Jerome H. Powell, the chair of the Federal Reserve, underscored on Monday that officials are likely to lower interest rates in the coming months — but that policymakers did not expect to make those rate cuts in large increments if the economy shapes up as expected.
Fed officials lowered interest rates by half a percentage point, or 50 basis points, at their meeting on Sept. 18, the first reduction in more than four years. Policymakers usually lower borrowing costs in quarter-point increments, so that was an unusually large decrease.
The move came as the Fed made notable progress in its fight against rapid inflation. Price increases have slowed substantially since their 2022 peak, which meant that the high interest rates the Fed had maintained since mid-2023 were no longer seen as necessary.
Now, the question is how quickly central bankers will ease off in the months ahead. Mr. Powell said that Fed officials’ recent forecasts showed that they expect to lower interest rates again later this year, but that they were not planning to make additional big rate cuts if the economy shaped up as expected. Those projections showed that policymakers thought they would lower rates by another half percentage point by the end of 2024.
“That would mean two more cuts, it wouldn’t mean more 50s,” Mr. Powell said Monday, speaking at a meeting of business economists in Nashville. “Of course, that will depend on the data. But ultimately, that’s what the base-line is.”
Rates remain at around 4.8 percent, which is much higher than the level most economists think is necessary to keep the economy growing steady over time. That level is sometimes referred to as a “neutral rate” or a “neutral policy stance.”
“Looking forward, if the economy evolves broadly as expected, policy will move over time toward a more neutral stance,” Mr. Powell said. “But we are not on any preset course.”
Mr. Powell’s measured message is a nod toward the two big risks facing the Fed.
High interest rates slow the economy by making it more expensive to borrow to buy a home, finance a car purchase, or expand a business. By lowering interest rates, the Fed is essentially taking their foot off the economic brakes.
But figuring out how quickly to do that is an inexact science. On one hand, officials do not want to lower interest rates so quickly that they cause the economy to sharply accelerate, fueling a burst in demand that could keep inflation too hot for comfort. On the other, they do not want to reduce interest rates too slowly, causing the job market to slow so much that unemployment jumps sharply and there is a risk of an outright recession.
The goal is to carve a middle path, often called a “soft landing,” in which Fed policy slows the economy enough to wrestle inflation fully under control without causing a painful downturn.
Already, the unemployment rate has climbed notably over the past year. And inflation has slowed to just a bit above the Fed’s official target of 2 percent (although a core measure, which strips out food and fuel costs for a sense of the underlying trend, remains more elevated).
“Inflation has moved down, and unemployment has moved up, in both cases significantly,” Mr. Powell said Monday.
The Fed’s decision to start their rate cuts with a big reduction at their September meeting “reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate economic growth and inflation moving sustainably down to 2 percent,” Mr. Powell explained.
Fed officials will receive key economic data between now and their next rate decision on Nov. 6-7, including a jobs report on Friday that should offer insight into how well the labor market is holding up.
“Most of the data that we’ll see before our next meeting hasn’t come yet,” Mr. Powell said Monday, though he noted that he had paid attention to data revisions showing that growth in recent years had been stronger than initially reported.
He called the adjustments to income “large” and “healthy.” Mr. Powell said a takeaway is that economists can be more comfortable that consumer spending can continue to chug along.
But he said that while the revisions make the Fed feel more confident “at the margin,” they would not stop officials from paying careful attention to incoming job market data. Hiring often deteriorates before consumer spending slows down.
As Fed officialsweigh the incoming data and assess their next policy steps, Mr. Powell made it clear that central bankers are aiming for a gentle landing.
“Our design overall is to achieve disinflation down to 2 percent without the kind of painful increase in unemployment that has often come with disinflation processes,” he said. “We haven’t completed that task.”
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