Fed Chair Signals More Rate Cuts, Cites Strong Economy
Published On: October 1st, 2024
Federal Reserve Chair Jerome Powell recently addressed the National Association for Business Economics in Nashville, offering insights into the future of US monetary policy. While Powell reaffirmed that more interest rate cuts are expected, he emphasized that the pace of these reductions would be gradual, based on incoming economic data. Investors who were hoping for aggressive rate cuts by the end of 2024 were left questioning how quickly these changes might materialize.
- The Fed's current benchmark rate is at 4.75%-5%, down from a high of 5.3%
- Inflation is at 2.2%, close to the Fed’s target of 2%
- Unemployment is steady at 4.2%, but hiring has slowed, with an average of 116,000 jobs added per month
- The Federal Reserve has planned two additional quarter-point cuts in November and December, contingent on economic data
Powell’s speech on September 30 marked a cautious yet optimistic tone. He reassured the audience that the US economy is on solid footing, with inflation steadily moving toward the Fed’s 2% goal. However, despite inflation coming under control, Powell indicated that further rate cuts should not be expected too quickly. The Fed lowered rates by 50 basis points earlier this month, the first major reduction since 2020. Powell's comments suggest the Federal Reserve aims to guide the economy gently into a neutral stance, avoiding both overheating and stagnation.
What this means for future Fed decisions
The Fed is expected to make two more rate cuts before the end of 2024. However, Powell emphasized that any additional reductions would depend on how the economy evolves in the coming months. Key data, such as the upcoming jobs report, will play a crucial role in determining whether the Fed speeds up or slows down its pace of rate cuts. While some insiders, like Fed Governor Michelle Bowman, have pushed for a slower, measured approach to avoid reigniting inflation, others support more aggressive rate cuts to counteract any potential weakening in the labor market.
Powell highlighted the importance of continued data monitoring. If hiring slows down significantly or the economy shows signs of strain, the Fed could adjust by cutting rates more quickly. Conversely, if the economy performs well, the cuts could proceed more gradually.
How will this impact the economy and consumers?
For the broader economy, the Fed’s cautious approach signals a strong effort to balance inflation control with employment growth. Lower interest rates should eventually lead to reduced costs on loans and mortgages for consumers, though the full effects may not be felt immediately. Auto loans, for instance, are expected to remain high for a while due to the slower reaction of longer-term bond yields.
Investors, meanwhile, were initially unsettled by Powell’s announcement, but markets quickly stabilized as they absorbed the reality that any future rate changes will be data-driven. The S&P 500 recovered after a brief dip following the speech.
While Powell's remarks signal that more rate cuts are likely on the horizon, they also indicate that the Federal Reserve will be taking a cautious, data-driven approach to avoid destabilizing the economy. Investors and consumers alike should prepare for gradual changes rather than swift economic shifts. With inflation largely under control and the labor market holding steady, the Fed's future decisions will heavily depend on how the US economy evolves in the coming months.