Federal Reserve Semiannual Monetary Policy Report: Overview of the Current Economic Situation and Monetary Policy

Jerome H. Powell Chairman of the Board of Governors of the Federal Reserve System To the Committee on Banking, Housing, and Urban Affairs of the United States Senate February 11, 2025 Chairman Scott, Ranking Member Warren, and other members of the Committee, thank you for the opportunity to present the Federal Reserve’s semiannual monetary policy report.

The Federal Reserve remains focused on achieving its dual mandate of maximum employment and stable prices for the American people. Overall, the U.S. economy has performed strongly, and has made substantial progress toward our goals over the past two years. Labor market conditions have cooled from earlier overheating but remain solid. Inflation has moved substantially closer to our 2 percent longer-run objective, but remains moderately above that level. We are closely monitoring risks to both sides of our dual mandate.

Before discussing monetary policy, let me review the current economic situation.

Current Economic Situation and Outlook

Recent data suggest that economic activity continues to expand at a solid pace. Gross domestic product (GDP) grew 2.5% in 2024, supported by resilient consumer spending. Although investment in equipment and intangible assets declined in the fourth quarter, overall performance was solid for the year. Housing market activity appears to have stabilized after a downturn in the middle of last year.

Labor market conditions remain strong and stabilizing. Over the past four months, monthly job creation has averaged 189,000. After rising earlier, the unemployment rate has remained stable since the middle of last year, at 4% in January, which remains low. Nominal wage growth has slowed over the past year, and the gap between job openings and the labor force has narrowed. Overall, a wide range of indicators suggest that the labor market is roughly balanced and is not a source of significant inflationary pressure. Strong labor market conditions in recent years have helped to narrow persistent disparities in employment and earnings among different groups of people.

Inflation has fallen significantly over the past two years, but remains slightly above the long-term target of 2%. In the 12 months ending in December, the personal consumption expenditures (PCE) price index rose 2.6% overall, and the core PCE price index, which excludes the more volatile food and energy categories, rose 2.8%. Long-term inflation expectations appear to remain stable, judging from various surveys of households, businesses and forecasters, as well as relevant indicators in financial markets.

Monetary Policy

Our monetary policy actions are guided by our dual mandate to promote maximum employment and stable prices for the American people. Since September, after maintaining the federal funds rate target range at 5.25% to 5.50% for 14 months, the Federal Open Market Committee (FOMC) has lowered the policy rate by a full percentage point from its peak. Given the progress on inflation and the cooling of the labor market, it is appropriate to adjust our policy stance. At the same time, we are continuing to reduce our holdings of securities assets.

Given that the current stance of policy is significantly less restrictive than it was previously and that the economy remains strong, there is no rush to adjust the stance of policy. We recognize that easing policy constraints too quickly or too much could hamper progress in controlling inflation, but easing policy constraints too slowly or too little could unduly weaken economic activity and employment. In considering the size and timing of further adjustments to the target range for the federal funds rate, the Federal Open Market Committee will assess incoming data, the changing economic outlook, and the balance of risks.

As economic conditions change, we will adjust the stance of policy in the manner that best achieves our maximum employment and stable price goals. If the economy remains strong and inflation does not move toward our 2 percent objective on a sustained basis, we could keep policy restrained for longer. If the labor market weakens unexpectedly or inflation declines more quickly than expected, we would also ease policy accordingly. We are closely monitoring the risks to both sides of our dual mandate, and current policies are well prepared to address the risks and uncertainties we face.

This year, we are conducting our second regularly scheduled review of monetary policy strategy, tools, and communication, the framework for achieving our congressionally mandated maximum employment and stable price goals. The focus of this review is the Federal Open Market Committee's Statement on Longer-Run Goals and Monetary Policy Strategy, which sets out the Committee's monetary policy approach, and the Committee's communication tools. The Committee's 2 percent longer-run inflation objective remains unchanged and is not the focus of this review.

Our review will include conversations and public engagement, including Fed Listens events around the country and a research conference in May. We will draw on lessons learned over the past five years and adjust our approach, where appropriate, to better serve the American people to whom we are accountable. We plan to complete this review by the end of the summer.

Finally, I want to emphasize that at the Federal Reserve, we will do everything we can to achieve the two goals of monetary policy set by Congress - maximum employment and stable prices. We are committed to supporting maximum employment, inflation that is consistently at our 2 percent target, and stable longer-term inflation expectations. Every American has a vital interest in our success on these goals. We know that our actions affect communities, families, and businesses across the country, and everything we do is in the service of fulfilling our public mission.