21910s crisis. We may be entering a period of more frequent supply shocks and may last longer - a serious challenge for both the economy and the central bank," he said.

In addition to possible revisions to the consensus statement, the Fed will also consider improving formal policy communications, especially statements about forecasts and uncertainties.

Powell said the Fed has been reviewing its assessment of the 2020 framework and policy decisions in recent years, and a general observation is that clear communication is needed as complex events unfold. Although FOMC communication is generally believed by academic and market participants to be effective, there is always room for improvement. In fact, clear communication is a problem even in relatively calm times. Powell believes that a key question is how to promote a broader understanding of the uncertainty facing the economy generally. In times of greater, more frequent or more different shocks, effective communication requires the Fed to convey an understanding of uncertainty around the economy and prospects.

When will the Fed cut interest rates?

The seminar that Powell attended this time is more academic, so he did not mention much about economic prospects and inflation. But judging from his speech, the transmission mechanism of inflation to interest rates has always been the most important consideration for the Federal Reserve to formulate monetary policy.

Last week, the Federal Reserve announced that it would maintain the target range of federal funds rate between 4.25% and 4.5%, and said that the U.S. economy has increased risk of rising unemployment and intensified inflation. Many Wall Street banks predict that the Fed will not cut interest rates before December or later this year.

The latest data shows that the U.S. Consumer Price Index (CPI) rose 2.3% year-on-year in April this year, better than market expectations, the lowest year-on-year increase since the beginning of 2021. The Fed's personal consumption expenditure (PCE) indicator that is more important will be released on May 31. In today's speech, Powell predicted the indicator to rise by about 2.2%.

Even though data shows inflation has been moderate, economists predict that this easing trend will not continue, and prices will start to accelerate in the coming months as import tariffs begin to work. Wall Street is also constantly adjusting its expectations for the next rate cut by the Federal Reserve.

Goldman Sachs economists team expect the Fed to start three rate cuts in December instead of the July previously predicted; Citigroup postponed the Fed's next rate cut from June to July; Barclays expects the Fed to cut only once in 2025, and three more rate cuts each time in the next year.

"Special statement: The content of the above works (including videos, pictures or audio) is uploaded and published by users of the "Dafenghao" self-media platform under Phoenix.com. This platform only provides information storage space services.

Notice: The content above (including the videos, pictures and audios if any) is uploaded and posted by the user of Dafeng Hao, which is a social media platform and merely provide information storage space services."

[Editor in charge: Xie Wei PF123]