Powell argued this week that the Fed was not "late" in starting its rate-cutting cycle.
His main challenge in the coming months will be to keep that narrative coherent if the job market continues to cool and the economy deteriorates.
“We don’t think of ourselves as lagging, we think of this as timely, but you can view it as a sign of our commitment not to fall behind,” Powell said at a news conference.
Some on Wall Street still have doubts that the Fed's aggressive 50 basis point rate cut this week was an attempt to catch up with the curve and that the path of future rate cuts may be too shallow.
Gregory Daco, chief economist at Ernst & Young, said the Fed was cutting rates "reactively" rather than proactively.
He noted that "Powell acknowledged that if the Fed had seen July's employment data first, it might have cut interest rates in July." Data released two days after the July meeting showed that the unemployment rate rose to 4.3%, raising concerns that the Fed waited too long to act.
While the unemployment rate fell to 4.2% in August, the same concerns could resurface if it rises again in the coming months.
"Fed policymakers must adopt a strong forward-looking framework and move away from data reliance, which, unfortunately, they have not done so far," Daco said.
Federal Reserve officials predicted this week that the U.S. unemployment rate will rise to 4.4% this year and remain at that level next year.
Another challenge for Powell is that Wall Street is pricing in more future rate cuts than Fed policymakers, who this week estimated two more quarter-point cuts by the end of 2024 and four more in 2025.
Michael Feroli, chief economist at JPMorgan Chase & Co., said he still expects rate cuts to come faster than the Fed consensus.
Feroli expects a 50 basis point rate cut at the next meeting in early November if the next two employment reports are further weak.
Luke Tilley, chief economist at Wilmington Trust, said the path of rate cuts the Fed is projecting is too slow for an economy where the job market is normalizing and inflation is on track to reach the Fed’s 2% target in the first quarter of 2025. As a result, Tilley expects 200 basis points of rate cuts next year (double the Fed’s forecast) and that rates will fall to a neutral level that neither stimulates nor suppresses growth by next fall.
“What’s more important is the longer-term path, and on that, the Fed is still a bit behind the times, as its median forecast is only for a 100 basis point rate cut next year,” he said.
Powell will also have to deal with signs of internal divisions over the path of rate cuts.
The Fed’s rate-setting committee was almost evenly divided on the number of additional rate cuts it expects this year, with seven policymakers backing another quarter-point cut by the end of the year and nine members favoring an additional 50 basis point cut. Two policymakers did not expect any more cuts.
That path means that while several officials may support a 25 basis point cut this month, a 50 basis point cut would be chosen to avoid further deterioration in the job market.
Fed Governor Bowman even voted against a 50 basis point rate cut in favor of a smaller 25 basis point cut, the first dissenting vote at the Fed since 2005.
"Fed Chairman (Powell) is now considered to have significant influence on the Federal Open Market Committee because he has successfully convinced most officials that an early rate cut is optimal, but at the expense of policymakers being more resistant to quick rate cuts in the next two policy meetings," Daco said.
The article is forwarded from: Jinshi Data
