Fed Chairman Jerome Powell said Thursday that strong U.S. economic growth will give policymakers time to decide how far and how quickly to cut interest rates.
“The economy is not signaling that we need to rush to lower interest rates,” Powell said in a speech to business leaders in Dallas. “The strength we see in the economy right now gives us the opportunity to approach our decisions carefully.”
(Watch Powell’s comments live here.)
In a positive assessment of current conditions, the central bank leader called domestic growth “by far the best of all major economies in the world.”
Specifically, he said the labor market is holding up well despite disappointing job growth in October, which he attributed largely to storm damage in the Southeast and labor strikes. Non-farm labor costs increased by only 12,000 during this period.
Powell noted that the unemployment rate has been rising, but has leveled off in recent months and remains low by historical standards.
Federal Reserve Chairman Jerome Powell delivers a speech in Dallas on November 14, 2024.
Ann Saphir | Reuters
On the issue of inflation, he cited “broad-based” progress, noting that Fed officials expect it to continue sliding toward the central bank’s 2% target. However, this week’s inflation data showed a slight increase in both consumer and producer prices, with 12-month interest rates moving further away from the Fed’s mandate.
Still, Powell said the two indexes indicate inflation at the Fed’s preferred benchmark of 2.3% in October, or 2.8% excluding food and energy.
“Inflation is getting much closer to our longer-term goal of 2 percent, but not there yet. We are committed to getting the job done,” Powell said, noting that reaching that goal “can sometimes be a could be a bumpy road.”
Powell’s cautious view on interest rate cuts caused stock prices to fall and government bond yields to rise. Traders also lowered their expectations for a rate cut in December.
The comments come a week after the Federal Open Market Committee cut the central bank’s interest rate by a quarter of a percentage point, dropping it to a range between 4.5% and 4.75%. That followed a half-point cut in September.
Powell has called these steps a recalibration of monetary policy, which no longer needs to be primarily aimed at eradicating inflation but now also has a balanced goal of preserving the labor market. Markets still largely expect the Fed to go ahead with another quarter-point rate cut in December, and then a few more in 2025.
However, Powell was non-committal when it came to giving his own prediction. The Fed is trying to lower its policy rate to a neutral environment that neither stimulates nor inhibits growth, but is unsure what the end point will be.
“We are confident that with an appropriate recalibration of our policy position, the strength of the economy and the labor market can be maintained, with inflation sustainably falling to 2 percent,” he said. “We are shifting policy to a more neutral setting over time. But the path to getting there is not predetermined.”
Powell added that calculating the transition to a neutral interest rate will be difficult.
“We’re navigating between… the risk of moving too fast and the risk of moving too slow. “We want to get to the middle and get it just right so that we provide support to the labor market, but also help inflation has to come down,” he said. “So slowing down a little bit, if the data allows us to go a little slower, seems like the smart thing to do.”
The Fed has also allowed the proceeds from its bond investments to disappear from its massive balance sheet every month. There are no indications as to when that process might end.