Federal Reserve Chairman Jerome Powell said Monday that the recent half-percentage-point rate cut should not be interpreted as a sign that future steps will be just as aggressive, but that subsequent steps will actually be smaller.
The central bank chief asserted during a speech in Nashville, Tennessee, that he and his colleagues will try to strike a balance between reducing inflation and supporting the labor market, and that the data will guide future steps.
“If the economy develops broadly as expected, future policy will move toward a more neutral stance over time. But we are not on a certain path,” he said in prepared remarks to the National Association for Business Economics. “The risks are two-sided and we will continue to make our decisions one meeting at a time.”
Powell did indicate that if economic data remain consistent, there will likely be two more interest rate cuts this year, but in smaller increments of a quarter of a percentage point. That contrasts with market expectations for more aggressive easing.
“This is not a committee that feels like it's in a hurry to cut rates quickly,” he said during a question-and-answer session after his speech with Morgan Stanley economist Ellen Zentner. 'If the economy performs as expected, it would mean more interest rate cuts this year, a total of fifty [basis points] more.”
Stocks fell as Powell spoke, with the Dow Jones Industrial Average losing more than 150 points. Government bond yields rose, as did the benchmark Treasury bond with a term of 10 years most recently returning almost 3.8%, up almost 5 basis points from the session.
The comments come less than two weeks after the rate-setting Federal Open Market Committee approved the half-percentage point, or 50 basis points, cut in the Fed's key interest rates. One basis point is equal to 0.01%.
While markets had largely expected this action, it was unusual because the Fed has historically only acted in such large steps during events like the 2020 Covid pandemic and the 2008 global financial crisis.
The likelihood of another 50 basis points of cuts would be consistent with estimates in the FOMC's dot plot, which shows individual officials' estimates of where rates are headed.
Commenting on the decision, Powell said it reflected policymakers' belief that it was time for a “recalibration” of policy that better reflected current conditions. Starting in March 2022, the Fed began combating rising inflation; Policymakers have recently turned their attention to a labor market that Powell described as “solid,” even though it has “clearly cooled over the past year.”
“This decision reflects our growing confidence that, with an appropriate recalibration of our policy stance, labor market strength can be maintained in an environment of moderate economic growth and inflation moving sustainably toward our target,” Powell said.
“We do not believe we need a further cooling in labor market conditions to reach 2 percent inflation,” Powell added.
Futures market prices suggest the Fed will be more cautious and approve a quarter-point cut at its Nov. 6-7 meeting. However, traders see the December move as a more aggressive half-point cut.
For his part, Powell expressed confidence in economic strength and sees inflation continuing to cool.
Inflation was about 2.2% annually in August, according to the Fed's personal consumer spending price index released Friday. While that is close to the central bank's 2% target, core inflation, excluding gasoline and groceries, was still 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 persistent area of inflation is housing costs, which rose a further 0.5% in August. However, Powell said he believes the data will eventually catch up to the easing of lease renewal prices.
“Inflation in housing services continues to fall, but slowly,” he said. “The growth rate of rents charged to new tenants remains low. As long as that remains the case, inflation in housing services will continue to decline. Broader economic conditions are also setting the stage for further disinflation.”
