Powell says he is not in a hurry to cut interest rates quickly, casting cold water on expectations of a sharp rate cut

Federal Reserve Chairman Jerome Powell said the Fed will lower interest rates "over time," while reiterating that the overall U.S. economy remains on solid footing.

Powell also reiterated his confidence that inflation will continue to move toward the Fed's 2% target, adding that economic conditions "set the stage" for further easing price pressures.

"Looking ahead, if the economy evolves broadly in line with expectations, policy will gradually shift to a more neutral stance," Powell said in a speech at the annual meeting of the National Association for Business Economics in Nashville. "But we are not on any preset course," he said, noting that policymakers will continue to make decisions on a meeting-by-meeting basis based on incoming economic data.

Neutral policy refers to policy that neither stimulates nor hinders the economy. The Fed's current benchmark rate is still widely viewed as restrictive to economic activity after being cut to a range of 4.75%-5% earlier this month.

The comments leave open the question of how policymakers will respond to the size and pace of rate cuts in the coming months, a critical question for investors.

In a question-and-answer session after the speech, Powell acknowledged that the projections officials released along with the September rate decision suggested the Fed would cut rates by 25 basis points in each of the next two meetings (November and December). But he warned that the Federal Open Market Committee (FOMC) will make decisions based in part on information they have not yet received.

"The committee is in no hurry to cut rates quickly," Powell said. "Ultimately, we will be guided by the data we receive. If the economy slows more than we expect, then we can cut rates faster. If it slows less than we expect, we can slow down."

The Fed cut borrowing costs by 50 basis points in early September, its first rate cut since 2020 and a bigger move than usual. Officials cut rates this time to prevent the slowing labor market from weakening further.

Powell called the labor market solid on Monday, but said employment conditions have "cooled significantly over the past year." "We think that We do not need to see a further cooling of labor market conditions to achieve 2% inflation,” he said.

Continued Disinflation

Inflation has been tame in recent months, a trend reinforced by government data released last week, with the Fed’s preferred inflation measure showing the overall personal consumption expenditures price index (PCE) slowing to 2.2% in August from a year earlier.

That gives officials more confidence that inflation is moving toward their goals, allowing them to focus more on supporting the labor market.

“The foundation for disinflation is broad, and recent data suggest that inflation is moving further toward a sustained return to our 2% objective,” Powell said.

Still, some policymakers remain wary of cutting rates too quickly and worry that it could reignite inflationary pressures in the economy.

“Our goal has always been to restore price stability while avoiding the rise in unemployment that tends to accompany cooling inflation,” Powell said. “While the task is not yet complete, we have made great progress toward that outcome.” ”

Powell acknowledged that the decline in housing inflation has been slow, but expressed confidence that it will cool further over time.

Nonfarm payrolls are crucial

At their meeting earlier this month, officials expected an additional 50 basis points of rate cuts for the rest of 2024 and a further 100 basis points in 2025, according to median forecasts.

A few Fed officials left the door open to such a move, saying any signs of significant weakness in the labor market could lead to another large rate cut.

Other officials estimated that the easing by the end of the year could be smaller. Fed Governor Bowman, who opposed a 50 basis point rate cut in September, favored a smaller cut. She stressed that she sees lingering inflation risks and said the Fed should lower rates at a "measured" pace.

Bond traders cut their expectations for rate cuts next year after Powell's speech overnight. Traders of short-term interest rate futures now see a 25 basis point cut in November as more likely than a 50 basis point cut.

On Tuesday, Treasuries gave up gains after a historic fifth straight month of gains. As measured by the Bloomberg US Treasury Total Return Index, Treasuries have returned 1.4% this month through Friday, which would be the longest monthly winning streak for the market since 2010. After climbing in the first few months of the year, yields began to fall in April, reversing year-to-date losses to a 4.1% gain as sticky inflation data undercut expectations for Fed rate cuts.

"The economy is in better shape," said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. Powell has placed more emphasis on the labor market, so Friday's non-farm data is more important. The sharp rise in U.S. Treasuries is likely to have exceeded reality. "We are at a critical turning point in data and policy," said Priya Misra, portfolio manager at J.P. Morgan Asset Management. If the number of new jobs exceeds 150,000, the market's interest rate expectations may rise slightly, as the probability of a 50 basis point rate cut in November will decrease, while a reading close to 100,000 or lower may prompt the Fed to cut interest rates by another 50 basis points. "The latest data on the labor market will be released on Friday. Economists surveyed by Bloomberg expect employers to add 150,000 jobs in September, consistent with a slowing labor market. The unemployment rate, which has climbed this year, is expected to stabilize at 4.2%.