Powell hints at further, smaller rate cuts, insists Fed 'not following a predetermined course'

Federal Reserve Chairman Jerome Powell said Monday that the recent half-percentage-point interest rate cut should not be interpreted as a sign that future measures will be equally aggressive, but rather that the next measures will be smaller.

The central bank chief said during a speech in Nashville that he and his colleagues will try to balance lowering inflation with supporting the labor market and let the data guide future moves.

“If the economy develops broadly as expected, policymakers will move toward a more neutral stance over time. But we are not on a predetermined course,” he told the National Association for Business Economics in prepared remarks. “The risks are two-sided and we will continue to make our decisions session by session.”

Powell noted that if economic data remains consistent, there will likely be two more rate cuts this year, but in smaller increments of a quarter of a percentage point. This contrasts with market expectations of more aggressive easing.

“This is not a committee that feels like it's in a rush to cut rates quickly,” he said during a question-and-answer session following his speech with Morgan Stanley economist Ellen Zentner. “If the economy performs as expected, that would mean more rate cuts this year, a total of 50.” [basis points] more.”

Stocks fell as Powell spoke, with the Dow Jones Industrial Average falling more than 150 points. Treasury yields rose along with the benchmark 10-year Treasury bond The yield was last at just under 3.8%, up nearly 5 basis points from the session.

The comments come less than two weeks after the Federal Open Market Committee approved cutting the Fed's key interest rate by half a percentage point, or 50 basis points. One basis point is equal to 0.01%.

Although markets had largely expected the move, it was unusual in that the Fed has only responded in such large steps in the past during events such as the Covid pandemic in 2020 and the global financial crisis in 2008.

The likelihood of further 50 basis point cuts would be consistent with estimates in the FOMC's “dot plot,” which reflects individual officials' assessments of the direction of interest rates.

Powell addressed the decision, saying it reflected policymakers' belief that it was time for a “recalibration” of policy that better reflects current conditions. Starting in March 2022, the Fed began to combat rising inflation; Policymakers have recently focused their attention on a labor market that Powell described as “solid,” although it has “cooled significantly over the last year.”

“This decision reflects our growing confidence that with an appropriate reset of our policy stance, the strength of the labor market can be maintained in an environment of moderate economic growth and inflation falling sustainably to our target,” Powell said.

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

Futures prices indicate that the Fed will act cautiously and approve a quarter-point cut at its meeting on November 6th and 7th. However, traders see the December move as a more aggressive cut of half a percentage point.

For his part, Powell expressed confidence that the economy is strong and that inflation will continue to cool.

Inflation was about 2.2% annually in August, according to the Fed's preferred consumer price spending index released Friday. While that's close to the central bank's 2 percent target, core inflation, which excludes gasoline and food, was still at 2.7 percent. Policymakers typically view core inflation as a better guide to longer-term trends because food and energy prices are more volatile than many other items.

Perhaps the most stubborn area of ​​inflation was housing costs, which rose another 0.5% in August. However, Powell said he believes the data will ultimately keep pace with falling lease renewal prices.

“Housing services inflation continues to decline, albeit slowly,” he said. “The growth rate of rents for new tenants remains low. As long as this remains the case, inflation in housing services will continue to fall. General economic conditions are also paving the way for further disinflation.”