Federal Reserve Chairman Jerome Powell recently said that the bank will gradually lower interest rates "over time," while reiterating that the overall economic conditions in the United States remain solid.
Speaking at the annual meeting of the National Association for Business Economics (NABE) in Nashville, Powell reiterated his confidence that inflation will continue to move toward the central bank's 2% target, adding that economic conditions have "set the stage" for a further easing of price pressures.
Powell said: "Looking ahead, if the economy develops broadly as expected, (monetary) policy will shift to a more neutral stance over time." Neutral monetary policy will neither promote too fast economic growth nor suppress economic activity.
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Two weeks ago, the Federal Reserve announced a 50 basis point rate cut, lowering the target range of the federal funds rate from 5.25%-5.5% to 4.75%-5%. This is also the first rate cut by the bank since March 2020, marking the start of a monetary easing cycle.
At the same time as announcing the interest rate decision, the Federal Reserve released a "dot plot" of interest rate forecasts, showing that the median long-term interest rate expectations of 19 policymakers were between 2.75% and 3%, 200 basis points lower than the current level.
Policymakers also generally expect the Fed to cut interest rates by a cumulative 50 basis points in 2024. But Powell pointed out that "we have not set any predetermined course" and policymakers will continue to make decisions on a case-by-case basis based on the latest economic data.
Powell also said that the U.S. labor market is solid, but the situation has indeed "cooled significantly over the past year" and "we do not believe that we need to see further cooling of the labor market to achieve our 2% inflation target."
Data released last week showed that the annual rate of the US PCE (personal consumption expenditures) price index slowed to 2.2% in August. "The decline in inflation is broad-based, and recent data suggest that we have made further progress towards a sustainable return to 2%."
At the same time, some central bank officials are still worried that cutting interest rates too quickly could reignite inflationary pressures. In this regard, Powell said: "Our goal has always been to restore price stability, but also to prevent a significant increase in unemployment."
"While the mission is not yet complete, we have made considerable progress on the path toward that goal." Powell acknowledged that housing-related inflation has been declining slowly, but he is confident that this trend will also slow further over time.