Powell: Strong Economy Means Fed Can Take Time on Rate Cuts

In a recent statement, Federal Reserve Chair Jerome Powell conveyed that the ongoing robust economic growth, alongside a solid job market and inflation exceeding the central bank’s 2% target, provides the U.S. central bank with the luxury of time when considering adjustments to interest rates. Speaking at a Dallas Fed event, Powell’s remarks, as reported by Reuters, underscore a cautious approach towards monetary policy adjustments, suggesting that there is no immediate need to rush into rate cuts.

Powell’s comments reflect a broader shift in expectations within financial markets, where the anticipation for rate reductions in the coming year has been dialed back from earlier forecasts by Fed officials. He reiterated that inflation is expected to sustainably return to the 2% target, which would allow the Fed to transition monetary policy towards a more neutral stance “over time.” However, he emphasized the flexibility of the Fed’s approach, stating, the pace of rate cuts “is not preset,” and “the economy is not sending any signals that we need to be in a hurry to lower rates.”

The backdrop to Powell’s cautious optimism includes the aftermath of the recent presidential election, where the economic agenda of President-elect Donald Trump, particularly concerning potential tax cuts, tariffs, and immigration policies, introduces uncertainties that could impact economic growth and inflation. Despite these uncertainties, Powell described the current economic situation as “remarkably good,” pointing to several positive indicators:

– A low unemployment rate of 4.1%.
– Economic growth at a “stout” pace of 2.5% annually, surpassing the Fed’s estimate of potential growth.
– Increased consumer spending fueled by rising disposable incomes.
– Expanding business investments.

However, inflation remains above the target. The personal consumption expenditures (PCE) price index, which the Fed uses to gauge its inflation target, hasn’t been released for October yet, but according to Powell, the core PCE, which excludes volatile food and energy prices, was likely at 2.8% last month, indicating a persistent trend above the target for four months now. The headline PCE, which includes all items, was estimated around 2.3% for October by Powell.

Market traders are currently betting on a quarter-percentage-point rate cut at the Federal Reserve’s upcoming meeting on December 17-18, yet with Trump’s victory and persistent inflation pressures, expectations for further cuts in 2024 have been tempered. Powell expressed confidence in the ongoing disinflation process but highlighted the Fed’s vigilance, particularly in monitoring sectors like housing costs that could influence inflation trends.

Powell’s remarks, as detailed by Reuters, convey a central bank that is cautiously optimistic, ready to adapt its policy based on incoming economic data, ensuring inflation not only approaches but sustainably achieves the 2% target, all while maintaining a strong economic environment.

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