Speech by Governor Cook on the economic outlook and monetary policy

Federal Reserve Governor Lisa D. Cook supported the recent 25 basis point fed funds rate cut to 3.75-4.00%, citing greater downside risks to employment than upside risks to inflation, and also backed the cessation of balance sheet runoff. She noted that inflation, estimated at 2.8% PCE, remains elevated due to tariff pass-through, expecting it to persist for the next year, though underlying inflation shows progress towards the 2% target, and she is prepared to act forcefully if necessary. The labor market is solid but gradually cooling, with concerns about a 'two-speed' economy affecting vulnerable households, while overall economic activity shows solid growth, boosted by AI-driven business investment despite temporary government shutdown effects. Cook emphasized a data-dependent approach, acknowledging elevated risks to both mandates and that every FOMC meeting is 'live'.

Analysis

Federal Reserve Governor Lisa D. Cook supported the recent 25 basis point reduction in the fed funds rate to 3.75-4.00%, citing greater downside risks to employment than upside risks to inflation. This decision, coupled with the cessation of balance sheet runoff on December 1, signals a gradual move towards policy normalization while maintaining a "modestly restrictive" stance. Inflation remains elevated, with the 12-month PCE price index estimated at 2.8% through September, primarily due to tariff-affected goods prices expected to persist for the next year, though underlying core PCE (excluding tariffs) is estimated at 2.3%.

Cook expressed a firm commitment to the 2% inflation target, indicating readiness to act forcefully if tariff effects prove persistent or if higher inflation becomes entrenched. The labor market is solid but gradually cooling, with the unemployment rate at 4.3%, yet a "two-speed" economy is evident, as vulnerable households face rising unemployment and increased delinquencies. Overall economic activity shows solid growth, driven by robust household consumption and strong AI-related business investment, which is expected to boost future productivity despite a temporary government shutdown.

The outlook projects moderate medium-term growth supported by an AI productivity boom, a solid labor market with downside risks, and elevated inflation with upside risks. Cook emphasized a data-dependent approach, acknowledging elevated risks to both employment and inflation mandates, and reiterated that every FOMC meeting is "live" for policy adjustments.

Key Decisions for Investors

• Monitor the persistence of tariff-driven inflation and the Fed's commitment to its 2% target, as forceful action remains a possibility despite the recent rate cut
• Assess the impact of the "two-speed" economy on consumer-facing businesses and credit portfolios, particularly those exposed to vulnerable households
• Evaluate long-term growth opportunities in sectors benefiting from AI-driven business investment, while acknowledging potential short-term disruptions from fiscal policy
• Maintain a data-dependent investment strategy, recognizing the FOMC's "live meeting" approach and elevated risks to both employment and inflation mandates