Federal Reserve Chair Jerome Powell recently indicated that while further rate cuts are likely, they won’t be as aggressive as the recent 50-basis-point reduction. In a speech delivered in Nashville, Powell emphasized that future monetary policy decisions will be data-driven, and the Fed is not on any preset path. His comments signal a cautious approach as the central bank aims to balance controlling inflation with supporting the labor market.
Powell suggested that if economic data continues to evolve as expected, there will likely be two more rate cuts this year, each of 25 basis points (0.25%), contrasting with earlier market expectations of larger cuts. He also stressed that the Federal Open Market Committee (FOMC) is not in a rush to lower rates quickly, preferring a more gradual approach based on economic conditions.
During his speech, Powell noted that while inflation is cooling and moving closer to the Fed's 2% target, the labor market remains resilient, though it has "clearly cooled over the last year." The goal of the Fed’s recent policy recalibration is to maintain strength in the labor market while guiding inflation toward sustainable levels. He reassured that policymakers do not believe further labor market weakening is necessary to achieve the inflation target.
Market Reactions and Outlook
Powell's comments came shortly after the Fed implemented a 50-basis-point rate cut in mid-September, marking one of the more significant reductions in recent years, usually only seen during crises such as the COVID-19 pandemic or the 2008 global financial crisis. Despite expectations for further rate cuts, the reduction in size to 25 basis points suggests that the Fed may not be as aggressive as some traders had anticipated.
Following Powell’s remarks, U.S. stock markets experienced a slight dip. The Dow Jones Industrial Average dropped by more than 150 points, while Treasury yields edged higher, with the 10-year Treasury note yield rising close to 3.8%. This reaction reflected growing uncertainty among investors about the pace and magnitude of future rate cuts.
Futures market data indicates that traders now expect the Fed to move cautiously during its next meeting in early November, with a likely 25-basis-point cut. However, some market participants anticipate a larger 50-basis-point cut in December, depending on the economic data leading up to the year’s end.
Economic Strength and Inflation Trends
Despite concerns over slowing growth, Powell expressed confidence in the overall strength of the U.S. economy, noting that inflation is gradually cooling. In August, the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, showed an annual increase of 2.2%, bringing it closer to the Fed’s 2% goal. However, core inflation, which excludes volatile food and energy prices, remained slightly higher at 2.7%.
One of the most persistent drivers of inflation has been housing-related costs, which continue to rise. In August, housing services inflation increased by 0.5%. Powell acknowledged the lag in housing-related data but noted that rent renewal rates have been stabilizing. He expects housing services inflation to decline as these changes in rent growth become more reflected in broader economic conditions.
The Fed’s Balancing Act
The Fed faces a delicate balancing act between managing inflation and preventing the labor market from weakening too much. While the economy is showing signs of resilience, the central bank must ensure that inflation continues to cool without causing undue harm to employment and wage growth.
Powell's comments suggest that the Fed is confident in its ability to achieve its inflation target without triggering a significant downturn in the labor market. However, he also made it clear that the Fed’s decisions will be based on data as it comes in, with no firm commitments to a specific course of action.
Conclusion
Jerome Powell’s latest remarks underscore the Fed’s cautious but flexible approach to monetary policy as it navigates a complex economic environment. While further rate cuts are likely, they will likely be smaller and more measured than the recent 50-basis-point reduction. Powell emphasized that the Fed remains data-dependent and is not following a preset path, meaning future decisions will hinge on how the economy evolves in the coming months.
For forex traders and investors, Powell's comments highlight the need to monitor key economic data closely, especially inflation and labor market trends, as these will directly influence the Fed's next moves. The potential for smaller, incremental rate cuts could have implications for the U.S. dollar and global currency markets, making it crucial to stay informed on further developments.
