Federal Reserve Chairman Jerome Powell said the Fed will lower interest rates "over time," while reiterating that the overall U.S. economy remains on solid footing.

Powell also reiterated his confidence that inflation will continue to move toward the Fed's 2% goal, adding that economic conditions "set the stage" for further easing of price pressures.

“Looking ahead, if the economy evolves broadly in line with expectations, policy will gradually move toward a more neutral stance,” Powell said in a speech to the National Association for Business Economics’ annual meeting in Nashville. “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.

Neutral policy is one that neither stimulates nor hinders the economy. The Fed's current benchmark interest rate is still widely seen as restrictive to economic activity after it was cut to a range of 4.75% to 5% earlier this month.

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

In a question-and-answer session after his speech, Powell acknowledged that projections released by officials in conjunction with the September rate decision indicated the Fed would cut rates by 25 basis points in each of the next two meetings, in November and December. But he warned that the Federal Open Market Committee would make decisions in part based on information they had not yet received.

"The committee is in no rush to cut interest rates quickly," Powell said. "Ultimately, we will be guided by the data we receive. If the economy slows more than we expect, then we can cut interest rates more quickly. If it slows less than we expect, we can move more slowly."

The Fed cut borrowing costs by 50 basis points in early September, its first rate cut since 2020 and a bigger move than usual. Officials cut rates this time to prevent the slowing labor market from weakening further.

Powell on Monday called the labor market solid but said employment conditions have “cooled noticeably over the past year." "We do not believe we need to see a further cooling of labor market conditions to achieve 2 percent inflation," he said.

Continued disinflation

Inflation has been tame in recent months, a trend reinforced by government data released last week, with the Federal Reserve's preferred inflation measure showing the overall personal consumption expenditures price index (PCE) slowing to 2.2% from a year earlier in August.

That gives officials more confidence that inflation is moving toward their target, allowing them to focus more on supporting the labor market.

"The foundation for disinflation has been broad, and recent data suggest that inflation has moved further toward our 2 percent objective on a sustained basis," Powell said.

Still, some policymakers remain cautious about cutting rates too quickly and worry that it could reignite inflationary pressures in the economy.

“Our goal has always been to restore price stability while avoiding the rise in unemployment that tends to accompany cooling inflation,” Powell said. “While the task is not yet complete, we have made great progress toward that outcome.”

Powell acknowledged that the decline in housing inflation has been slow but expressed confidence that it will cool further over time.

Non-farm payrolls are crucial

At their meeting earlier this month, officials expected an additional 50 basis points of rate cuts for the rest of 2024 and a further 100 basis points in 2025, according to the median forecast.

A handful of Fed officials left the door open to such a move, saying any signs of serious labor market weakness could lead to another big rate cut.

Some officials also estimated that the easing by the end of the year might be smaller. Fed Governor Bowman, who opposed the 50 basis point rate cut in September, supported a smaller rate cut. She stressed that she believed inflation risks were lingering and said the Fed should lower interest rates at a "measured" pace.

Bond traders trimmed their expectations for rate cuts next year after Powell's speech overnight. Traders of short-term interest rate futures now see a 25 basis point rate cut in November as more likely than a 50 basis point cut.

U.S. Treasuries gave up gains on Tuesday after a historic fifth straight month of gains. For the month through Friday, Treasuries have returned 1.4%, as measured by the Bloomberg US Treasury Total Return Index, which would be the market’s longest monthly winning streak since 2010. After climbing in the first few months of the year, yields began to fall in April, reversing year-to-date losses into a 4.1% gain as sticky inflation data dampened expectations for Federal Reserve rate cuts.

"The economy is in better shape," said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. "Powell has put more emphasis on the labor market, so Friday's non-farm data is more important. Treasuries have risen sharply, and it is likely that they have gotten ahead of reality."

“We are at a critical inflection point in data and policy,” said Priya Misra, portfolio manager at J.P. Morgan Asset Management. “If the job gains exceed 150,000, the market’s rate expectations may rise slightly as the probability of a 50 basis point cut in November will decrease, while a reading closer to 100,000 or lower may prompt the Fed to cut rates by another 50 basis points.”

The latest data on the labor market will be released on Friday. Economists surveyed by Bloomberg expect employers to have added 150,000 jobs in September, consistent with a slowing labor market. The unemployment rate, which has climbed this year, is expected to stabilize at 4.2%.

The article is forwarded from: Jinshi Data