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Powell indicated that if the economy develops as expected, there will be two more rate cuts totaling 50 basis points this year.
Federal Reserve Chairman Powell stated that the Fed will "over time" lower interest rates, while once again emphasizing that the overall U.S. economy still has a solid foundation.
Powell also reiterated his confidence that inflation will continue to move towards the Fed's 2% target, adding that economic conditions have "laid the groundwork" for further easing of price pressures.
"Looking ahead, if the economic trajectory is broadly in line with expectations, policy will gradually shift to a more neutral stance," Powell said in a speech at the annual meeting of the National Association of Business Economics in Nashville. "But we are not on any preset course," he said, noting that policymakers will continue to make decisions meeting by meeting based on upcoming economic data.
A neutral policy is one that neither stimulates nor hinders economic activity. The Fed's current benchmark interest rate, which was lowered to a range of 4.75%-5% earlier this month, is still widely considered restrictive to economic activity.
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These remarks leave an unresolved question of how policymakers will respond to the scale and speed of rate cuts in the coming months, which is a crucial issue for investors.
In the Q&A session following the speech, Powell acknowledged that the projections released by officials alongside the September interest rate decision indicated that the Fed would cut rates by 25 basis points in each of the next two meetings (November and December). But he warned that the Federal Open Market Committee (FOMC) will make decisions to some extent based on information they have not yet received.
"The committee is not in a hurry to cut rates rapidly. Ultimately, we will be guided by the data we receive. If the economic slowdown is greater than we expect, then we can cut rates more quickly. If the pace is slower and the magnitude is less than we expect, we can slow down," Powell said.
The Fed lowered borrowing costs by 50 basis points at the beginning of September, marking its first rate cut since 2020 and taking a larger step than usual. Officials made this substantial rate cut to prevent further weakening of the slowing labor market.
Powell called the labor market solid on Monday but said that employment conditions have "noticeably cooled" over the past year. "We believe that we do not need to see further cooling in labor market conditions to achieve a 2% inflation rate," he said.Sustained Disinflation
In recent months, inflation has been quite moderate, and government data released last week reinforced this trend, with the Federal Reserve's preferred inflation indicator showing that the overall Personal Consumption Expenditures (PCE) price index slowed to a year-over-year increase of 2.2% in August.
This has given officials more confidence that inflation is moving towards their target, allowing them to focus more on supporting the labor market.
Powell said, "The foundation for disinflation is broad, and recent data suggest that the inflation rate is making further progress towards a sustained return to the 2% target."
Nevertheless, some policymakers remain cautious about lowering interest rates too quickly and worry that this could reignite inflationary pressures in the economy.
Powell said, "Our goal has always been to restore price stability while avoiding the rise in unemployment that often accompanies the cooling of inflation. Although the task is not yet complete, we have made significant progress towards this outcome."
Powell acknowledged that the decline in housing inflation has been slow, but expressed belief that it will cool further over time.
Non-farm Payrolls are CrucialBased on the median forecast, at a meeting earlier this month, officials anticipated an additional interest rate cut of 50 basis points for the remainder of 2024 and a further reduction of 100 basis points in 2025.
A minority of Federal Reserve officials left the door open for such a move, stating that any significant signs of weakness in the labor market could lead to another substantial rate cut.
Some officials also estimated that the easing by the end of the year might be smaller. Fed Governor Bowman, who opposed a 50 basis point rate cut in September, supported a more modest reduction. She emphasized her belief that inflation risks are lingering and stated that the Federal Reserve should lower interest rates at a "measured" pace.
Following Powell's overnight speech, bond traders have dialed back their expectations for rate cuts next year. Short-term interest rate futures traders now believe that the Federal Reserve is more likely to cut rates by 25 basis points in November, rather than 50.
On Tuesday, U.S. Treasuries gave back gains after a historic fifth consecutive month of increases. As measured by the Bloomberg US Treasury Total Return Index, U.S. Treasuries have returned 1.4% this month through last Friday, which would be the longest streak of monthly gains for the market since 2010. Yields began to fall in April after climbing in the first few months of the year, and the losses at the beginning of the year have been reversed into a 4.1% gain.
Jack McIntyre, portfolio manager at Brandywine Global Investment Management, said, "The economic conditions are better. Powell put more emphasis on the labor market, so Friday's non-farm data will be even more important. The significant rally in U.S. Treasuries has likely gone beyond reality."
Priya Misra, portfolio manager at J.P. Morgan Asset Management, stated, "We are at a critical inflection point for data and policy. If new jobs exceed 150,000, market rate expectations may rise slightly because the possibility of a 50 basis point rate cut in November will decrease, while a reading close to 100,000 or lower could prompt the Federal Reserve to cut rates by 50 basis points again."
The latest data on the labor market will be released on Friday. Economists surveyed by Bloomberg expect employers to have added 150,000 jobs in September, consistent with a slowing labor market. The unemployment rate, which has climbed this year, is expected to stabilize at 4.2%.