Powell states that interest rates "still have moderate restrictions," warns that there is no risk-free policy path, and that the stock market is overvalued (full text of the speech attached)

In his first public speech after the Federal Reserve announced interest rate cuts last week, Fed Chairman Jerome Powell continued to leave room for further rate cuts, as he did during last week's press conference, and hinted at a cautious approach to rate cuts in a challenging risk environment.

In his speech on Tuesday, the 23rd, Eastern Time, Powell warned again that the Fed's dual mandate—maximum employment and price stability—faces threats, and the risks on both sides mean there is no risk-free policy path. If the rate cuts are too large or too fast, it may not be possible to control high inflation, allowing inflation to remain above the Fed's 2% target, while if monetary tightening lasts too long, it could unnecessarily drag down the labor market.

Powell pointed out, "In the short term, there are upside risks to inflation, while there are downside risks to employment—this is a challenging situation." In the context of a "lackluster and somewhat weak labor market," the risk of employment downturn has increased. It was precisely because of the increased employment risk that the Fed decided to cut rates last week.

Regarding tariffs, Powell reiterated that the reasonable expectation is that tariffs will have a temporary impact on inflation, leading only to one-time price fluctuations. However, "one-time" fluctuations do not mean "immediate," and may last for several quarters. Powell still believes that the Fed must closely monitor the potential lasting impacts of tariffs, stating that it is essential to ensure that tariffs do not evolve into a persistent inflation issue.

Powell's speech did not reveal any information suggesting whether he would support a rate cut at the next Fed monetary policy meeting in October.

David Russell, Global Head of Market Strategy at TradeStation, commented that Powell is laying the groundwork for expectations of rising inflation due to tariffs in the fourth quarter of this year. He is doing this to give himself leeway in responding to political pressure from the Trump administration while downplaying public opinion by emphasizing that the impact of tariffs is temporary. He said:

"Powell does not want to offend the White House, but he will not yield either. He is leaving himself room to respond to potential inflation pressures in the future. Powell is not intentionally taking a hawkish stance, but he is trying to avoid some strong demands for aggressive rate cuts."

"New Federal Reserve News Agency": Powell Keeps the Door Open for Rate Cuts, Indirectly Responds to Bessent's Criticism

Nick Timiraos, a senior Fed reporter known as the "New Federal Reserve News Agency," commented that Powell's prepared speech essentially repeated what he said during last week's press conference on the day the Fed announced the rate cut. Relatively speaking, a highlight of this speech is that despite the rate cut last week, Powell interpreted that the policy rate "still has a moderate restrictive nature."

From Powell's above judgment, Timiraos believes this means that if Fed officials continue to think that the recent weakness in the labor market outweighs the negative impact of rising inflation on the economy, there is still room for further rate cuts this year. He believes Powell's speech shows that he keeps the door open for future rate cuts.

U.S. Treasury Secretary Bessent criticized on the 5th of this month that the Fed has issues of institutional bloat and functional expansion, which he believes are the main reasons the Trump administration questions the Fed's independenceTmiraos pointed out that in this speech, Powell also indirectly responded to criticisms from people like Bessenet.

Powell reviewed how the 2008 financial crisis and the 2020 COVID-19 pandemic forced the Federal Reserve to take extraordinary measures to avoid a more severe economic crisis. His conclusion was:

"Despite experiencing two unprecedented shocks, the performance of the U.S. economy remains robust compared to other major developed economies, and even surpasses them."

After Powell called stock valuations "quite high," the three major stock indices hit intraday lows

During the Q&A session following his speech on Tuesday, Powell stated that the U.S. labor market can no longer be considered robust, and there is indeed a noticeable substantive weakness in the labor market. The risks to financial stability have not increased. The banking sector's capital positions are sound, and households are in good financial condition. The current risks to financial stability are not high.

Regarding tariffs, Powell stated that tariffs are not a significant factor in inflation. The transmission mechanism of tariffs is not as pronounced as imagined. Most forecasts indicate that the effects of tariffs will persist until 2026.

Powell believes that certain asset prices are high relative to historical levels. By many indicators, stock market valuations are quite high.

When asked about the Federal Reserve officials' level of concern regarding market prices and whether they are more tolerant of higher price levels, Powell said:

"We will pay attention to overall financial conditions and consider whether our policies are influencing financial markets in the direction we expect. But you are correct, by many indicators, such as stock prices, current valuations are indeed high."

Powell believes that corporate hesitation is due to uncertainty about what to do. The U.S. economy is in a state of low layoffs and low hiring activity. A low unemployment rate and a low-employment economy are challenging for young workers.

Speaking about artificial intelligence (AI), Powell believes it is too early to assess the impact of AI. AI means that certain jobs will be eliminated. Research shows that AI is not a major reason for the slowdown in hiring. The slowdown in hiring is partly related to uncertainty in government public policy.

Powell also stated that the Federal Reserve's monetary decisions will not consider partisan politics. Many people do not believe this. Powell criticized those who think that certain actions of the Federal Reserve are politically motivated, calling their claims "baseless."

After Powell mentioned that the stock market is overvalued, the Dow Jones Industrial Average turned negative, and all three major U.S. stock indices subsequently turned lower, with the declines in the S&P and Nasdaq widening. Shortly after Powell finished speaking, the three indices hit intraday lows, with the Nasdaq down nearly 1.1%, the S&P down over 0.7%, and the Dow down slightly over 100 points, a decline of more than 0.2%.

Full Text of Powell's "Economic Outlook" Speech

The following is the full text of Powell's speech titled "Economic Outlook":

Economic Outlook

(Federal Reserve) Chairman Jerome H. Powell delivered remarks at the Greater Providence Chamber of Commerce 2025 Economic Outlook Luncheon in Warwick, Rhode Island

Thank you all. I am very pleased to be back in Rhode Island. The last time I had the opportunity to speak at the Greater Providence Chamber of Commerce was in the fall of 2019. At that time, I said, "If the situation changes significantly, policies will adjust accordingly."

Who would have thought that just a few months later, the COVID-19 pandemic would break out? The economic situation and policies underwent unprecedented changes. While Congress, the government, and the private sector took a series of measures, the decisive actions of the Federal Reserve also helped avoid an unprecedented severe shock to the economy.

The world has been experiencing a long and difficult economic recovery after the financial crisis, followed by the COVID-19 pandemic. These two global crises have left indelible scars on humanity, and their effects will last for a long time. In democratic countries around the world, public trust in economic and political institutions has also been challenged. Those of us in public service need to focus even more on diligently fulfilling our responsibilities in the face of turbulent and unpredictable circumstances.

During this tumultuous period, central banks like the Federal Reserve had to innovate in their policies to address the challenges during the crisis, rather than for routine economic management. Despite experiencing two unprecedented shocks, the performance of the U.S. economy remains robust compared to other major developed economies, and even outperforms them. As in the past, we must continue to reflect on this difficult period and learn from it, a process that has been ongoing for over a decade.

Looking ahead, although significant changes are occurring in areas such as trade, immigration, fiscal policy, regulation, and geopolitics, the U.S. economy has demonstrated strong resilience. These policies are still evolving, and their long-term impacts will take time to manifest.

Economic Outlook

Recent data indicate a slowdown in economic growth. The unemployment rate, while low, has risen slightly. Job growth has slowed, and the risks to employment have increased. At the same time, inflation has risen recently and remains at a high level. In recent months, the balance of risks has shifted significantly, prompting us to adjust our monetary policy stance to be closer to neutral at last week's meeting.

In the first half of this year, the GDP growth rate was about 1.5%, down from 2.5% last year. The slowdown in growth mainly reflects a deceleration in consumer spending. The real estate market remains weak, but business investment in equipment and intangible assets has grown faster than last year. As noted in the September Beige Book, which collects economic information from across the Federal Reserve's districts, businesses still believe that uncertainty affects their future expectations. Consumer and business confidence indices fell sharply this spring; they have since rebounded but remain below the levels at the beginning of the year.

In terms of the labor market, both labor supply and demand have significantly slowed—this is an unusual and challenging phenomenon. In such a lackluster and somewhat weak labor market, the risks to employment have increased. The unemployment rate rose slightly to 4.3% in August, but has remained low over the past year. During the summer, job growth slowed significantly, averaging only 29,000 new jobs per month over the past three months. The current job growth rate seems to be below the "break-even point" needed to maintain the unemployment rate. However, some other labor market indicators remain stable overall. For example, the ratio of job vacancies to unemployed persons is still close to 1In addition, various measures of job vacancies and the number of first-time applicants for unemployment benefits have remained relatively stable.

Inflation has significantly retreated from its highs in 2022 but is still above our long-term target of 2%. The latest data shows that personal consumption expenditures (PCE) overall prices rose by 2.7% in the 12 months ending in August, up from 2.3% in August 2023. Excluding the volatile food and energy prices, core PCE prices increased by 2.9% last month, also higher than the same period last year. After declining last year, commodity prices have started to rebound, becoming a major factor driving inflation higher. Existing data and surveys indicate that these price increases primarily reflect higher tariffs rather than broader price pressures. Inflation in the services sector, including housing prices, continues to trend downward. Influenced by tariff news, short-term inflation expectations have generally trended upward this year. However, looking ahead to about a year from now, most long-term inflation expectation indicators remain consistent with our 2% inflation target.

The overall impact of significant changes in trade, immigration, fiscal, and regulatory policies on the economy remains to be seen. A reasonable expectation is that the impact of tariffs on inflation will be temporary—just a one-time price fluctuation. A "one-time" fluctuation does not mean "immediate." Increased tariffs may take some time to affect the entire supply chain. Therefore, a one-time increase in price levels may persist for several quarters and lead to a slight increase in inflation during that period.

However, the uncertainty surrounding inflation trends remains high. We will carefully assess and manage the risks of high inflation and persistent inflation. We will ensure that this price increase does not evolve into a persistent inflation problem.

Monetary Policy

Recent inflation risks are skewed to the upside, while employment risks are skewed to the downside—this is a challenging situation. The dual risks mean that there is no risk-free path. If monetary policy is eased too much, we may not be able to effectively control inflation and may need to adjust policy in the future to achieve the 2% inflation target. If monetary policy is tightened for too long, the labor market may unnecessarily weaken. In this context of conflicting objectives, the policy framework requires us to maintain balance in achieving our dual mandate.

The increased downside risk to the employment outlook has shifted the risk balance for achieving our targets. Therefore, at our last meeting, we decided to move further toward a more neutral policy stance, lowering the target range for the federal funds rate by 25 basis points to 4% to 4.25%. I believe that the current policy stance remains moderately restrictive but allows us to better respond to changes in the economic situation.

Our policy is not on a preset path. We will continue to determine the appropriate policy stance based on the latest data, economic outlook, and risk balance. We are committed to supporting full employment and keeping inflation sustainably at the 2% target level. Achieving these goals is crucial for all Americans. We are well aware that our policy actions will impact communities, families, and businesses across the country.

Thank you again for inviting me to today's meeting. I look forward to engaging in in-depth discussions with everyone