– Powell Sees No More than 50 Basis Points of Further Cuts by End-2024
By Steven K. Beckner
(MaceNews) – Federal Reserve Chair Jerome Powell said Monday that he and his fellow monetary policymakers will adjust the pace of future interest rate cuts based upon the pace of economic growth, employment and inflation, but are in no rush.
In his first major public remarks since the Fed’s policymaking Federal Open Market Committee slashed the federal funds rate by half a percentage point on Sept. 18, Powell said the FOMC is “not in any hurry” to cut rates, but will do as much monetary easing as necessary to prevent undue economic “pain” while striving to keep reducing the inflation rate to the Fed’s 2% target.
As things now look, the FOMC is likely to lower the funds rate only another “50 basis points” between now and the end of the year, he told the National Association for Business Economics.
Powell repeated that the FOMC will be making rate decisions “meeting by meeting” depending on how incoming data illuminate the economic outlook and balance of risks.
Twelve days ago, the FOMC approved a 50 basis point cut in the funds rate to a target range of 4.75% to 5.00% after leaving it unchanged since last July following 525 basis points of hikes to fight inflation. In a rare dissent, Fed Governor Michelle Bowman voted “no’ in preference for a “more measured” 25 basis point cut.
In its policy statement, the FOMC explained it had “gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance.”
The 19 FOMC participants projected another 50 basis points of rate reductions before the end of this year to a target range of 4.25% to 4.5%. And they anticipated it will be “appropriate” to cut the funds rate another 100 basis points next year to a range of 3.25% to 3.5%. By the end of 2026, they project the funds rate will fall to 2.75% to 3.0%. That would be a median 2.9%, same as the FOMC’s upwardly revised 2.9% estimate of the “longer run” or “neutral” rate.
After the FOMC meeting, Powell told reporters diminished upside risks to inflation and heightened downside risks to employment had justified an aggressive rate cut. He said the Fed had made “a good strong start” toward removing monetary restriction and would proceed “meeting by meeting” to make the funds rate “more neutral.”
Powell continued in that same vein as he spoke to hundreds of economists at the NABE’s annual convention in Nashville.
The FOMC’s Sept. 18 50 basis point rate cut “reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in an environment of moderate economic growth and inflation moving sustainably down to our objective,” he said in prepared remarks.
While calling both the economy and the labor market “solid,” Powell said, “Still, labor market conditions have clearly cooled over the past year….. We do not believe that we need to see further cooling in labor market conditions to achieve 2% inflation.”
What’s more, he said, “broader economic conditions also set the table for further disinflation. The labor market is now roughly in balance.”
Powell steered clear of uttering the words “soft landing,” but told the economists that the FOMC’s “goal all along has been to restore price stability without the kind of painful rise in unemployment that has frequently accompanied efforts to bring down high inflation.”
“We have made a good deal of progress toward that outcome,” he added.
Powell acknowledged that the FOMC has been slow to cut rates, but said, “that patient approach has paid dividends: Inflation is now much closer to our 2% objective. Today, we see the risks to achieving our employment and inflation goals as roughly in balance.”
Since the FOMC took the funds rate to its peak last July, he observed, “inflation has moved down, and unemployment has moved up, in both cases significantly.”
So, “it was time for a recalibration of our policy stance to reflect progress toward our goals as well as the changed balance of risks…,” he went on. “(O)ur decision to reduce our policy rate by 50 basis points reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate economic growth and inflation moving sustainably down to 2%.”
Looking ahead, Powell said “if the economy evolves broadly as expected, policy will move over time toward a more neutral stance.”
But, as he has often done, the Fed chief stressed “we are not on any preset course. The risks are two-sided, and we will continue to make our decisions meeting by meeting.”
Responding to questions from NABE President Ellen Zentner, Powell indicated that the FOMC will continue to take a relatively “patient” approach now that it has begun cutting rates, but will cut them either slower or faster depending on how the economy evolves.
“This is not a committee that’s in a hurry to cut rates quickly,” he said. “We’ll be guided by the incoming data.”
“If the economy slows more, we will cut faster,” he continued. “If it slows less we will cut slower.”
The easing process “will play out over time,” he added. “It’s not something we need to go fast on.”
Asked about rate prospects at the Nov. 6-7 and Dec. 17-18 meetings, Powell noted the FOMC will be getting two employment reports and one inflation report, and he added, “The main thing will be to be look at the totality of the data — activity, employment, inflation… (and ask) is the policy stance where it needs to be to foster achievement of our goals…”
Powell said, “we will do what it takes in terms of the speed at which we move…relative to where we were two weeks ago.”
At the Sept. 18 meeting, he recalled, “the bulk” of the 19 FOMC participants favored a total of 75 to 100 basis points of meeting over the last three meetings of 2024.
Powell said that implies “two more cuts — not two more 50s. If the economy performs as we expect it would mean two more cuts – a total of 50” basis points.
Powell was upbeat about the economy, suggesting that in some ways downside risks have lessened. For one thing, he said reports suggest that the risks have lessened that gross domestic product will turn out to have been overstated relative to gross domestic income. “That removes a downside risk to the economy.”
He also said concerns have lessened that consumers’ spending was exceeding their savings. Because income was revised up more than spending, “that suggests spending can continue at a healthy level.” He said he has also been encouraged by “a modest improvement in productivity.”
Asked whether the Fed can achieve the much sought after “soft landing,” he replied, “nothing suggests that a downturn is more likely than at any time.”
Reminded that he said after the FOMC meeting that the Fed has “made a good start” toward returning to “neutral,” Powell was asked whether that action had increased his confidence in a soft landing.
“It’s a reflection of our growing confidence that inflation is moving sustainably down to 2%….without a painful increase in unemployment,” he replied. “That’s our goal…”
Powell vowed to “use our tools in a way that demonstrates our commitment” to price stability and maximum employment. “Overall, the economy is in solid shape; we intend to use our tools to keep it there.”
Powell’s remarks come closely on the heels of an ostensibly favorable report on the Fed’s preferred inflation gauge. The Commerce Department said Friday its price index for personal consumption expenditures (PCE) rose 0.1% in August or 2.2% from a year earlier. That’s down from 2.5% in July. Excluding food and energy, the core PCE rose 0.1% in August and 2.7% from a year ago – up a tenth from July.
The report also showed 0.2% August rises in both personal income and personal spending. The increases were a bit softer than expected, but still show positive momentum that the Fed will no doubt need to consider as it weighs economic risks.
Earlier Monday, Bowman explained why she preferred a 25 basis point rate cut. “The U.S. economy remains strong and core inflation remains uncomfortably above our 2% target,” she said
in an address to the Georgia Bankers Association.
She listed several considerations which she thinks “supported the case for a more measured approach in beginning the process to recalibrate our policy stance to remove restriction and move toward a more neutral setting.” She was concerned that:
* first, “reducing the target range for the federal funds rate by 1/2 percentage point could be interpreted as a signal that the Committee sees some fragility or greater downside risks to the economy. In the current economic environment, with no clear signs of material weakening or fragility, … beginning the rate-cutting cycle with a 1/4 percentage point move would have better reinforced the strength in economic conditions, while also confidently recognizing progress toward our goals….”
* second, “reducing the policy rate by 1/2 percentage point could have led market participants to expect that the Committee would lower the target range by that same pace at future meetings until the policy rate approaches a neutral level. If this expectation had materialized, we could have seen an unwarranted decline in longer-term interest rates and broader financial conditions could become overly accommodative….”
* third, “there continues to be a considerable amount of pent-up demand and cash on the sidelines ready to be deployed as the path of interest rates moves down. Bringing the policy rate down too quickly carries the risk of unleashing that pent-up demand….”
* fourth, “in dialing back our restrictive stance of policy, we also need to be mindful of what the end point is likely to be. My estimate of the neutral rate is much higher than it was before the pandemic. Therefore, I think we are much closer to neutral than would have been the case under pre-pandemic conditions, and I did not see the peak stance of policy as restrictive to the same extent that my colleagues may have. With a higher estimate of neutral, for any given pace of rate reductions, we would arrive at our destination sooner.”
Bowman added she sees “greater risks to price stability, especially while the labor market continues to be near estimates of full employment.”
Meanwhile, Atlanta Federal Reserve President Raphael Bostic said he’s ready to vote for another 50 basis point rate cut if labor market data warrant it. “A surprise to the weak side …. would pull me much further into really needing another dramatic move,” the FOMC voter told Reuters.
On the other hand, he said “if the story is that inflation is continuing its drop and the labor market is staying strong, I think we have the luxury of being a bit more patient.”
Also Monday morning, the NABE released a survey of its members showing nearly two-thirds of them believe the FOMC cut the fed funds rate “just in time,” while a quarter of them think it was “too late in reducing the policy rate.”
A third of the business economists believe the funds rate level is “calibrated just right currently,” while a third believe the rate should be less than 4.75% and 30% believe the rate should be 5% or higher. The NABE said 45% of its members think the long-run neutral rate is within a range of 3%-3.24% (a bit higher than the Fed’s 2.9% median estimate), while “an equal share thinks the rate should be lower than 3%.”
The survey revealed a big shift in how economists evaluate risks to the economic outlook. Only 35% of panelists think upside and downside risks are balanced — down from 46% in the previous survey. Now 55% think risks are weighted to the downside, up from 39%.
They consider a “monetary policy mistake” the greatest downside risk.