The Fed Is Patient

Powell Suggests Cautious Decision-Making on Rate Reductions

Federal Reserve Chair Jerome Powell emphasized on Thursday that the current strength in the U.S. economy allows the central bank to adopt a measured approach to interest rate cuts. Speaking at an event in Dallas, Powell highlighted that recent signs of economic resilience have diminished the urgency to lower rates rapidly.

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

The Federal Reserve has reduced interest rates at its last two meetings, starting with a half-percentage-point cut in September. This was followed by a quarter-point reduction last week, bringing the benchmark rate to a range of 4.5% to 4.75%. Market analysts predict another quarter-point cut at the Fed’s next meeting on December 17–18, followed by a slower pace of reductions in 2025. Powell refrained from providing specific insights on whether the December meeting would result in further cuts.

Transitioning to Neutral Rates

Last year, the Fed raised rates to their highest levels in two decades to combat surging inflation. The current focus is on bringing rates closer to the so-called neutral level, which neither accelerates nor restrains economic growth. While the precise neutral rate is uncertain, it is estimated to be below 4%. Powell suggested that as rates approach this level, the pace of cuts could decelerate.

Powell acknowledged that inflation has declined significantly since mid-2023 but described the progress as uneven.
Using the Fed’s preferred inflation gauge, prices excluding food and energy are projected to rise by 2.8% for the year ending in October, while overall prices are expected to increase by 2.3%. The Fed’s long-term inflation target remains at 2%.
While recent inflation reports slightly exceeded expectations, Powell expressed confidence in the broader downward trend.
The labor market continues to cool under the weight of restrictive monetary policy. Powell described the current situation as being well-aligned with the Fed’s objectives.

Powell also discussed the potential economic implications of policy changes under the incoming administration of President-elect Donald Trump. Trump has proposed new tariffs to promote domestic production, which Powell noted could have varied effects compared to the 2018–2019 trade war with China.

Retail Sales See Strong October Growth

On Friday, the Commerce Department reported a 0.4% increase in retail sales for October, surpassing economists’ forecast of 0.3% growth. September’s retail sales growth was also significantly revised upward, from an initial estimate of 0.4% to 0.8%. These figures underscore continued consumer resilience.

The stronger-than-expected retail sales data has fueled concerns among Federal Reserve officials about the possibility of disinflation stalling.
Federal Reserve Governor Susan Collins reiterated her stance on inflation during a speech on Thursday, aligning with comments made by Fed Chair Jerome Powell last week.
Collins dismissed the notion that new economic strengths were driving inflation higher, attributing current price stickiness to lingering effects of past price hikes.

Collins and Powell suggested that inflationary pressures in certain areas, such as car insurance, are primarily “catch-up” effects. These increases reflect adjustments to past inflationary trends, like rising car prices, which have since stabilized. Powell has described this as a delayed normalization rather than a sign of accelerating inflation.

Disclaimer

Please note that Benchmark does not produce investment advice in any form. Our articles are not research reports and are not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Vladimir Solomianyi / Unsplash.