"The Federal Reserve's Mouthpiece": Powell's Unusual Behavior This Time!

Federal Reserve "mouthpiece," Wall Street Journal reporter Nick Timiraos wrote the following about the Federal Reserve's interest rate decision in November.

The Federal Reserve decided on Thursday to cut interest rates by 25 basis points, but it released more uncertainty about the pace of future rate cuts, as it continues to work to prevent the significant rate hikes of the past two and a half years from dragging down the economy.

In the post-meeting press conference, Federal Reserve Chairman Jerome Powell stated that the upcoming election would not affect the Fed's recent policy decisions. He also reiterated his intention to remain at the Federal Reserve until his four-year term as chairman expires in May 2026.

When asked whether he believes the president could dismiss him or other senior officials before the end of their terms, Powell unusually provided a concise response, reiterating his consistent view: "The law does not allow it."

Additionally, advisors to President-elect Trump indicated that he would not seek to change the leadership of the Federal Reserve.

Thursday's rate decision follows a 50 basis point cut in September, bringing the federal funds benchmark rate to a range of 4.5%-4.75%. All 12 Federal Reserve voters supported the rate cut.

Officials stated that these measures were necessary because they are more confident that inflation will return to the central bank's target, and they believe that even with the latest rate cuts, rates remain high enough to suppress economic activity.

This move was anticipated. Following the announcement, the S&P 500 and NASDAQ Composite Index maintained their upward momentum, ultimately reaching historic highs.

Trump's victory in the election this week has the potential to reshape the economic outlook, with the Republican majority on Capitol Hill likely to implement significant changes in taxation, spending, immigration, and trade. Economists are divided on whether these policy combinations will promote or hinder economic growth and drive up prices. The shift in outlook has in turn raised questions on Wall Street about whether the Federal Reserve will alter its earlier expectations of steadily lowering rates over the next year or two.

Powell stated that it is too early to say how the next administration's policies will reshape the economic outlook, "We do not speculate, do not conjecture, do not assume" what policies may be implemented.

Since the Federal Reserve's rate cut in September, long-term bond yields have risen significantly, indicating an increase in borrowing costs for mortgages or auto loans. The rise in yields is largely due to better economic data reducing investors' concerns about a recession, which could prompt larger rate cuts. However, some analysts believe that the sharp decline in the bond market may also reflect concerns among some investors about higher deficits or inflation under a second Trump administration.

Regardless, the market has produced an unusual outcome: borrowing costs have risen following the Federal Reserve's rate cut. According to Freddie Mac, the average interest rate on a 30-year mortgage has jumped from 6.1% in mid-September to 6.8% this week.

Within a similar timeframe, investors in the interest rate futures market have continuously lowered their expectations for the magnitude of rate cuts by the Federal Reserve over the next year. According to Citibank, they now believe the Federal Reserve will lower rates to around 3.6% by 2026, compared to their estimate of 2.8% in September Officials are trying to bring interest rates back to a more "normal" or "neutral" level, which neither stimulates nor slows economic growth, but they are unsure what a normal interest rate is. Policies that promote economic activity or prices also lead officials to conclude that they should maintain a moderately restrictive interest rate stance. This means they will keep interest rates slightly above normal or neutral levels.

Before the 2008-09 financial crisis, many believed the neutral interest rate might be around 4%, but after the crisis, the economic recovery was extremely slow, and economists and Federal Reserve officials believed the neutral interest rate might be closer to 2%. Rate forecasts submitted in September showed that most officials expect that if the economy grows robustly and inflation continues to cool, they might lower rates to around 3.5% next year.

According to the Federal Reserve's preferred index, the inflation rate in September was 2.1%, an increase compared to the same period last year. The so-called core inflation rate, excluding volatile food and energy prices, was 2.7%. The Federal Reserve's long-term goal is for the inflation rate to reach 2%.

Due to officials' lack of clarity on the position of the neutral interest rate, they may use economic performance in the coming months as guidance. If inflation continues to slow and demand for workers appears weak, officials may conclude that it is reasonable to continue lowering rates along the path they envisioned in September.

Officials are "trying to choose between two risks: one is acting too quickly, which could undermine the progress we've made on inflation, and the other is acting too slowly, leading to an overly weak labor market," Powell said.

If inflation progress stalls, or if booming financial markets raise concerns that inflation may exceed targets, officials may be more reserved about continuing to steadily lower rates at meeting after meeting.

The most direct focus is whether the Federal Reserve will lower rates again at the upcoming meeting in December. In September, 19 participants had roughly the same opinion on whether there would be one or two more rate cuts this year. Among them, 9 believed there would be no more than one cut, either in November or December, while 10 believed there would be two cuts.

Diane Swonk, chief U.S. economist at KPMG, said, "There is a lot to learn between now and the December meeting. They can't keep the door wide open, but they also can't close it."

Powell stated that slowing the pace of rate cuts is "something we are just beginning to consider," and "as we approach what seems to be neutral or near-neutral levels, it may be appropriate to slow our easing pace."

Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said that even before the election results come out, recent data suggest that another rate cut would be a delicate balancing act, as inflation rates may appear slightly higher than officials' forecasts, while the unemployment rate has recently declined. He noted that the election results have driven the stock market to new highs, while enhancing the outlook for strong economic growth, rising inflation, and improving labor markets, which increases the likelihood that the Federal Reserve will forgo a rate cut next month. Luzzetti said, "From a risk management perspective, these are strong evidence against skipping interest rate cuts."

Glenn Hubbard, an economist at Columbia University and former senior advisor to President George W. Bush, stated that given the recent strong momentum in the economy, Federal Reserve officials may prefer a 25 basis point cut in September rather than a 50 basis point cut.

Hubbard noted that if inflation slows in returning to the Federal Reserve's target and if the neutral interest rate is higher, "you really don't have much room for significant cuts." "I don't think you'll see a lot of rate cuts."