Fed's Powell signals patient stance on rate cuts

by Craig Torres and Catarina Saraiva

Federal Reserve Chair Jerome Powell said the recent performance of the US economy has been “remarkably good,” giving central bankers room to lower interest rates at a careful pace.

“The economy is not sending any signals that we need to be in a hurry to lower rates,” Powell said Thursday in Dallas. “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.”

US central bankers began lowering borrowing costs in September with an aggressive half-percentage-point cut, and then lowered the policy rate again by a quarter point last week. They’ve signaled a willingness to cut rates further so long as inflation continues to slow. Powell’s comments appear in line with some of his other colleagues who are advocating a go-slow approach to future rate reductions.

“We are on the verge of a pause,” said Lindsey Piegza, chief economist at Stifel Financial Corp. “Clearly the Fed has taken out more policy firming than needed at this point.”

Piegza forecasts a pause by January and then just three cuts next year “at most.”

Powell’s remarks prompted traders to pare back expectations for a December rate cut, with the policy-sensitive yield on two-year Treasuries rising as much as eight basis points to 4.36% Thursday. Swaps traders also lowered the chance to less than 60% for the Fed to reduce rates at its next meeting that ends on Dec. 18 — from roughly 80% a day earlier.

In a moderated discussion that followed his speech, Powell added that uncertainty over the neutral level of rates — where policy is neither stimulating nor dampening growth — provides yet another reason to move cautiously. Several Fed officials have said they believe the fed funds rate remains in restrictive territory and favor moving gradually down toward it.

“In this situation, what it calls for is us to be careful,” he said. As the central bank approaches “the plausible range of neutral levels,” he added, “it may be the case that we slow the pace of what we’re doing just to increase the chances that we get this right.”

Data out earlier this week showed a measure of underlying US inflation remained firm in October. The so-called core consumer price index — which excludes food and energy costs — increased 0.3% for a third month.

“Inflation is running much closer to our 2% longer-run goal, but it is not there yet,” Powell said. “We are committed to finishing the job. With labor-market conditions in rough balance and inflation expectations well anchored, I expect inflation to continue to come down toward our 2% objective, albeit on a sometimes-bumpy path.”

Powell made no comments on the possibility of a cut at the December meeting.

Monetary policy could face crosswinds next year if President-elect Donald Trump fulfills his campaign promises to cut taxes, restrain immigration and deploy tariffs. Policy uncertainty may also be contributing to the Fed’s more inertial attitude toward lowering rates right now. 

Trump policies

In the Q&A session, Powell repeated his previous comments that it’s too early for policymakers to shift in anticipation of new fiscal or trade policies.

“I think we have time to make assessments about what the net effects of policy changes will be on the economy before we react,” he said.

He emphasized that when it comes to potential new tariffs the reaction of US trading partners will complicate the impact on the US, and the negative effect on growth could run counter to the positive impact of fiscal policy.

“Another thing is: What about retaliation?” Powell said.  “In addition, that’s happening at a time when there could be fiscal policy which could be supportive of the economy. So what’s really the net effect?”

Trump has also criticized the Fed and Powell. At his Nov. 7 press conference, Powell said he wouldn’t leave the Fed if asked to resign. He also added that any attempt to demote him or any other Fed governor in a leadership position was “not permitted under the law.”

The US economy continues to expand at a robust pace, averaging about 3% growth over the past two years. The labor market, meanwhile, has cooled, but remains resilient. Powell said the labor market is in “solid condition,” and said by many metrics it’s back to “more normal” levels consistent with the maximum employment mandate.

“Improving supply conditions have supported this strong performance of the economy,” Powell said. “The labor force has expanded rapidly, and productivity has grown faster over the past five years than its pace in the two decades before the pandemic, increasing the productive capacity of the economy and allowing rapid economic growth without overheating.”

Higher productivity, which allows workers to produce more output per hour, helps to keep a lid on inflation and is key to long-term economic growth.

Some policymakers, including the Minneapolis Fed’s Neel Kashkari, have said higher productivity may ultimately lead to fewer rate reductions. 

“Ultimately, the path of the policy rate will depend on how the incoming data and the economic outlook evolve,” Powell said.

Framework Review

The Fed chair also made his most revealing comments to date on the central bank’s upcoming framework review. 

He said the questions posed in the review will revolve around how concerned policymakers are about the zero lower bound now that interest rates look poised to remain at higher levels than before the pandemic. Since 2008, officials have cut their benchmark rate to zero twice, which limits the effectiveness of monetary policy.

While Powell said the Fed hasn’t made any decisions, he suggested the central bank will shift to a traditional inflation target. The current framework, released in 2020, says policymakers will pursue a period of overshooting the Fed’s 2% target when price growth has been persistently running below their goal.

“At the same time, the base case should be more like a traditional reaction function,” Powell said. “You don’t promise an overshoot, you just target inflation. We haven’t made any decisions, but those are the questions we’ll be asking.”