Federal Reserve Chair Jerome Powell stated that the central bank will gradually lower interest rates over time while reiterating that the overall economy remains robust. He expressed confidence that inflation will continue to move toward the Fed's 2% target, adding that current economic conditions lay the foundation for further easing of price pressures.
Powell mentioned that if the economy evolves as expected, monetary policy will gradually return to a more neutral stance. However, he emphasized that decisions will be based on forthcoming economic data. Neutral policy denotes a stance that neither stimulates nor restrains economic activity. Earlier this month, the Fed lowered its benchmark interest rate to a target range of 4.75%-5.0%, still considered restrictive to economic activity.
Powell's comments leave the scale and pace of future rate cuts uncertain. This ambiguity is crucial for investors. During a Q&A session, Powell noted the predictions in the September dot plot, suggesting 25 basis point cuts in the next two meetings, but warned that the Federal Open Market Committee (FOMC) will rely on upcoming data for decision-making.
In September, the Fed reduced rates by 50 basis points. Officials stated that the aggressive rate cut aimed to prevent further weakening of the labor market. Powell described the labor market as strong, yet significantly cooled over the past year. He emphasized that achieving a 2% inflation rate does not require further labor market softening.
Recent months have seen a continued decline in inflation. Data released last week showed the Fed's preferred inflation measure, the PCE Price Index, rose slightly by 2.2% year-over-year in August. This reinforced officials' confidence that inflation is moving toward their goal, allowing them to focus more on supporting the labor market.
However, some policymakers worry that rapid rate cuts could reignite inflationary pressures within the economy. Powell stressed that the Fed's objective has been to restore price stability without triggering a painful rise in unemployment.
Although inflation related to housing has been slow to decrease, Powell remains optimistic about future declines. The latest labor market data, set to be released on Friday, is expected to show the addition of 150,000 jobs in September, consistent with a softening labor market, and the unemployment rate staying around 4.2%.
