Federal Reserve Chairman Jerome Powell signaled on Monday that while more interest rate cuts are expected this year, the central bank is taking a cautious approach and is not in a rush to implement aggressive measures. Speaking at the National Association for Business Economics conference in Nashville, Powell emphasized that the Federal Reserve will continue to let economic data guide its decisions, rather than adhering to a predetermined path.
"We are not on any preset course," Powell said during his prepared remarks, highlighting that the economy remains resilient but will require balanced actions. He noted that if the U.S. economy continues to evolve as expected, policy adjustments will gradually move toward a "neutral stance," which refers to interest rates that neither stimulate nor slow down the economy. Powell acknowledged that while inflation has cooled, challenges remain in achieving the Fed's 2% inflation target.
In contrast to the larger-than-expected half-percentage-point cut made earlier this month, Powell indicated that future reductions would likely be smaller, with two additional quarter-point cuts anticipated before the end of the year. "This is not a committee that feels like it's in a hurry to cut rates quickly," Powell said during a Q&A session with Morgan Stanley economist Ellen Zentner, reinforcing the Fed's careful approach to monetary easing.
The stock market reacted negatively to Powell's speech. The Dow Jones Industrial Average fell over 150 points during his remarks, and Treasury yields rose, with the 10-year Treasury note climbing to near 3.8%. Investors had hoped for clearer signals of aggressive rate cuts, but Powell's comments suggested a more measured approach based on economic conditions.
The Federal Reserve's recent focus has shifted from battling surging inflation to stabilizing the labor market. Beginning in March 2022, the Fed raised interest rates aggressively to curb inflation, but as inflation has slowed, attention has turned to maintaining job growth. Powell noted that the labor market remains strong but has "clearly cooled over the last year," prompting a recalibration of monetary policy. He added that the Fed believes maintaining a solid labor market is achievable even as inflation trends down.
"Looking forward, the risks are two-sided, and we will continue to make our decisions meeting by meeting," Powell reiterated. This cautious stance suggests the Fed is carefully watching how inflation and employment data develop in the coming months before deciding on further rate cuts.
At the heart of the Fed's decision-making is its long-standing goal of bringing inflation down to 2%. Inflation during August was recorded at 2.2% annually, according to the Fed's preferred measure, the personal consumption expenditures (PCE) price index. Core inflation, which strips out volatile food and energy prices, still stands at 2.7%, a sign that more work is needed to tame price pressures.
Powell acknowledged that housing costs remain a stubborn contributor to inflation, with rental prices rising in recent months. However, he expressed optimism that this will eventually ease, as data on rent renewals show prices are stabilizing. "Housing services inflation continues to decline, but sluggishly," he said, adding that broader economic conditions should support further disinflation in this sector.
Despite some positive signs, Powell's remarks made it clear that the Fed is prepared to act more aggressively if the economic outlook deteriorates. During the Q&A, Powell stated that while the base case for policy is a slower pace of rate cuts, the central bank will respond quickly if necessary. "We will do what it takes in terms of the speed at which we move," Powell said, suggesting that more drastic action could be taken if inflation spikes or the labor market weakens unexpectedly.
The market anticipates a quarter-point cut during the Fed's November meeting, with a potential for a larger, half-point reduction in December. However, as Powell made clear, these decisions are contingent on the economic data released between now and then, including the key labor report expected this Friday.
The Fed's cautious approach has led many to speculate that it is attempting to orchestrate a "soft landing"-reducing inflation without triggering a sharp rise in unemployment or pushing the economy into recession. Powell expressed confidence that the central bank has made significant progress toward that goal, stating, "Our goal all along has been to restore price stability without the kind of painful rise in unemployment that has frequently accompanied efforts to bring down high inflation."
