Federal Reserve Chair Jerome Powell conveyed on Monday that the recent half-percentage point interest rate cut should not be seen as an indication that future adjustments will be equally aggressive. Instead, he suggested that forthcoming changes would likely be more moderate.
Speaking in Nashville, Powell emphasized that he and his colleagues at the Federal Reserve will strive to find a balance between reducing inflation and supporting the labor market, with future policy decisions being data-driven. During his address to the National Association for Business Economics, Powell noted, “Looking forward, if the economy evolves broadly as expected, policy will move over time toward a more neutral stance. But we are not on any preset course. The risks are two-sided, and we will continue to make our decisions meeting by meeting.”
Powell also mentioned that, contingent on consistent economic data, two additional rate cuts of 25 basis points each could be expected this year. This approach contrasts with the market’s anticipation of more aggressive rate reductions. During a Q&A session following his speech, he remarked, “This is not a committee that feels like it’s in a hurry to cut rates quickly. If the economy performs as expected, that would mean two more rate cuts this year, a total of 50 basis points more.”
These statements were made shortly after the Federal Open Market Committee (FOMC) approved a half-percentage point reduction in the Fed’s key overnight borrowing rate. While such a large adjustment was anticipated by the market, it is uncommon and historically only seen during significant crises such as the Covid-19 pandemic in 2020 and the global financial crisis in 2008.
Another reduction of 50 basis points aligns with the individual officials’ projections in the FOMC’s “dot plot,” which indicates their future rate expectations. Powell explained that this decision aligned with policymakers’ belief in the necessity of a “recalibration” of policy to better reflect current conditions. Since March 2022, the Fed has been combating rising inflation, but the focus has now shifted to a labor market that, while still strong, has shown signs of cooling over the past year.
Powell stated, “That decision reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in an environment of moderate economic growth and inflation moving sustainably down to our objective. We do not believe that we need to see further cooling in labor market conditions to achieve 2 percent inflation.”
Market trends suggest a cautious approach by the Fed in its November 6-7 meeting, potentially resulting in a quarter-point reduction. However, the December meeting might see a more significant half-point cut. Powell expressed optimism about the economic conditions and anticipated continued cooling of inflation.
As of August, inflation was about 2.2% annually according to the Fed’s preferred consumer price index, just above the central bank’s 2% target. However, core inflation, which excludes volatile items such as gas and groceries, remained at 2.7%. Core inflation is often seen as a more reliable indicator of long-term trends.
Powell acknowledged that housing-related costs remain a persistent area of inflation, with another 0.5% increase in August. Nevertheless, he expects that data will eventually reflect the easing prices of rent renewals. “Housing services inflation continues to decline, but sluggishly,” he said. “The growth rate in rents charged to new tenants remains low. As long as that remains the case, housing services inflation will continue to decline. Broader economic conditions also set the table for further disinflation.”
Following his speech, Powell participated in a question-and-answer session with Morgan Stanley economist Ellen Zentner.
