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Jay Powell backed a gradual approach to lowering interest rates, saying the US central bank does not need to be “in a hurry” during a strong economy and a “bumpy” path down for inflation.
The Federal Reserve chair hailed the “remarkably good” performance of the world’s largest economy, noting “significant progress” in taming the pace of price increases.
Given the economy’s resilience, Powell signalled little urgency to ease monetary policy quickly, instead cautioning there was still work to do to get inflation all the way back to the central bank’s 2 per cent target.
“The economy is not sending any signals that we need to be in a hurry to lower rates,” Powell said in prepared speech in Dallas on Thursday. “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.”
In government bond markets, the two-year Treasury yield — which closely tracks interest rate expectations — jumped following Powell’s remarks, trading 0.08 percentage points higher at 4.36 per cent by the late afternoon in New York.
Market pricing indicated traders were betting on a 60 per cent probability of a quarter-point rate cut in December, scaling back expectations that had been strengthened on Wednesday by the latest US inflation reading.
Last week, the US central bank opted to lower its benchmark policy rate by a quarter-point to a new target range of 4.25 per cent to 4.75 per cent. Officials next meet in December for their final gathering of the year and appear on track to deliver a third-consecutive cut.
The Fed’s challenge is to take its foot off the economic brakes quickly enough to prevent any significant increase in joblessness, but also slow it enough to ensure inflation is kept at bay.
“We are confident that with an appropriate recalibration of our policy stance, strength in the economy and the labour market can be maintained, with inflation moving sustainably down to 2 per cent,” Powell said on Thursday.
Officials more broadly have endorsed a gradual approach to lowering rates, given both the underlying strength of the economy as well as the stickiness of residual price pressures.
The latest consumer price index report released on Wednesday underscored how uneven the path down to the Fed’s 2 per cent is likely to continue to be. Powell on Thursday described it as “more of an upward bump than we had expected”, even as he said overall downward trend was “still intact”.
After several months of larger than expected drawdowns in inflation, the annual pace ticked up to 2.6 per cent following a third straight month in which “core” prices that strip out volatile food and energy prices rose 0.3 per cent.
Another metric of underlying inflation — one that focuses on prices for services that also exclude housing-related costs — ticked higher in October and now registers an annual pace of 4.4 per cent. Powell on Thursday said he expected inflation to continue to retreat, “albeit on a sometimes-bumpy path”.
He suggested the central bank would consider slowing the pace of cuts further if warranted by the data, echoing comments earlier on Thursday from Adriana Kugler, a Fed governor.
“If any risks arise that stall progress or reaccelerate inflation, it would be appropriate to pause our policy rate cuts,” Kugler said at an event in Uruguay. “But if the labour market slows down suddenly, it would be appropriate to continue to gradually reduce the policy rate.”
Economists have warned the economic proposals put forward by president-elect Donald Trump, such as tariffs and deportations, could cause inflationary pressures to reignite.
Asked on Thursday how that may affect the Fed’s policy decisions, Powell said the central bank would be “careful about changing policy until we have a lot more certainty”.
He said the impact of tariffs “isn’t obvious until we see actual policies”, stressing the Fed would “reserve judgment”.
