Federal Reserve Chairman Jerome Powell said Monday that the recent half-percentage-point interest rate cut should not be interpreted as a signal that future moves will be strong, in fact it indicates that the next moves will be smaller.
The head of the central bank confirmed during a speech in Nashville, Tennessee, that he and his colleagues will seek to achieve a balance between reducing inflation, supporting the labor market, and allowing data to guide future movements.
“Looking ahead, if the economy develops broadly as expected, policy will move over time toward a more neutral stance,” he told the National Association for Business Economics in prepared remarks. “But we are not on any predetermined path.” “The risks are two-sided, and we will continue to make our decisions meeting after meeting.”
Powell noted that if economic data remains consistent, there will likely be two additional rate cuts this year but in smaller increases of a quarter of a percentage point. This contrasts with market expectations for further aggressive easing.
“This is not a committee that feels like it's in a rush to cut interest rates quickly,” he said during a question-and-answer period after his speech with Ellen Zentner, an economist at Morgan Stanley. “If the economy performs as expected, that would mean two additional interest rate cuts this year, a total of an additional 50 (basis points).”
Stocks fell as Powell spoke, with the Dow Jones Industrial Average falling more than 150 points. Treasury yields rose with the index 10-year Treasury bonds Most recently, the yield was nearly 3.8%, up nearly 5 basis points during the session.
These comments come less than two weeks after the Federal Open Market Committee, which sets interest rates, agreed to reduce the key overnight borrowing rate by half a percentage point, or 50 basis points. A basis point equals 0.01%.
Although the action was largely expected by markets, it was unusual as the Fed has historically only moved in large increases during events such as the Covid pandemic in 2020 and the global financial crisis in 2008.
The likelihood of another 50 basis point cuts would be consistent with estimates in the FOMC's “dot chart” which indicates individual officials' assessments of where interest rates are headed.
Speaking about the decision at the meeting on September 17-18, Powell said it reflects policymakers' belief that it is time for a policy “reset” that better reflects current conditions. Starting in March 2022, the Fed began to fight rising inflation; Policymakers have recently turned their attention to the labor market, which Powell described as “solid” although it has “clearly calmed over the past year.”
“This 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 toward our goal,” Powell said.
“We don't think we need to see a further slowdown in labor market conditions to achieve 2% inflation,” Powell added.
Futures market pricing suggests the Fed is likely to move cautiously at its meeting on November 6-7 and agree to a quarter-point cut. However, traders view December's move as a more aggressive half-point cut.
For his part, Powell expressed his confidence in the economic strength and believes that inflation is continuing to slow.
Inflation through August was about 2.2% annually, according to the Federal Reserve's preferred personal consumption expenditures price index released Friday. While this is close to the central bank's target of 2%, core inflation, which excludes gas and groceries, is still running at 2.7%. Policymakers typically view core inflation as a better guide to long-term trends, as food and energy prices are more volatile than many other items.
Perhaps the most challenging area for inflation was housing-related costs, which rose another 0.5% in August. However, Powell said he believes the data will eventually catch up with lower rental renewal prices.
“Housing services inflation continues to decline, but slowly,” he said. “The growth rate of rents charged to new tenants remains low. As long as this remains the case, housing services inflation will continue to decline. Broader economic conditions are also setting the stage for further deceleration of inflation.”
