Fed's Powell speaks about the state of the US economy, outlook on future rate cuts

Federal Reserve (Fed) Chairman Jerome Powell participated in a moderated discussion titled "A View from the Federal Reserve Board" at the National Association for Business Economics Annual Meeting in Nashville on Monday. Powell noted that while he remains confident that inflation will continue easing toward Fed targets, the Fed Chair acknowledged that the US central bank is set to take further action if the data suggests it necessary.

Key highlights

Risks are two-sided, decisions will be meeting-by-meeting.

The US economy is in solid shape; we intend to use our tools to keep it there.

We have made good progress toward restoring price stability without painful rise in unemployment.

A 50 bps rate cut reflects growing confidence that appropriate policy recalibration can maintain labor market strength and inflation moving toward goal.

Housing services inflation will continue to decline as long as growth rate in rents for new tenants remains low.

Disinflation is broad based, recent data indicate further progress toward sustained return to 2%.

Colleagues and I have greater confidence inflation is on sustainable path to 2%.

Labor conditions are solid, labor market roughly in balance.

Annual GDP revisions were 'quite interesting’.

The labor market may give a better real time picture of the state of the economy than GDP.

There's nothing suggesting a downturn is more likely now.

The Fed is not in a hurry to cut rates quickly, will be guided by data.

Following the Fed head's initial comments, rate markets held onto bets that the next rate cut from the Fed would be 25 bps in November. According to the CME's FedWatch Tool, rate futures are pricing in nearly 60% odds of a 25 bps cut on November 7, with the remaining 40% still hoping for a 50 bps double-cut.

Other Fed policymakers join the Powell chorus

Atlanta Fed President Raphael Bostic echoed Fed Chair Powell's words earlier on Monday, though cautioned that the Fed may have to make further outsized rate moves if the US labor market deteriorates.

Key highlights

I am open to another half-percentage-point rate cut if labor market shows unexpected weakness.

Baseline case is for an 'orderly' easing with inflation expected to continue slowing and job market to hold up.

I do not want to get overconfident on inflation given core personal consumption expenditures price index remains 2.7%.

Business contacts continue to say they do not expect layoffs.

I will be watching upcoming jobs data closely; if employment growth slows much below 100,000 jobs, it would warrant closer questioning of what is happening.

Fed rate outlook remains uncertain

The Fed opted for a 50 basis points (bps) interest-rate cut following the September policy meeting, bringing the fed funds rate to the range of 4.75%-5.0%. The revised Summary of Economic Projections (SEP), the so called dot-plot published alongside the policy statement, showed that projections imply 50 bps of additional rate cuts in 2024 from current level, 100 bps more in 2025 and another 50 bps in 2026.

The CME FedWatch Tool shows that markets are currently pricing in a nearly 50% probability of another 50 bps rate reduction at the next policy meeting in early November. On Friday, the US Bureau of Economic Analysis reported that the core Personal Consumption Expenditures (PCE) Price Index rose 0.1% on a monthly basis in August, at a softer pace than the market expectation of 0.2%. 

Fed policymakers spoke on the policy outlook recently and their remarks painted a mixed picture. Fed Governor Michelle Bowman noted that she prefers a more measured re-calibration of policy and added that she continues to see greater risks to price stability. Speaking again on Monday, Bowman reiterated that "bringing the policy rate down too quickly carries the risk of unleashing that pent-up demand." On a dovish note, Chicago Fed President Austan Goolsbee argued that interest rates need to come down significantly and said that "many more rate cuts" are likely needed over the next year.