Federal Reserve Semiannual Monetary Policy Report: The labor market has become balanced, reiterating a wait-and-see approach for clearer prospects

On June 20th, local time, the Federal Reserve released its semi-annual monetary policy report submitted to the U.S. Congress. The Federal Reserve stated that the labor market has become balanced; the current monetary policy stance allows decision-makers to continue to wait for a clearer economic outlook.

Federal Reserve officials announced on Wednesday that they would maintain interest rates, a continuation of the practice this year. This policy stance enables the Federal Reserve to wait for more clear signals regarding inflation and economic activity. They hope to further observe how U.S. President Trump’s policies will impact the economy.

Labor Market

In terms of data, the unemployment rate in the U.S. for May was 4.2%, relatively stable since mid-last year and at a historical low. The average monthly increase in new jobs over the first five months of this year was 124,000, a slowdown from last year's 168,000. Nominal wage growth continues to slow but remains robust. The employment cost index for total hourly compensation of private sector workers rose by 3.4% over the 12 months ending in March, gradually declining from a peak of 5.5% in mid-2022.

The Federal Reserve pointed out that the labor market conditions are "robust," with employment growing at a "moderate" pace and the unemployment rate remaining low. The growth rate of labor supply is lower than in previous years, with a significant reduction in immigration since mid-last year, and the labor participation rate has also slightly declined. This helps maintain balance in the labor market against the backdrop of cooling job growth:

As labor demand has gradually slowed over the past few years, multiple indicators show that the labor market has become balanced, with the current level of tightness lower than pre-pandemic levels.

The report also noted that the benefits of the job market are widespread: the unemployment rate has remained stable over the past year and has maintained relatively low levels across various labor groups (classified by age, education level, gender, and race/ethnicity).

Inflation Situation Analysis

The Personal Consumption Expenditures (PCE) price index rose by 2.1% over the 12 months ending in April, down from 2.6% at the end of last year. The core PCE price index, excluding food and energy, rose by 2.5% over the 12 months ending in April, down from 2.9% at the end of last year.

The report pointed out that short-term inflation expectations have risen significantly this year, mainly reflecting concerns about tariffs, while most long-term inflation expectation indicators remain within the range of the decade before the pandemic, generally consistent with the Federal Reserve's long-term target of 2%.

Economic Activity Analysis

GDP growth has slowed. U.S. economic activity paused in the first quarter, with a real GDP annualized growth rate of -0.2%. This was mainly due to businesses and households importing a large amount of goods in anticipation of tariff increases, leading to a historic surge in imports.

Consumer spending growth has slowed this year, with a real growth rate of about 1% in the first quarter, down from the strong growth rates of about 3% expected in 2023 and 2024.

Financial Market Conditions

In terms of the interest rate environment, nominal yields on U.S. short-term and medium-term government bonds have moderately declined this year, reflecting that the significant decline in real yields has offset the recent rise in inflation compensation. The market expects the federal funds rate to decline by more than 100 basis points to 3.3% by the end of 2026 compared to current levels In the U.S. stock market, stock price indices have experienced significant fluctuations, with the largest volatility occurring after April 2, primarily influenced by trade policy news and economic outlook. The S&P 500 index has remained roughly flat since the beginning of the year.

The report indicates that the overall financial system remains resilient, despite experiencing considerable volatility in April. The total debt of households and non-financial corporations as a percentage of GDP continues to trend downward and is currently at its lowest level in the past 20 years.

International Situation

Foreign economic activity is expected to moderately expand in the first quarter of 2025, partly supported by increased demand from U.S. importers ahead of anticipated tariff hikes. However, recent indicators show a slowdown in foreign growth, with business conditions and confidence in many foreign economies significantly declining this year.

Monetary Policy Outlook

The Federal Reserve stated that it will continue to reduce its holdings of U.S. Treasury securities and agency mortgage-backed securities, and will further slow the pace of reductions starting in April to facilitate a smooth transition to ample reserve balances.

The Federal Open Market Committee (FOMC) is strongly committed to supporting full employment and returning inflation to the 2% target. In considering the extent and timing of further adjustments to the federal funds rate target range, the committee will carefully assess upcoming data, the evolving outlook, and the balance of risks.

The report reaffirms the position of Federal Reserve Chair Jerome Powell and other officials that the current monetary policy stance is conducive for decision-makers to remain patient and wait for a clearer economic outlook.

Overall, the report indicates that the Federal Reserve has adopted a cautious monetary policy stance in the current economic environment, aiming to address inflationary pressures while maintaining stability in the labor market, and closely monitoring the uncertainties surrounding domestic and international economic developments