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Federal Reserve Preparing More Interest Rate Cuts
WASHINGTON – Federal Reserve Chair Jerome Powell signalled Monday that more interest rate cuts are in the pipeline. However, their size and speed will depend on the evolution of the economy.
Recent Fed Actions
Earlier this month, the Fed followed up with a larger-than-usual half-point cut. Investors on Wall Street and economists are contemplating whether another hefty reduction will come at upcoming meetings in November or December.
Upcoming Rate Cuts
At their meeting on September 18, Fed officials pencilled in two more quarter-point rate cuts for the final 2024 meetings. This shows a continued effort to realign the economic balance.
State of the Economy
In a speech at the National Association for Business Economics in Nashville, Tennessee, Powell emphasised that the U.S. economy and hiring are largely healthy. He highlighted that the Fed is “recalibrating” its key interest rate, which is now about 4.8%. Powell further noted the rate is headed towards a “neutral stance,” a level that doesn’t stimulate or hold back the economy. Officials peg this neutral rate at about 3%, significantly below its current level.
Current Economic Indicators
Inflation, according to the Fed’s preferred measure, fell to just 2.2% in August, as reported by the government. Core inflation, which excludes volatile food and energy categories, ticked up slightly to 2.7%.
Employment Overview
The unemployment rate ticked down to 4.2% last month from 4.3%, still nearly a full percentage point higher than the 3.4% low reached last year. Hiring has also slowed to an average of just 116,000 jobs a month over the past three months, about half its pace a year ago.
Job Market Overview
Powell mentioned the job market is solid but “cooling” and stated the Fed aims to prevent unemployment from rising much higher. Over time, the Fed’s rate reductions should lower borrowing costs for consumers and businesses, including rates for mortgages, auto loans, and credit cards.
Policy Transition
Since the Fed’s rate cut, many policymakers have provided their insights. Austan Goolsbee, president of the Fed’s Chicago branch, noted that the Fed would likely implement “many more rate cuts over the next year.” However, Tom Barkin, president of the Richmond Fed, expressed a more cautious approach, suggesting he wasn’t prepared to support a cut all the way to a more neutral setting yet.
Dual Mandate Focus
The Fed is reducing its rate primarily because hiring has slowed and unemployment has edged up, threatening to decelerate the economy. As required by law, the Fed seeks both stable prices and maximum employment. Powell and other policymakers are now focusing on a dual mandate of jobs and inflation after nearly three years of centring on fighting price increases.
Powell’s Assurance
Powell stated, “Overall, the economy is in solid shape,” and stressed the Fed’s intention to use its tools to maintain that solidity: “We intend to use our tools to keep it there.” He reflected confidence that with appropriate recalibration, the strength in the labor market can be maintained in a context of moderate economic growth and conquering inflation sustainably down to 2%.
Looking Ahead
The evolving position of the Federal Reserve reflects their nuanced approach towards economic health. While the mixed opinions among Fed’s leaders show a vigorous debate, the shared goal remains to balance growth and stability.
| Fed Target Rates and Economic Indicators | Current Value |
|---|---|
| Key Interest Rate | 4.8% |
| Neutral Rate | ~3% |
| Inflation Rate (August) | 2.2% |
| Core Inflation Rate (August) | 2.7% |
| Unemployment Rate | 4.2% |
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