Federal Reserve Chairman Jerome Powell said Monday that the recent 0.5 percentage point rate cut should not be interpreted as a sign that future moves will be more aggressive, and that in fact the next move could be more He said this indicates that it will be small-scale.
In a speech in Nashville, Tenn., the central bank president said he and others will work to balance controlling inflation with supporting the labor market, and that data will guide future moves.
“Going forward, if the economy progresses broadly as expected, policy will move toward a more neutral stance over time,” he told the National Association for Business Economics in prepared remarks. “We are not on a certain course.” “There are risks on both sides, and we will continue to make decisions meeting by meeting.”
Powell suggested that two more rate cuts this year are likely if economic data is consistent, but they could be as small as a quarter of a percentage point. This is in contrast to market expectations for more aggressive easing.
“This is not a committee that feels like it’s in a hurry to cut rates early,” he said during a question-and-answer session with Morgan Stanley economist Ellen Zentner after his speech. “If the economy performs as expected, there will be another rate cut this year, totaling an additional 50 (basis points),” he said.
Stocks fell during Powell’s remarks, with the Dow Jones Industrial Average dropping more than 150 points. Government bond yields rose along with the benchmark 10 year Treasury bill The latest yield was nearly 3.8%, rising nearly 5 basis points during the trading session.
The remarks came less than two weeks after the Federal Open Market Committee, which decides interest rate settings, approved a 0.5 percentage point (50 basis point) cut in the Fed’s key overnight borrowing rate. A basis point is equal to 0.01%.
Markets largely expected this action, given that the Fed has previously only made moves this large during events such as the 2020 coronavirus pandemic and the 2008 global financial crisis. That was unusual.
The likelihood of another 50 basis points cut would be consistent with the estimates shown in the FOMC’s dot plot, which shows officials’ assessments of the direction of interest rates.
Powell said the decision reflects policymakers’ belief that the time has come to “recalibrate” policy to better reflect the current situation. Starting in March 2022, the Fed began fighting soaring inflation. Policymakers have recently shifted their focus to the labor market, which Powell characterized as “robust,” but which has “obviously cooled over the past year.”
“This decision underscores our confidence that an appropriate readjustment of policy stance can maintain labor market strength in an environment of moderate economic growth and sustained on-target inflation,” Powell said. It reflects the growing trend.”
“We do not believe that labor market conditions need to cool further to achieve 2% inflation,” Powell added.
Futures market pricing indicates the Fed is likely to act cautiously and approve a quarter-point rate cut at its Nov. 6-7 meeting. However, traders believe December’s price action will be a more aggressive 0.5 point cut.
Chairman Powell expressed confidence in the economy’s strength and believes inflation will continue to decline.
Inflation was at an annual rate of about 2.2% in August, according to the Federal Reserve’s preferred personal consumption expenditure price index released Friday. This is close to the central bank’s 2% target, but core inflation, which excludes gasoline and food, is still running at 2.7%. Because food and energy prices are more volatile than many other items, policymakers typically consider core inflation to be a better guide to long-term trends.
Perhaps the most stubborn area of inflation was housing-related costs, which rose another 0.5% in August. But Powell said he believes the data will eventually catch up with the easing of rental renewal prices.
“Housing services inflation continues to decline, but at a slower rate,” he said. “The rate of growth in rents charged to new tenants remains low. As long as this continues, inflation in housing services will continue to fall. Broader economic conditions also position the market for further deflation. .”
