But No Rush to Act

Federal Reserve Chair Jerome Powell confirmed on Monday that the central bank plans to continue lowering interest rates in a bid to sustain economic growth and promote hiring. However, Powell made it clear that the Fed is not in a hurry to make aggressive cuts, despite having recently reduced rates by a half-percentage point, the first reduction since 2020.

  • Speaking at a conference in Nashville, Powell highlighted the central bank's focus on maintaining a balance in economic activity.
  • The Fed’s approach is to lower rates to a level that neither spurs nor slows economic activity, but Powell cautioned that this process does not need to happen hastily.

The next Federal Reserve meeting is scheduled for November 6-7, and many experts anticipate at least a quarter-point rate cut. Powell's remarks come in the context of the Fed’s recent decision to lower its benchmark rate to a range of 4.75% to 5%, down from its highest level in two decades. This marked a shift from the Fed’s focus on fighting inflation to fostering steady growth.

Smaller Rates Cuts Going Forward

Powell’s comments also underscored that further rate cuts will likely come in smaller increments. With two more meetings before the year ends, the Fed will have additional employment and inflation data to inform its decisions.

  • The recent rate cut reflected the Fed’s growing confidence that lowering rates could strengthen the labor market without reigniting inflation.
  • The unemployment rate has increased from 3.7% in January to 4.2% in August, signaling a cooling labor market. Powell emphasized that the central bank is carefully monitoring the job market to avoid a deeper slowdown.
  • In recent years, inflation has been a primary concern for the Fed, with price increases peaking at 7.2% in 2022. However, inflation has significantly decreased, with August figures showing a 2.2% increase over the previous year. The Fed's target is to maintain inflation around 2%. Powell noted that inflation is no longer the central risk to the economy, allowing the Fed to pivot its attention toward the labor market.

A major goal for the Fed is to achieve a "soft landing"—reducing inflation without causing a sharp rise in unemployment. Powell believes progress has been made toward this objective, although he stressed that the task remains incomplete.

Consumer Spending And Labour Force

One of the puzzles facing policymakers is the contrast between strong consumer spending and signs of a cooling labor market. Recent revisions to economic data have revealed stronger income growth than previously thought, providing some optimism for the Fed’s outlook. Personal savings rates were also revised higher, giving policymakers reasons for cautious optimism about the economy’s resilience.

  • Nonetheless, Powell acknowledged that these revisions do not erase concerns about the labor market.
  • Still, Powell stressed that the better news on recent years’ household income growth was not going to stop them from looking really carefully at the labor market data

The upcoming November meeting will provide further insights into the Fed’s strategy for balancing growth with the risk of further economic slowdowns.

Disclaimer

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