Fed Signals Caution as Jobs Data Takes Centre Stage
Federal Reserve Chair Jerome Powell yesterday indicated a more measured approach to future interest rate reductions, following the recent 50bp cut. Speaking at a conference in Nashville, Tennessee, Powell emphasised that upcoming rate adjustments would be smaller and guided by economic data.
"Looking forward, if the economy evolves broadly as expected, policy will move over time toward a more neutral stance," Powell told the National Association for Business Economics. "But we are not on any preset course."
Powell suggested that if the economy progresses as expected, two additional 25bp rate cuts may occur this year. This projection aligns with the Federal Open Market Committee's (FOMC) 'dot plot' estimates but stands in contrast to more aggressive market expectations.
Powell expressed confidence in the economy's strength and expects inflation to continue to moderate. He noted that the labour market remains "solid" despite softening over the past year. "We do not believe that we need to see further cooling in labour market conditions to achieve 2 percent inflation," he added.
The August PCE Price Index inflation rose 2.2%yoy, nearing the Fed's 2% target. However, core inflation, excluding food and energy prices, stood at 2.7%yoy. Housing-related costs remain a persistent area of inflation, but Powell anticipates that data will eventually reflect the easing prices for rent renewals.
The recent 50bp reduction was described as a "recalibration" of policy to better reflect current economic conditions. This move was unusual, as such large cuts typically occur during major economic events like the 2020 pandemic or the 2008 financial crisis.
"This is not a committee that feels like it's in a hurry to cut rates quickly," Powell stated during a Q&A session. "If the economy performs as expected, that would mean two more rate cuts this year, a total of 50 [basis points] more."
We also heard from the Fed’s Bostic who envisions a gradual easing of monetary policy over the next 15 months, with the policy rate potentially dropping to 3.00%-3.25% by the end of 2025. However, he warned that a significant weakening in the labour market could accelerate rate cuts. Bostic considers monthly job growth above 100,000 as crucial for supporting labour market stability, emphasising that this level is necessary to absorb new entrants into the workforce.
All eyes are now on the upcoming US employment report, due on Friday. Markets currently expect that 150,000 jobs were created in September, a figure that will be closely scrutinised by Fed officials and market participants alike. This report could significantly influence the Fed's decision-making process regarding future rate cuts, potentially confirming or challenging the cautious stance outlined by Powell and Bostic.
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