Powell: The Fed is not in a hurry to cut interest rates, and it should not be assumed that a 50 basis point cut is a new rhythm

On Wednesday, September 18th, after the Federal Reserve cut interest rates by a significant 50 basis points, exceeding market expectations and traditional pace, Federal Reserve Chairman Powell held a highly anticipated press conference.

As he mentioned that the Fed is not in a hurry to cut rates and warned against viewing a significant rate cut as a future regular rhythm, his hawkish remarks caused the three major U.S. stock indexes to turn from gains to losses, U.S. bond yields erased their post-Fed decision declines and turned higher again, while gold surged and then retreated.

How to understand the significant rate cut? Not a future regular rhythm, the Fed is not in a hurry to cut rates, does not indicate high recession risks

One of the most frequently asked questions to Powell during the press conference was why the Fed made a significant rate cut, whether it was acknowledging that a rate cut should have been made in July but now lagged behind the curve, and whether it was emphasizing the high risks of a U.S. economic downturn.

Powell admitted, "It might indeed have been appropriate to cut rates in July, and we didn't do that." However, he denied that the Fed had waited too long to cut rates, and did not believe that this action lagged behind the rate curve. He emphasized that this rate cut was actually a reflection of the Fed's commitment to not lag behind the economic situation.

His reasoning was that, considering the outlook, although other major central banks around the world had cut rates before, the Fed had been "very patient and waiting," and this patience eventually paid off, convincing the Fed that inflation would continue to fall to 2%:

"This supported our strong move today. I don't think anyone should look at this and say, 'Oh, this is the new speed.'"

In other words, Powell's point is that investors should not assume that a 50 basis point rate cut is a new future rhythm, and the Fed will not continue to cut rates at this pace, cooling down some rather enthusiastic and aggressive market expectations.

Some analysts also pointed out that Powell referred to the rate cut in his speech as a "recalibration" of Fed policy, which does not commit to taking similar aggressive measures at every future meeting.

Furthermore, Powell explicitly stated that there is nothing in the Fed's Summary of Economic Projections (SEP) indicating an urgency to complete rate cuts, "Central bank forecasts do not point to emergency action," and "the rate cut process will evolve over time." The Fed is not in any preset mode and will continue to make decisions at each meeting:

"Data will drive monetary policy choices, rate cuts will accelerate, decelerate, or pause as needed."

Powell stated that the Fed's current goal is to maintain cooling inflation while ensuring that the unemployment rate does not rise. Investors should view the significant 50 basis point rate cut as a sign of the Fed's "firm commitment" to achieve these goals:

"We are trying to achieve a situation where we restore price stability without causing the painful rise in unemployment that sometimes accompanies deflation." When it comes to the economy, Powell repeatedly emphasized that the US economic situation is basically good, with no signs of increasing risks of economic downturn:

"You see stable economic growth, declining inflation rates, and the labor market remaining at a very stable level, so I really don't see this situation of (increased risk of economic downturn)."

Prior to Powell's press conference, due to the Fed's decision to significantly cut interest rates to start this cycle, traders increased their bets on the extent of easing, which had previously pushed US bond yields and the US dollar to plunge in the short term. Traders bet that by the end of 2024, the Fed would cut rates by about 123 basis points in total, higher than the approximately 112 basis points before the decision was announced.

Powell's assessment of the US economy: Downside risks to employment increase, upside risks to inflation recede, the fight against inflation is not yet won

Powell stated that the overall US economy is strong, the job market is stable, and the Fed hopes to maintain this state. He will adhere to the commitment to maintaining economic strength in the face of the dual responsibilities, and "when the labor market is strong, it is the time to support employment."

He also acknowledged that the current US job market has cooled significantly from its previous overheated state and continues to cool, with the unemployment rate rising although still low, and inflation has eased significantly but remains above target. "Downside risks to employment have increased, and upside risks to inflation have receded."

He praised the progress of inflation cooling as usual, stating that long-term inflation expectations seem to be well anchored, and it is expected that the August PCE personal consumption expenditure price index will further decrease from the previous 2.5% to 2.2%, although this data will not be released until the end of September:

"The Fed's patient approach over the past year has been effective. Inflation is now closer to our target, and our confidence in inflation steadily moving towards 2% has also strengthened."

During the Q&A session, he emphasized that the inflation issue has not been completely resolved, but the Fed is encouraged by the progress made, as "inflation pressures have clearly weakened." Housing inflation is one of the drag factors, and the Fed cannot solve the real problem of housing supply shortage.

When evaluating the labor market, Powell mentioned that although labor market conditions are close to full employment, the slowdown in job growth over the past few months is "worth noting," and the Fed has taken note of the relevant signs. The Quarterly Census of Employment and Wages (QCEW) report suggests that employment figures may be revised downward. The Fed's policy actions have a lagging impact on economic conditions.

However, he also mentioned that there has been no increase in unemployment claims or layoffs, and no reports from companies about such matters, so there is no need to overly loosen the labor market to suppress inflation. Many indicators indicate that the labor market remains stable, with the unemployment rate at the low end of the 4%-5% range, indicating a good employment situation, and immigration issues have also pushed up the US unemployment rate:

"Before the next FOMC monetary policy meeting, we can observe two (non-farm) employment reports. If the job market unexpectedly slows down, (the Fed) can react.

We will not wait for this (unexpected slowdown in the job market) situation, because the time to support the labor market is when the labor market is still strong." Overall, Powell believes that "the recalibration of our policy stance will help maintain a strong economy and labor market and will continue to push inflation further down as we move towards a more neutral stance."

What else did he say? Not returning to the era of ultra-low interest rates, neutral interest rates may be raised, central bank independence helps curb inflation

Powell stated that the Federal Reserve is not considering stopping the pace of balance sheet reduction. Although today's decision to cut rates significantly had one dissenting vote, it also "received broad support from Fed officials after repeated discussions," with "various views and actually a lot of consensus."

He believes that the interest rate expectations for 2024 shown in the "dot plot" indicate that there has been a significant change in the stance of Fed officials since June, with still a wide range of uncertainty in the assessment of neutral interest rates, but "we will not return to the era of ultra-low rates":

"Intuitively, most people, or many people, will acknowledge that we may not return to the era where tens of trillions of dollars of sovereign bonds traded at negative rates, or the era where long-term bonds traded at negative rates. The future neutral interest rate may be much higher than at that time."

With the November U.S. presidential election looming, Republican candidate Trump previously claimed that he should have a say in Fed monetary decisions. Powell reiterated the importance of central bank independence, stating that it can better support the economy and curb inflation.

Some analysts point out that the next Fed rate decision will come after the election day, and the impact of the current Fed rate cut on the election outcome is still unknown. However, the rate cut has sparked a common response from both parties in the U.S. and will continue to be a topic of discussion in the near future.

Earlier, prominent Democratic Senator Warren stated that the significant rate cut by the FOMC means that Fed Chairman Powell has waited too long on easing issues, and the Fed needs to continue cutting rates.

Furthermore, Powell also mentioned today that it is difficult to determine how much further mortgage rates will decline, which will depend on the economic situation. The housing supply issue needs to be addressed jointly by the market and the government. The Fed's idea is that all U.S. financial regulatory agencies will collectively propose relevant suggestions for public comment and strive to reach a consensus in the first half of next year. The changes in the banking capital system are the result of negotiations among all parties, and he supports the existing reform plan, aiming to finalize the reform plan by 2025.

The Fed will hold its next monetary policy meeting on November 6-7, with the last meeting of the year on December 17-18. The "dot plot" reflecting the rate views of Fed officials shows that 19 FOMC members (including voters and non-voting members) expect the federal funds rate to reach 4.4% by the end of this year, equivalent to the target range of 4.25% to 4.5%, indicating a further 50 basis points of rate cuts.

The dot plot also indicates that by 2025, the Fed expects rates to fall to 3.4%, which means a further 100 basis points of rate cuts next year. By 2026, it is expected that rates will fall to 2.9%, equivalent to a further 50 basis points of rate cuts that year