Fed will adopt more neutral policy "over time," says Powell

Fed will adopt more neutral policy "over time," says Powell
The central bank governor says policymakers are in no hurry to cut rates, indicating modest moves for its next two decisions.
SEP 30, 2024
By  Bloomberg

Federal Reserve Chair Jerome Powell said the central bank will lower interest rates “over time,” while again emphasizing that the overall US economy remains on solid footing. 

Powell also reiterated his confidence that inflation will continue moving toward the Fed’s 2% target, adding that economic conditions “set the table” for a further easing of price pressures.

“Looking forward, if the economy evolves broadly as expected, policy will move over time toward a more neutral stance,” Powell said in a speech in Nashville at the annual meeting of the National Association for Business Economics. “But we are not on any preset course,” he said, noting that policymakers will continue to make decisions meeting by meeting based on incoming economic data.

A neutral policy is one that neither stimulates nor holds back the economy. The Fed’s current benchmark rate, which officials lowered to a range of 4.75%-5% earlier this month, is widely regarded as still restricting economic activity.

The remarks left open the question of how policymakers will approach the size and pace of interest-rate cuts in coming months, a crucial matter for investors.

In a Q&A session following his speech, the Fed chair acknowledged that projections issued by officials alongside their September rate decision point toward quarter-point rate cuts at the next two meetings, in November and December. But he cautioned that the Federal Open Market Committee will make its decisions based, in part, on information they haven’t yet received.

“This is not a committee that feels like it’s in a hurry to cut rates quickly,” Powell said. “Ultimately we will be guided by the incoming data. And if the economy slows more than we expect, then we can cut faster. If it slows less than we expect, we can cut slower.”

The central bank lowered borrowing costs by a half percentage point earlier in September, the first reduction since 2020 and a larger-than-usual move. Officials have described the outsize cut as one aimed at protecting a slowing labor market from further weakening.

Powell on Monday described the labor market as solid, but said conditions have “clearly cooled over the past year.”

“We do not believe that we need to see further cooling in labor market conditions to achieve 2% inflation,” he said. 

Continued Disinflation

Inflation has been tame in recent months, a trend reinforced by government data released last week showing the Fed’s preferred gauge of price pressures rose modestly in August. On a 12-month basis, the personal consumption expenditures price index climbed 2.2%.

That’s provided officials more confidence that inflation is moving toward their goal, allowing them to place a greater focus on shoring up the labor market. 

“Disinflation has been broad based, and recent data indicate further progress toward a sustained return to 2%,” Powell said.

Still, some policymakers are wary of cutting rates too quickly and potentially reigniting inflationary pressures in the economy. 

“Our goal all along has been to restore price stability without the kind of painful rise in unemployment that has frequently accompanied efforts to bring down high inflation,” Powell said. “While the task is not complete, we have made a good deal of progress toward that outcome.”

Path Forward

Powell acknowledged the decline in housing-related inflation has been sluggish, but expressed confidence that in time it would further taper. 

At their meeting earlier this month, officials penciled in a half point of additional cuts for the remainder of 2024 and a further percentage point of reductions in 2025, according to the median projections. However, several officials estimated a smaller amount of easing through year’s end. 

Investors are betting the Fed will lower rates by roughly another 75 basis points this year, according to futures markets, implying one more large cut in either November or December.

A handful of Fed officials have left the door open to such a move, saying any sign of serious weakening in the labor market could warrant another big cut. Fed Governor Michelle Bowman, who dissented against the recent half-point reduction in favor of a smaller, quarter-point cut, has emphasized that she sees lingering inflation risks. She said the Fed should lower interest rates at a “measured” pace. 

Fresh figures on the labor market are due Friday. Economists surveyed by Bloomberg expect employers added 150,000 jobs in September, consistent with a moderating labor market. The unemployment rate, which has climbed this year, is seen holding steady at 4.2%. 

Latest News

Advisor moves: RBC swipes $1.7B UBS team, Baird duo departs for LPL's Linsco channel
Advisor moves: RBC swipes $1.7B UBS team, Baird duo departs for LPL's Linsco channel

RBC Wealth Management's latest move in New York adds an elite eight-member team to its recently opened Westchester office.

Stifel star broker, Chuck Roberts, leaves firm under cloud of investor complaints
Stifel star broker, Chuck Roberts, leaves firm under cloud of investor complaints

Stifel – so far - is on the hook for more than $166 million in damages, legal fees and settlements in investor complaints involving Roberts, a 35-year industry veteran.

iCapital secures $820M in latest funding, hits $7.5B
iCapital secures $820M in latest funding, hits $7.5B

The giant alt investments platform's latest financing led by T. Rowe Price and SurgoCap Partners, along with State Street, UBS, and BNY, will fuel additional growth on multiple fronts.

Merrill Lynch on the hook for $3.7M after clients claimed sale of unsuitable private equity
Merrill Lynch on the hook for $3.7M after clients claimed sale of unsuitable private equity

Some investors recently have seen million dollar plus decisions by FINRA arbitration panels involving complex products decisions go their way.

What does it take to feel 'financially comfortable' or 'wealthy' in 2025?
What does it take to feel 'financially comfortable' or 'wealthy' in 2025?

New report shines a light on how Americans view wealth today.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.