– Cites Strong Growth; Low Unemployment; ‘Higher’ Inflation
By Steven K. Beckner
(MaceNews) – Federal Reserve Chair Jerome Powell strongly suggested Wednesday that he favors a gradual, careful approach to further interest rate reductions.
Powell said the Fed is in the process of lowering short-term interest rates to a “more neutral” level but said the strength of economic activity and labor conditions together with “a little higher” inflation mean that the Fed can “afford to be a little more cautious as we try to find neutral.”
Fed policymakers are not taking potential tariff hikes under the incoming Trump administration into consideration in setting rates now, he told a New York Times DealBook Summit.
Preceding Powell’s remarks, a number of other Fed officials had made divergent comments about the economy and monetary policy, with some sounding more eager to cut rates again this month than others.
The Fed’s rate-setting Federal Open Market Committee has lowered the federal funds rate by a cumulative 75 basis points in two steps – a 50 basis point reduction on Sept. 18 and a 25 basis point move on Nov. 7, which took the policy rate down to a target range of 4.5% to 4.75%.
In their quarterly Summary of Economic Projections, published on Sept. 18, FOMC participants projected the policy rate would fall to 3.4% by the end of 2025 and to 2.9% by the end of 2026. A revised “dot plot” will be released on Dec. 18.
FOMC participants have been raising their estimate of the longer run or “neutral” funds rate, most recently to 2.9%, which implies a “real” rate of 0.9% plus the 2% inflation target. Some officials have speculated that it needs to go higher yet, which would impact the appropriate level of the actual, nominal funds rate.
With uncertainty about the proper level apparently in mind, Powell suggested the FOMC will be feeling its way toward neutrality.
Asked why the FOMC is cutting rates despite relatively strong economic growth and above-target inflation, he began by responding, “The background is that … the U.S. economy is doing very well. We’re in a very good place on the economy. We’re growing at around 2 ½ percent, and inflation has come down.”
“Headline inflation was as high as 7.2% or so; now it’s at 2.3%,” he noted. “And unemployment is at 4.1%, which is a little higher than it was a couple of years ago, but it’s still near…it’s at a very, very low level.”
“And we’re not quite there on inflation, but we’re still making progress,” Powell continued, “So the back story is that the U.S. economy is in very good shape, and there’s no reason for that not to continue.”
Powell recalled that “we raised rates to between 5 ¼ and 5 1/2%, and we held them there for 14 months, and other central banks around the world had already started cutting. We were the last major central bank to cut.”
“And we’re now on a path to bring rates back down to a more neutral level over time,”
he went on. “But you’re right, the economy is strong, and it’s stronger than we thought it was going to be in September. The labor market is better, and the downside risks appear to be less in the labor market. Growth is definitely stronger than we thought, and inflation is coming in a little higher.”
“So, the good news is that we can afford to be a little more cautious as we try to find neutral,” Powell added.
Asked how prospective tariff hikes will affect monetary policy, Powell listed “what we don’t know about tariffs”: how big tariff hikes will be; the timing and duration of tariff hikes; what goods and what countries will be hit with higher tariffs.
He said the Fed also can’t know “how that will play into prices… We don’t know how people and markets will react…; we don’t know if other countries will retaliate .…”
So, Powell said “we can’t really start making policy on that … until well into the future .…” What’s more, “we don’t know all the other things that will be happening in the economy when this happens.” So he said the FOMC has no choice but to base its policy decisions “on what’s happening now.”
Powell repeated past defenses of Fed independence in the face of Trump suggestions that he would like to have more to say about monetary policy. He also said he anticipates a good relationship with Trump’s nominee to be Treasury Secretary Scott Bessent, despite adverse comments the latter has made.
A number of other Fed officials have said the funds rate needs to fall further to eventual “neutral” level, but have given mixed signals about the timing and magnitude of additional rate cuts. By and large they have suggested a cautious approach to monetary easing.
Earlier Wednesday, St. Louis Federal Reserve Bank President Alberto Musalem counseled caution about further easing.
Musalem, who will be an FOMC voter next year, said he “expect(s) that inflation will converge to the FOMC’s 2% target and that additional easing of moderately restrictive policy toward neutral will be appropriate over time.”
However, he added, “along this baseline path, it seems important to maintain policy optionality, and the time may be approaching to consider slowing the pace of interest rate reductions, or pausing, to carefully assess the current economic environment, incoming information and evolving outlook.”
Muslaem said he “favor(s) a patient approach that focuses on returning inflation sustainably to 2% for several reasons: In the current environment, core PCE inflation is above target, the economy is strong and growing above its long-term potential, and the labor market is consistent with full employment. Also, the balance of risks around the price stability and maximum employment goals has shifted, and there is uncertainty about the neutral policy rate and productivity trends.”
“Going the last mile to return inflation to 2% will help keep inflation expectations anchored and
provide the price stability underpinning needed to maintain maximum employment and a
sustained economic expansion,” he told the Bloomberg and Global Interdependence Center Symposium.
Richmond Federal Reserve Bank President Tom Barkin told CNBC monetary policy is headed in the right direction “on both sides of our mandate.”
Fed Governor Christopher Waller seemed more eager to cut rates on Monday, although like Musalem he allowed for a pause.
“At present I lean toward supporting a cut to the policy rate at our December meeting,” he said, but added, “that decision will depend on whether data that we will receive before then surprises to the upside and alters my forecast for the path of inflation.”
But Waller also said “there is a case for skipping a rate cut at the next meeting,” given that “monthly readings on inflation have moved up noticeably recently, and we don’t know whether this uptick in inflation will persist, or reverse….”
Also Monday, Atlanta Federal Reserve Bank President Raphael Bostic allowed for more rapid easing if it appears “the labor market is cooling more dramatically than I had imagined….”
said he voted for both rate cuts because “the risks to achieving the Committee’s dual mandates of maximum employment and price stability have shifted such that they are roughly in balance, so we likewise should begin shifting monetary policy toward a stance that neither stimulates nor restrains economic activity.”
In deciding whether to vote for a December rate cut, Bostic said he’ll be asking, “How restrictive is monetary policy? How restrictive does it need to be to keep inflation declining toward 2 percent? On the flip side, how quickly and by how much do we need to lower the federal funds rate to ensure we don’t seriously damage labor markets and inflict undue pain on the American people?”
Bostic allowed for more rapid easing if it appears “the labor market is cooling more dramatically than I had imagined ….”
Meanwhile, New York Federal Reserve Bank President John Williams was noncommittal. “Monetary policy remains in restrictive territory to support the sustainable return of inflation to our 2% goal. I expect it will be appropriate to continue to move to a more neutral policy setting over time.”
The FOMC vice chair added that “the path for policy will depend on the data…. Our decisions on future policy actions will continue to be made on a meeting-by-meeting basis. And they will be based on the totality of the data, the evolution of the economic outlook, and the risks to achieving our dual mandate goals.”
On Tuesday, Governor Ariana Kugler was somewhat vague about where she stands on monetary policy in months to come.
Pointing to 2.8% core PCE price inflation in October, she said she “still view(s) those readings, as of now, as consistent with inflation on a path to return to our 2% goal” and said she is “encouraged that inflation expectations appear to remain well anchored.”
“But they also show the job is not yet done…..,” she added.
Kugler said “continuation of disinflation and a modest cooling in the labor market” justified “steps toward removing restraint” and “moving policy toward a more neutral setting” in September and November.
Looking ahead, she “will vigilantly monitor for incoming risks or negative supply shocks that may undo the progress that we have achieved in reducing inflation.”
Also Tuesday, San Francisco Fed President Mary Daly was emphatic on the need for further rate cuts without specifically advocating a Dec. 18 move.
“In order to keep the economy in a good place we have to continue to recalibrate policy,” Daly told Fox Business. “Whether it’ll be in December or some time later, that’s a question we’ll have a chance to debate and discuss in our next meeting, but the point is we have to keep policy moving down to accommodate the economy.”
Chicago Fed President Austan Goolsbee said he expects interest rates will “come down a fair amount from where they are now” over the next year.