– FOMC Will Proceed ‘Carefully,’ ‘Patiently’ Toward ‘Neutral’ Funds Rate
– FOMC May Slow Pace of Easing As It Approaches Neutral Range
– Level of Neutrality Uncertain; So Should Move ‘Slowly and Carefully’
By Steven K. Beckner
(MaceNews) – Federal Reserve Chairman Jerome Powell declared Thursday that the Fed is in no “hurry” to keep lowering interest rates and vowed to move “carefully” in determining how much more rate reductions are needed in pursuit of its dual mandate goals of “maximum employment” and “price stability.”
Powell said the Fed wants to cut the key federal funds rate to a “neutral” level that is neither expansionary or contractionary, but said uncertainty about where neutrality lies requires moving “slowly” and “carefully.”
As the funds rate approaches a neutral range, the Fed will likely slow the pace of rate cuts, he told the Dallas Regional Chamber and World Affairs Council.
Powell reiterated that the Fed’s policymaking Federal Open Market Committee wants to avoid either cutting rates too far and fast or lowering them too little.
The Fed chief declined to get into questions about the monetary implications of President-elect Donald Trump’s proposed tax, trade and other policy proposals, but he defended central bank independence and said he plans to continue as Fed Chairman through the end of his term in January 2028.
Powell’s remarks come on the heels of October inflation data, which show price increases continuing to exceed the Fed’s 2% target. On Wednesday, the Labor Department reported that its Consumer Price Index rose 0.2% in October, leaving it up 2.6% from a year earlier – a modest acceleration from the 2.4% September pace. The core CPI rose 0.3% or 3.3% from a year earlier.
Inflation at the wholesale level also picked up last month. The Producer Price Index rose 0.2% or 2.4% for the 12 months ended in October, up from 1.9% in September.
Powell was speaking a week after the FOMC cut the funds rate for a second straight meeting. Last Thursday, he and his colleagues lowered the policy rate by 25 basis points to a target range of 4.50% to 4.75%, following a 50 basis point cut on Sept. 18.
In his post-FOMC press conference, Powell declined to give any “forward guidance” on further rate cuts, but said the FOMC will likely be moving the funds rate further to a “more neutral level … patiently, carefully” and “gradually.”
Powell spoke in much that same cautionary vein Thursday.
He began by saying that “the recent performance of our economy has been remarkably good” and “has made significant progress toward our dual-mandate goals of maximum employment and stable prices.”
“The labor market remains in solid condition,” he said. “Inflation has eased substantially from its peak, and we believe it is on a sustainable path to our 2% goal.”
As he elaborated, though, Powell seemed not entirely comfortable with economic conditions. He pointed to rising unemployment, although he said it remains ‘historically low” at 4.1%. And while noting that inflation is “down significantly” and “running much closer to our 2% longer-run goal,” he said “it is not there yet.”
“We are committed to finishing the job,” he continued in prepared remarks. “With labor market conditions in rough balance and inflation expectations well anchored, I expect inflation to continue to come down toward our 2 percent objective, albeit on a sometimes-bumpy path.”
Responding to questions, Powell said the October increase in the PPI was “slightly more of an upward bump than we expected.”
Powell said he and his fellow policymakers “are confident that with an appropriate recalibration of our policy stance, strength in the economy and the labor market can be maintained, with inflation moving sustainably down to 2%.”
“We see the risks to achieving our employment and inflation goals as being roughly in balance, and we are attentive to the risks to both sides,” he continued. “We know that reducing policy restraint too quickly could hinder progress on inflation. At the same time, reducing policy restraint too slowly could unduly weaken economic activity and employment.”
Powell said the FOMC is “moving policy over time to a more neutral setting,” but reiterated that ‘the path for getting there is not preset” but will be data-dependent.
He emphasized that the FOMC can be deliberate in easing policy now that it has cut the funds rate by 75 basis points.
“The economy is not sending any signals that we need to be in a hurry to lower rates,” he said. “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.”
Powell doubled down on that cautious and patient approach in response to questions.
He said uncertainty about the level of neutrality and other uncertainties “argues for moving carefully.”
“Policy is restrictive, but we can’t say how restrictive,” he said, adding that “restrictive” policy is “weighing on the economy; it’s cooling down … pretty much as we hoped it would; the labor market has not quite stabilized but is in a good place.”
In those circumstances, Powell said the FOMC is “moving back down to neutral … carefully and patiently.”
If the economy or the labor market were to weaken suddenly, he said the FOMC “may have to move quickly,” but he added, “We’re not seeing that.”
In their September Summary of Economic Projections, FOMC participants revised their estimate of the “longer run” “neutral” rate to 2.9%, and projected the funds rate will reach that level by the end of 2026. But since then, market expectations for rate cuts have moderated.
What’s more, Fed officials differ on where exactly “neutral” is. For example, Dallas Federal Reserve Bank President Lorie Logan said Wednesday she “see(s) substantial signs that the neutral rate has increased in recent years, and some hints that it could be very close to where the fed funds rate is now.”
Other officials think the funds rate remains well above neutral. Across the policy spectrum, uncertainty about the “real” component of the neutral rate is causing ambivalence and caution among officials as they think about “appropriate monetary policy” might be in coming months.
Thus, St. Louis Fed Preisdent Alberto Muslaem said Wednesday the FOMC can afford to move “judiciously and patiently.”
“I think policy is well positioned … on a path toward neutral,” said Muslaem, a 2025 voter. “The strength of the economy is likely to provide space for a gradual easing of policy with little urgency to try to understand and find where the neutral rate is.”
The fact that monetary policy works “with long and variable lags,” as Nobel Prize-winning economist Milton Friedman famously said, also makes it “difficult” to determine the appropriate policy stance,” Powell said.
“That calls for us moving carefully,” he reiterated. “As we get near a plausible range of neutral levels … maybe we slow the pace of what we’re doing. just to increase the chances we get this right,” he went on, adding that the FOMC wants to steer a “middle course” bet ween cutting rates too slowly or too quickly in order to “get it just right.”
Moving more slowly is “the right thing to do,” Powell added.
Asked why the FOMC should cut rates at all if it’s in such “a good place,” he responded that the Committee must remain “mindful of the risk that we go too far too fast but also the risk that we don’t go far enough.’
For now, he said, “We’re right where we ought to be in. The economy is in a good place, and policy is in a good place. We can be careful about that (cutting rates) and that’s what we’re planning to do.”
Powell steered clear of the political implications of Donald Trump’s reelection for monetary policy. He was peppered with questions about potential Trump tariff increases and tax cuts, but was reluctant to answer specifically,
“I don’t want to get into political issues,” he said with a hint of mirth. “I want to stay as far away from that as I possibly can.”
Besides, he said, “it’s too soon” to know what the shape or impact of such policies will be. So the FOMC “will be very careful about changing (monetary) policy until we have lot more certainty” about changes in fiscal and other Republican policies.
Last Thursday, he asserted that he would not resign if asked to do so by Trump and added that the president has no legal authority to force him to step down as Fed chairman. In his latest remarks, Powell simply declared his intention to serve out his current four-year term.
Earlier Thursday, Fed Governor Adriana Kugler took a dualistic approach to monetary policy going forward. The Fed must focus not just on risks to “price stability,” but also to the “maximum employment” side of its dual mandate.
While the FOMC might need to continue cutting rates, it might also need to “pause,” depending on how inflation and employment data unfold, she said.
“The United States has seen considerable disinflation while experiencing a cooling but still resilient labor market,” Kugler said. “While wage moderation and anchored inflation expectations may allow us to continue making progress on inflation, stubborn housing inflation and high inflation in certain goods and services categories may stall progress in reaching our target.”
“At the same time, labor markets have rebalanced, given greater labor supply from immigration and prime-age workers and lower demand from restrictive monetary policy,” she continued. “Thus, although the labor market experienced an extended period of low unemployment and job creation these past several years and strong real wage growth, the labor market has cooled.”
Kugler said “this combination of a continued but slowing trend in disinflation and cooling labor markets means that we need to continue paying attention to both sides of our mandate.”
“If any risks arise that stall progress or re-accelerate inflation, it would be appropriate to pause our policy rate cuts,” she went on. “But if the labor market slows down suddenly, it would be appropriate to continue to gradually reduce the policy rate.”