Powell claims that given the robust economy, the Fed doesn't need to make rate reduction quickly

Federal Reserve Chair Jerome Powell stated on Thursday that the U.S. central bank does not need to rush to reduce interest rates due to ongoing economic growth, a strong labor market, and inflation that remains above its 2% target. He emphasized that inflation is considered "on a sustainable path to 2%," which should enable the Fed to gradually move monetary policy toward a more neutral stance that neither stimulates nor slows the economy.

However, Powell noted that the precise level of this neutral rate, as well as the pace at which the Fed might approach it, remains uncertain. Central bankers are evaluating the strength of the economy and assessing how potential policies from the incoming Trump administration, such as increased tariffs and reduced immigrant labor, could impact growth and inflation.

When asked about the effects of new import tariffs or a reduced workforce, Powell sidestepped any extensive comments, stating, "We can do the arithmetic. If there are fewer workers, there will be less work done," while avoiding deeper political discussions.

Currently, Powell sees no urgent signals from the economy to accelerate rate cuts. Instead, he suggested a cautious approach: "The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing gives us the ability to approach our decisions carefully," he said at a Dallas Fed event.

In response to Powell's remarks, yields on short-term Treasury bonds rose, and market expectations for future rate cuts shifted. The Fed recently lowered its benchmark overnight rate to a range of 4.5% to 4.75%. Although officials previously anticipated the rate could drop as low as 2.9% by 2026, investors now see it potentially holding around 3.9%.

Michael Feroli, chief U.S. economist at JP Morgan, commented, "We still think the FOMC is likely to cut in December but believe today’s speech signals a potential slowdown in the pace of easing by January."

During a Q&A session, Powell highlighted that while Fed staff may begin analyzing the implications of tariffs and other Trump administration proposals, clarity will only emerge once new policies are finalized. "The answer is not obvious until we see the actual policies," he remarked, stressing a need to wait until new laws or directives are enacted.

Powell also observed that current economic conditions differ from those during Trump's initial term eight years ago, noting higher inflation, growth, and productivity levels today. A recent immigration surge has contributed to economic expansion amid a post-pandemic labor shortage.

Despite some public perceptions of economic challenges, Powell described the present situation as "remarkably good," with a 4.1% unemployment rate, a "stout" 2.5% annual growth pace, rising disposable incomes driving consumer spending, and increased business investment.

Nonetheless, inflation remains a concern. Although the personal consumption expenditures (PCE) index for October has yet to be released, Powell indicated that preliminary data suggests a 2.8% rise in the PCE index, excluding food and energy costs—marking a fourth month of stalled inflation progress.

The Fed's 2% inflation target is measured by the headline PCE reading, with Powell noting that October's figure likely stands around 2.3%. Policymakers continue to monitor key inflation metrics closely and are committed to maintaining a trajectory toward their long-term goals.

While traders expect another quarter-point rate cut at the Dec. 17-18 meeting, Powell and the Fed remain vigilant. "Major aspects of inflation have returned to rates closer to our goals ... We are watching carefully to be sure that they do ... Inflation is running much closer to our 2% longer-run goal, but it is not there yet," Powell concluded.

 

 

 

 

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.