Fed Signals Shift Toward Neutral Monetary Policy as Economy Remains Strong

U.S. Federal Reserve Chair Jerome Powell envisions a shift toward a more “neutral stance” in future monetary policy.

Speaking at an economic conference in Nashville this week, Powell described the overall state of the economy as “strong.” He emphasized that the Fed faces comparable risks in its dual objectives of curbing inflation while sustaining a robust labor market.

The recent decision to lower the policy rate by 50 basis points reflects increased confidence that, with a suitable adjustment in policy, the strength of the labor market can be preserved alongside moderate economic growth and a sustainable decline in inflation toward the 2% target.

Looking ahead, Powell indicated that if the economy unfolds as anticipated, the Fed’s policies will gradually align with a more neutral approach.

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However, he stressed that there are no fixed plans, as the risks involved are two-sided. The Fed will continue to make decisions based on the data, evolving economic outlook, and the balance of risks, reinforcing the overall stability of the economy with the available tools.

Notably, the Fed reduced interest rates last month for the first time since March 2020, with the U.S. inflation rate recorded at 2.5% in August.