https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20241218.pdf
The following summary represents direct quotes (with minor immaterial changes to make reading easier) from the press conference.
A, Backdrop
- Monetary policy actions are guided by the dual mandate to promote maximum employment and stable prices for the American people. Currently, the risks to achieving employment and inflation goals as being roughly in balance, and the Committee is attentive to the risks on both sides of our mandate.
- The economy is strong overall with GDP growing at 2.8% in the third quarter and has made significant progress toward our goals. Growth of consumer spending has remained resilient, and investment in equipment and intangibles has strengthened. In contrast, activity in the housing sector has been weak.
- In the labor market, conditions remain solid. Payroll job gains have slowed from earlier in the year, averaging 173 thousand per month over the past three months. The unemployment rate is higher than it was a year ago, but at 4.2 percent in November, it has remained low. Nominal wage growth has eased over the past year, and the jobs-to-workers gap has narrowed. Overall, a broad set of indicators suggests that conditions in the labor market are now less tight than in 2019. The labor market is not a source of significant inflationary pressures. Pretty close to estimates of the natural rate of unemployment, job creation is a little below the level that would keep it there, but nonetheless, close. But labor market is still cooling by many measures, and the Committee is watching that closely. It’s not cooling in a quick or in a way that really raises concerns.
- Inflation has eased significantly over the past two years but remains somewhat elevated relative to our 2 percent longer-run goal. Estimates based on the Consumer Price Index and other data indicate that total PCE prices rose 2.5 percent over the 12 months ending in November; and that, excluding the volatile food and energy categories, core PCE prices rose 2.8 percent. Longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets. The story of why inflation should be coming down is still intact, in particular the labor market People are feeling right now is the effect of high prices, not high inflation.
- The longer-run neutral rate (r*) is the neutral rate at a time when supply and demand are in balance, the full economy is in balance and no shocks are hitting the economy. The Committee is not focused on long-term r* but to adjust policy-stance in real-time.
B. Justification for the rate Cut – A Close Call
- Lowering the target range for federal funds rate by 1/4 percentage point, to 4-1/4 to 4-1/2 The Committee has been moving policy toward a more neutral setting in order to maintain the strength of the economy and the labor market while enabling further progress on inflation. In totality, the policy rate has been lowered by a full percentage point from its peak (significantly closer to neutral), and the policy stance is now significantly less restrictive. The Committee can therefore be more cautious as the Committee considers further adjustments to the policy rate.
- At 4.3 percent and change, the policy is still meaningfully restrictive. The Committee doesn’t think further softening is needed to get to 2 percent inflation.
- Reducing policy restraint too quickly could hinder progress on inflation, while reducing policy restraint too slowly could unduly weaken economic activity and employment. Policy is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate. The Committee is trying to steer between those two risks and on balance decided to go ahead with a further cut.
- Downside risks to the labor market do appear to have diminished, but the labor market is now looser than pre-pandemic and it’s clearly still cooling further. So far, in a gradual and orderly way. There is no need for further cooling in the labor market to get inflation down to 2 percent. A great deal of progress on inflation has been made. The 12-month core inflation through November is estimated at 2.8 percent, down from a high of 5.6 percent, but 12-month inflation has actually been moving sideways since late last year.
- The Committee is at or near a point at which it will be appropriate to slow the pace of further adjustments. reflecting both the higher inflation readings this year, and the expectation inflation will be higher.
- In the current Summary of Economic Projections, FOMC participants wrote down their individual assessments of an appropriate path for the federal funds rate, based on what each participant judges to be the most likely scenario going forward. The median participant projects that the appropriate level of the federal funds rate will be 3.9 percent at the end of next year and 3.4 percent at the end of 2026. These median projections are somewhat higher than in September, consistent with the firmer inflation projection. These projections, however, are not a Committee plan or decision.
- As the economy evolves, monetary policy will adjust in order to best promote the Committee’s maximum employment and price stability goals. If the economy remains strong and inflation does not continue to move sustainably toward 2 percent, the Committee can dial back policy restraint more slowly. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, the Committee can ease policy more quickly. Policy is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of the dual mandate. We’ve now gotten to a place where the risks of the two are what we think are broadly, roughly, in balance.
C. What’s Driving the Slow Rate Cut Path?
- Growth is stronger. the economy grew faster in the second half of 2024, so far, than expected, and is expected to be above what the Committee’s expectations in September next year as well.
- Unemployment is lower
- The Committee thinks that the downside risks are less and uncertainty is less at the end. So that’s more strength.
- Inflation is higher this year, it’s also higher in the forecast for next year. There was a year-end projection for inflation and it’s kind of fallen apart as the end of the year approves. There is uncertainty around inflation. And it’s kind of common-sense thinking that when the path is uncertain you go a little bit slower.
- Closer to the neutral rate, which is another reason to be cautious about further moves.
D. Thinking Around Future Cuts – Short-Term Focused
- To think about further cuts, the Committee is going to be looking for progress on inflation. Inflation has been moving sideways on 12-month inflation as the 12-month window moves. That’s in part because inflation was very, very low measured in the 4th quarter of 2023. Nonetheless, going forward, the Committee is going to want to see further progress on bringing inflation down and keeping a solid labor market.
- “We’re not trying to make decisions about the longer-run, we are — we’re trying to make sensible policy as we go.”
E. How Does Tariffs Impact Inflation, thus Policy (Reactive not Proactive)
- “[W]e need to take our time, not rush and make a very careful assessment, but only when we’ve actually seen what the policies are and how they’re implemented and we’re just — we’re just not at that stage. We’re at the stage of doing what other forecasters are doing, which is kind of thinking about these questions but not trying to get to definitive answers for some time.”
Summary
After a reduction of 100bp (including the December 25bp cut), the Fed believes the current rate remains “significantly restrictive” and is “significantly closer to neutral”. Going forward, the Fed is to move cautiously and look for progress on inflation. The September concerns regarding the labor market have dissipated. Now the risks are in balance between the two mandates of price stability and full employment. Policies remain data dependent.