Federal Reserve Chair Jerome Powell indicated a positive outlook for the U.S. economy, highlighting a potential soft landing driven by gradual interest rate reductions. Powell emphasized that the initial rate cut in September marked the beginning of this process, and further adjustments will be based on evolving economic data.
During his speech at the National Association for Business Economics (NABE) annual meeting in Nashville, Tennessee, Powell remarked on the possibility of sustaining a strong labor market amid moderate economic growth and manageable inflation through appropriate policy recalibration. He stressed the importance of using the Fed's tools to maintain the economy's healthy state.
Powell anticipated two additional 25-basis-point rate cuts this year if the current economic trajectory persists. However, market expectations lean towards a more aggressive rate-cutting cycle. The Federal Open Market Committee (FOMC) voted on September 18 to lower the federal funds rate target by 50 basis points to a range of 4.75% to 5.0%, marking the first adjustment since July 2023.
Earlier in the day, interest rate futures markets predicted a 62% probability of a 25-basis-point rate cut at the November meeting, with the remainder expecting a larger reduction. Futures pricing also indicated a greater rate cut in 2025 than the Fed's latest economic projections in September, which targeted a federal funds rate range of 3.25% to 3.5% by the end of next year.
As Powell spoke, futures market pricing projected a target rate range of 3.0% to 3.25% by the end of 2025, a 25-basis-point increase from earlier in the day. Concurrently, the yield on the U.S. two-year Treasury note rose by 0.1 percentage points to 3.66%.
Powell highlighted the absence of a predetermined policy path, emphasizing that the Fed's decisions would remain contingent on each meeting's developments. The current U.S. economic landscape shows no signs of needing emergency interventions, with the Atlanta Fed's GDPNow model estimating a 3.1% annualized growth rate for Q3. Consumer spending remains robust, business bankruptcies are low, and U.S. stock indices are near record highs. Fiscal policy is expected to support economic growth, regardless of the outcome of the November election.
The Fed does not anticipate a cooling labor market to achieve its 2% inflation target. The core Personal Consumption Expenditures (PCE, Financial) price index increased by 2.7% year-over-year in August, though recent inflation rates have decelerated. If this trend continues, the core PCE index could fall below the Fed's 2% annual goal.
The labor market has significantly cooled from its post-pandemic high, with August's unemployment rate at 4.2%, up from the March low of 3.4%. Despite slowing job growth, employment remains positive. Powell noted recent GDP data revisions indicating stronger economic growth in 2022 and 2023, thanks to increased consumer income, spending, and moderate productivity gains.
