Jerome Powell’s press conference last week offered a wealth of information for investors looking to understand the Federal Reserve’s current stance and future direction. It’s more than the rate cut, which was expected and even a little less generous than some hoped.

However, the Fed is not on a preset course. They are proceeding cautiously and will be looking at incoming data, the evolving outlook and the balance of risks to determine further adjustments. This measured approach means that investors should expect a data-dependent Fed rather than aggressive rate cuts.

The Fed is focused on its dual mandate of maximum employment and stable prices. They see the risks to achieving these goals as roughly in balance. While they acknowledge that the labor market is cooling, it’s not a source of significant inflationary pressures. The Fed also notes that inflation has eased significantly but remains somewhat elevated relative to their 2% goal. 

Core PCE prices rose 2.8% over the 12 months ending in November, down from a high of 5.6%. This suggests the Fed is comfortable with the current state of the labor market and will be primarily focused on getting inflation down to their target.

The U.S. economy is currently performing well, with a GDP growth of 2.8% in the third quarter. The economy is growing at roughly a 2.5% rate this year. The Fed expects growth to remain solid, with a median projection of about 2% over the next few years. This solid growth supports a more cautious approach to further rate cuts. The U.S. economy is outperforming its global peers, and there’s no indication of an impending downturn.

Although inflation has come down, it has underperformed relative to expectations. The Fed is committed to getting inflation back down to its 2% target. Longer-term inflation expectations remain well anchored. The median projection for total PCE inflation is 2.4% this year and 2.5% next year, falling to 2% thereafter. 

However, the Fed is aware of recent high inflation readings and the uncertainty around the path of inflation. The Fed is also monitoring various inflation components such as housing services, goods, and non-market services.

The Fed has reduced the policy rate by 100 basis points and believes policy is still meaningfully restrictive. The Fed’s policy stance is significantly less restrictive. They are now much closer to the neutral rate. The median projection for the federal funds rate is 3.9% at the end of next year and 3.4% at the end of 2026. 

The Fed will be cautious about further cuts. The slower pace of cuts for next year reflects the higher inflation readings and expectations. The actual cuts will be based on incoming data. The Fed recognizes that it is in a new phase and will proceed cautiously.

The labor market is cooling gradually and in an orderly way. Job creation is below the level needed to hold unemployment constant. The unemployment rate is at 4.2%, the same as it was in July. The hiring rate is low, but layoffs are also low. The labor market is not a source of inflationary pressures. The Fed is paying close attention to the labor market, but they don’t think further cooling is needed to get inflation down.

The Fed is carefully monitoring geopolitical risks, but so far, these haven’t significantly affected the U.S. economy. The price of oil has been coming down because of global supply conditions. The Fed also noted some preliminary steps to incorporate the highly conditional estimates of economic effects of policies into their forecast, indicating sensitivity to policy changes. The Fed acknowledges uncertainty around these factors and is prepared to adjust policy as necessary.

The Fed’s ultimate pain point is headline inflation, which is what people experience, but they also look at core inflation since it is a better predictor of future inflation. The difference between “headline” inflation and “core” is that headline includes food and energy prices, which fluctuate and aren’t necessarily indicative of tightness in the economy.

Savvy investors should take away that the Fed is now in a phase of measured easing with a focus on sustained progress on inflation while also maintaining a strong labor market. The Fed will continue to be data-dependent, and there’s no guarantee of a specific path for future rate cuts.

• Don’t expect rapid rate cuts. The Fed is likely to move cautiously.
• Be prepared for some volatility. Markets may react to incoming data.
• Focus on quality and growth. Look for companies with solid fundamentals.
• Stay informed. Monitor economic data and Fed communications.

By understanding the Fed’s current position and its approach to monetary policy, we can make savvy, informed decisions and position ourselves for success in the current economic environment.