Powell signaled further, smaller interest rate cuts, insisting the Fed was “not following any preset path.” | Wilnesh News

Federal Reserve Chairman Jerome Powell said on Monday that the latest half-percentage point rate cut should not be read as a sign that future steps will be so aggressive and in fact indicates that the next step will be smaller.

In a speech in Nashville, the central banker said he and his colleagues would seek to strike a balance between lowering inflation and supporting the labor market and let data guide future actions.

“Looking forward, if the economy develops broadly as expected, policy will shift to a more neutral stance over time,” he told the National Association of Business Economics in prepared remarks. “But we are not on any preset course.” The risks go both ways and we will continue to make decisions from meeting to meeting.”

Powell did say that if economic data holds up, there could be two more rate cuts this year, but they would be smaller cuts of a quarter of a percentage point. This is in sharp contrast to market expectations for more aggressive easing policies.

“This is not a committee that is rushing to cut rates quickly,” he said during a question-and-answer session after the speech. “If the economy performs as expected, that would mean further rate cuts this year, totaling another 50 basis points.”

The comments came less than two weeks after the Federal Open Market Committee approved a half percentage point, or 50 basis point, cut to the Fed’s key overnight borrowing rate. One basis point is equal to 0.01%.

While markets have largely expected this move, what is unusual is that historically the Fed has only taken such drastic steps during events such as the 2020 COVID-19 pandemic and the 2008 global financial crisis.

The likelihood of an additional 50 basis points cut would be consistent with estimates provided in the FOMC’s “dot plot,” which shows individual officials’ assessments of the direction of interest rates.

Powell said of the decision that it reflected policymakers’ belief that it was time to “recalibrate” policy to better reflect current conditions. Starting in March 2022, the Fed began to deal with a surge in inflation; policymakers have recently turned their attention to a labor market that Powell described as “solid” despite the labor market “cooling significantly in the last year.”

“This decision reflects our growing confidence that, by appropriately adjusting our policy stance, we can maintain labor market strength in an environment of moderate economic growth and continued decline in inflation toward our goals,” Powell said.

“We do not believe we need to see further cooling in labor market conditions to achieve 2% inflation,” Powell added.

Futures market pricing suggests the Fed is more likely to take cautious action and approve a 25 basis point rate cut at its meeting on November 6-7. However, traders see December’s move as a more aggressive half-percentage point downward revision.

Powell expressed confidence in the strength of the economy and believed that inflation will continue to cool.

Inflation was about 2.2% in August, according to the Federal Reserve’s preferred consumer price expenditures index released on Friday. While that’s close to the central bank’s 2% target, core inflation, which excludes gas and groceries, is still running at 2.7%. Policymakers generally consider core inflation a better guide to long-term trends because food and energy prices are more volatile than many other items.

Perhaps the most stubborn area of ​​inflation is housing-related costs, which rose another 0.5% in August. However, Powell said he believes the data will eventually catch up with the slowdown in renewal prices.

“Housing services inflation continues to fall, but slowly,” he said. “Rent growth rates charged to new tenants remain low. As long as this persists, housing services inflation will continue to fall. Broader economic conditions also set the stage for further deflation.”

After the speech, Powell plans to hold a Q&A with Morgan Stanley economist Alan Zentner.