Federal Reserve Chair Jerome Powell emphasized the central bank’s patient approach to cutting interest rates, signaling that rate reductions would occur “over time.” Speaking at the National Association for Business Economics annual meeting in Nashville, Powell reiterated that the US economy remains on solid footing, giving the Fed confidence that inflation is heading toward its 2% target.
“Looking ahead, if the economy continues to evolve as expected, monetary policy will gradually move toward a more neutral stance,” Powell said. However, he cautioned that the Fed is not following a predetermined course, leaving room for adjustments based on incoming economic data. Currently, the Fed’s benchmark rate, which was cut to 4.75%-5%, is still considered restrictive, holding back economic growth.
This latest commentary raises the question of how quickly the Fed will proceed with further rate cuts, an issue of particular importance to investors. Powell did not provide specifics on the pace or size of future cuts, reiterating that the Fed would assess conditions on a meeting-by-meeting basis.
During a post-speech Q&A, Powell acknowledged that the Fed’s projections suggest quarter-point rate cuts at its November and December meetings. However, he stressed that actual decisions will depend on forthcoming economic data. “This is not a committee in a rush to lower rates,” Powell stated. “If the economy slows more than expected, we can act faster. If it slows less, we’ll adjust accordingly.”
The Fed’s recent decision to cut rates by 50 basis points earlier in September marked its first rate reduction since 2020. The outsized cut was intended to support a weakening labor market, which has shown signs of cooling over the past year. Powell reassured that while labor market conditions have eased, they are still solid. “We do not believe further weakening in the labor market is necessary to achieve our inflation target,” he added.
Inflation and Economic Outlook
Inflation has moderated significantly in recent months, a trend that provides the Fed with greater confidence in reaching its 2% goal. Government data showed the Fed’s preferred inflation gauge, the personal consumption expenditures price index, rose by just 2.2% year-on-year in August, reinforcing the Fed’s belief that inflation pressures are easing. “Disinflation has been broad-based,” Powell said, “and we’ve seen further progress toward our inflation goals.”
Still, Powell and other Fed officials remain cautious. Rapid rate cuts could reignite inflationary pressures, undoing the progress made so far. “Our objective has always been to restore price stability without triggering a sharp rise in unemployment, which often happens during efforts to reduce inflation,” Powell noted. “While we haven’t finished the task, significant progress has been made.”
Path Forward for Investors
As the Fed navigates its next steps, market participants are closely watching. Powell indicated that while housing inflation remains elevated, he expects it to taper over time. In line with Fed projections, the central bank anticipates cutting rates by another half-point before the end of 2024, with further reductions in 2025. Yet some officials suggest that fewer cuts may be warranted, given ongoing inflation risks.
Investors are currently betting that the Fed will lower rates by around 75 basis points by year-end, implying at least one more significant cut in the coming months. While some Fed officials remain open to more aggressive easing if the labor market deteriorates, others, like Fed Governor Michelle Bowman, favor a more measured approach. Bowman dissented during the last rate decision, advocating for smaller, quarter-point cuts to avoid reigniting inflation.
Economic data remains critical for determining the Fed’s path. The upcoming labor market report, expected to show 150,000 new jobs in September, will provide additional insight into the health of the economy. The unemployment rate is projected to hold steady at 4.2%, a figure that could sway the Fed’s approach to rate cuts moving forward.
Expanded Analysis: Opportunity for Investors
For market participants, the Fed’s measured approach to rate cuts signals both opportunity and risk. A gradual decline in interest rates tends to support equity markets, especially in sectors sensitive to borrowing costs, such as real estate and technology. However, the Fed’s cautious stance means that investors should remain prepared for a slower-than-anticipated pace of monetary easing. Those expecting rapid rate cuts might need to temper their expectations as the Fed prioritizes long-term price stability over short-term market relief.
Sectors such as fixed income and bonds could see renewed interest, particularly if the Fed continues on its projected path of gradual rate cuts. Investors with a balanced portfolio approach may find opportunities in both equities and bonds as the market adjusts to the new rate environment.
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