Federal Reserve Chairman Jerome Powell stated that the U.S. economy is on track for a soft landing, a process that will be facilitated by the Fed gradually reducing interest rates. In his speech on Monday, he noted that the rate cut in September has already begun this process, and further "re-calibration" will be made based on changes in economic data.
Speaking at the annual conference of the National Association for Business Economics (NABE) in Nashville, Tennessee, Powell said, "By appropriately re-calibrating our policy stance, the strong performance of the labor market can be maintained in an environment of moderate economic growth and sustainable decline in inflation."
He added, "Overall, the economic conditions are good, and we intend to use our tools to sustain this situation." Powell expects that if the economy continues on its current trajectory, there will be two more rate cuts of 25 basis points this year. However, the market has been betting on a more aggressive rate-cutting cycle.
At the meeting on September 18th, the Federal Open Market Committee (FOMC) voted to lower the target for the federal funds rate by 50 basis points to between 4.75% and 5.0%, while the Fed has kept interest rates unchanged since July 2023. There has been extensive discussion among investors and economists about whether this rate cut should start with a 25 basis point or 50 basis point reduction.
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Earlier on Monday, the interest rate futures market predicted a 62% probability of a 25 basis point rate cut by the Fed at the November meeting, with the remaining possibilities leaning towards a more significant rate cut. Additionally, futures pricing also showed that the rate cuts in 2025 would be significantly larger than what Fed officials expected in their latest economic forecasts in September. At that time, the Fed predicted the target range for the federal funds rate to end next year at between 3.25% and 3.5%.
With Powell's speech, futures market pricing showed the target interest rate range at the end of 2025 to be between 3.0% and 3.25%, up by 25 basis points from earlier in the day. Meanwhile, the yield on the two-year U.S. Treasury note rose by 0.1 percentage point to 3.66%.
Powell emphasized, "We do not have a preset policy path; risks are two-sided, and we will continue to make decisions based on each meeting's circumstances."
Currently, the U.S. economy has not shown signs of needing emergency assistance. The GDPNow model of the Atlanta Fed estimates an annualized growth rate of 3.1% for the U.S. economy in the third quarter. Consumer spending remains strong, except in some interest rate-sensitive areas, the number of corporate bankruptcy filings is low, and U.S. stock indices are near historical highs. Regardless of which party wins control of Washington in the November elections, fiscal policy will support economic growth.
Powell pointed out, "We do not believe that labor market conditions need further cooling to achieve a 2% inflation target."
The Fed's preferred core Personal Consumption Expenditures (PCE) price index rose by 2.7% year-on-year in August, but the recent pace of inflation has slowed. If the inflation rate of the past three months were to persist for a year, the core PCE index would be below the Fed's 2% annual target.At the same time, the labor market has cooled significantly from the overheated levels of the rebound from the COVID-19 pandemic. The unemployment rate in August was 4.2%, higher than the 3.4% half-century low last year. Despite a slowdown in monthly job growth, it remains positive. Powell and other Federal Reserve officials have indicated that they do not want to see further weakening in the labor market.
Powell also referred to the recently released annual revision of past Gross Domestic Product (GDP) data, showing an increase in economic growth for 2022 and 2023. This upward revision is mainly due to increased consumer income and expenditure, as well as a moderate increase in productivity. He concluded: "When the economy is performing so strongly, it does give you more security when you see the labor market cooling down."
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