Federal Reserve Semiannual Monetary Policy Report: Overview of Economic Situation and Monetary Policy

Source: Powell's speech

Jerome H. Powell Chairman of the Board of Governors of the Federal Reserve System In the United States Senate Committee on Banking, Housing and Urban Affairs February 11, 2025 Chairman Scott, Ranking Member Warren, and other members of the Committee appreciate the opportunity to present the Federal Reserve's semiannual monetary policy report.

The Federal Reserve remains focused on achieving its dual mandate goals of maximum employment and stable prices for the American people. Overall, the U.S. economy has performed strongly, and we have made significant progress toward our goals over the past two years. Labor market conditions have cooled from prior overheating but remain solid. Inflation has moved substantially closer to our 2 percent longer-run objective, but remains slightly above that level. We pay close attention to the risks facing both sides of our dual mission.

Before discussing monetary policy, let me review the current economic situation.

Current Economic Situation and Outlook

Recent data indicate that economic activity continues to expand at a solid pace. Gross domestic product (GDP) grew by 2.5% in 2024, supported by resilient consumer spending. Although investment in equipment and intangible assets declined in the fourth quarter, overall performance was stable for the full year. After a slump in the middle of last year, housing market activity appears to have stabilised.

Labor market conditions remain solid and stabilizing. Over the past four months, monthly job creation has averaged 189,000. After rising earlier, the unemployment rate has remained stable since the middle of last year and, at 4% in January, remains at a low level. Nominal wage growth has slowed over the past year and the gap between job openings and the workforce has narrowed. Overall, a wide range of indicators suggest that the labor market is roughly balanced and is not a source of significant inflationary pressure. Strong labor market conditions in recent years have helped narrow long-standing gaps in employment and income between different groups of people.

Inflation has declined significantly over the past two years but remains slightly above our 2% long-term target. The personal consumption expenditures (PCE) price index increased 2.6% overall in the 12 months through December, and the core PCE price index, which excludes the more volatile food and energy categories, increased 2.8%. Judging from various surveys of households, businesses and forecasters, as well as relevant indicators of financial markets, long-term inflation expectations appear to remain stable.

Monetary Policy

Our monetary policy actions are guided by our dual mandate to promote maximum employment and stable prices for the American people. Since last September, after keeping the federal funds rate target range at 5.25% to 5.50% for 14 months, the Federal Open Market Committee (FOMC) has cut the policy rate by a full percentage point from its peak. Given the progress on the inflation front and the cooling of the labor market, it is appropriate to adjust our policy stance. At the same time, we are continuing to reduce our holdings of securities assets.

Given that the current policy stance is significantly less restrictive than before and the economy remains strong, there is no need to rush to adjust the policy stance. We are well aware that relaxing policy restrictions too quickly or too much could hamper progress in controlling inflation; at the same time, relaxing policy restrictions too slowly or too little could unduly weaken economic activity and employment. In considering the size and timing of further adjustments to the target range for the federal funds rate, the Federal Open Market Committee will assess incoming data, the changing economic outlook, and the balance of risks.

As economic conditions change, we will adjust the stance of policy in the manner that best achieves our maximum employment and stable price goals. If the economy remains strong and inflation fails to move toward our 2 percent objective on a sustained basis, we could keep policy restricted for longer. We would also ease policy if the labor market weakened unexpectedly or inflation fell faster than expected. We are closely monitoring the risks on both sides of our dual mission, and our current policies are well prepared to address the risks and uncertainties we face.

This year, we are conducting our second regular review of our monetary policy strategy, tools, and communications framework for achieving the maximum employment and stable price goals given to us by Congress. The review focuses on the Federal Open Market Committee's Statement on Longer-Run Goals and Monetary Policy Strategy, which sets out the Committee's monetary policy approach, and the Committee's policy communication tools. The Committee’s 2 percent longer-run inflation objective will remain unchanged and is not a focus of this review.

Our review will include conversations with a wide range of stakeholders and public engagement, including “Fed Listens” events around the country and a research conference in May. We will learn from the lessons of the past five years and adjust our strategy, where appropriate, to better serve the American people, to whom we are accountable. We plan to complete this evaluation by the end of summer.

Finally, I want to emphasize that at the Federal Reserve, we will do everything we can to achieve the two twin goals of monetary policy set by Congress - maximum employment and stable prices. We are committed to supporting maximum employment, inflation consistently above our 2 percent target, and anchoring longer-term inflation expectations. Every American has a vital interest in our success on these goals. We understand that our actions impact communities, families, and businesses across the country, and everything we do is in line with our public mission.

Thank you everyone, and I look forward to your questions.