Powell: Will further cut interest rates, rate cuts support a soft landing for the economy, pouring cold water on significant rate cuts

Fed Chairman Powell hinted at further rate cuts on Monday, but insisted that the Fed "has not taken any preset path," dampening market expectations for a 50 basis point rate cut at the next meeting. Powell did not disclose specific action plans for the next steps.

Powell dampens market expectations for significant rate cuts

Speaking at the National Association for Business Economics (NABE) annual meeting in Nashville, Powell stated that "a recent 50 basis point rate cut should not be interpreted as future actions being taken in the same aggressive manner."

During a Q&A session following his speech with Morgan Stanley economist Ellen Zentner on Monday, Powell indicated that "if economic data remains consistent, there may be two more rate cuts this year, but of a smaller magnitude, at 25 basis points each. This is in line with the Fed's September dot plot, but sharply contrasts with the market's expectations for more aggressive easing policies:

Overall, the economic conditions are good, and we intend to use our tools to maintain this situation. Fed officials are focused on lowering rates to a level that neither stimulates nor weakens economic activity.

To avoid market expectations of further significant rate cuts, Powell referenced their economic forecast released two weeks ago. The forecast shows that most officials expect two more rate cuts this year, each by a quarter point. The Fed has two more meetings this year.

This is not a committee that is eager to quickly cut rates. If the economic performance meets expectations, this means further rate cuts this year, cutting rates twice, totaling 50 basis points.

Powell is confident in the U.S. economy and believes that inflation will continue to cool down. He stated that the U.S. economic conditions provide the possibility for further cooling of inflation, and the policy stance will tend towards neutrality over time. He and his colleagues will seek to balance reducing inflation with supporting the labor market and let data guide future actions:

Looking ahead, if the U.S. economy evolves roughly as expected, policy will move towards a more neutral stance over time.

But we have no preset path, which means that if the labor market deteriorates significantly, larger rate cuts may be made.

Risks are two-sided, and we will continue to make decisions at each meeting.

Fed officials have expressed their desire to achieve a so-called soft landing, that is, to lower the inflation rate without significantly increasing the unemployment rate. Powell's latest statement:

While the task is not yet complete, we have made significant progress towards the goal of a soft landing.

Regarding the 50 basis point rate cut decision in September, Powell stated that this reflects policymakers' belief that it was time to "readjust" policy to better reflect the current situation:

The decision to cut rates by 50 basis points in September reflects our growing confidence that, by appropriately adjusting our policy stance, the strong labor market can be sustained in an environment of moderate economic growth and inflation continuing to decline towards our target We do not believe that it is necessary to see further cooling in the labor market in order to achieve 2% inflation.

Powell reiterated his hope that the labor market will not soften further. We believe that the current labor market conditions do not need to cool further.

The most stubborn area of inflation in the United States may be related to housing costs, which rose by 0.5% in August. However, Powell recently stated that he believes this data will eventually cool down with lease renewals:

Housing services inflation continues to decline, but at a slow pace. The growth rate of rents for new tenants remains low. As long as this situation continues, housing services inflation will continue to decline. The broader economic conditions also lay the foundation for further cooling of inflation.

Powell mentioned the GDP and personal income revisions released by the U.S. Department of Commerce last week. These data have been revised upwards. Powell described the income revisions as "very significant," eliminating "downside economic risks":

The revised savings rate is not as low as imagined, and a higher savings rate "indicates that (consumer) spending can continue at a healthy level."

Due to the revisions announced last week, productivity now appears to have improved. However, Powell expressed caution about the sustainability of the productivity rebound in the Q&A session. He said it is "too early" to assert that productivity will continue to rise.

The labor market usually provides better real-time signals than GDP data. There is more evidence supporting the reliability of the GDP data we have obtained. This is helpful to some extent. But this will not prevent us from paying very close attention to the labor market. Many people believe that in certain situations, the labor market may reflect real-time conditions better than GDP data.

Powell cited previous recession cases, predicting that recessions are not indicated by GDP data, but by labor data. He said that positive GDP data is somewhat helpful, but labor is the key focus.

"New Fed News Agency"

Nick Timiraos, a well-known financial journalist known as the "New Fed News Agency," commented that Powell stated that Fed officials will continue to lower interest rates from their 20-year highs to maintain steady economic growth, but they currently see no reason to cut rates significantly as they did at the recent meeting.

Timiraos pointed out that since the recent FOMC meeting, several Fed officials have hinted that the Fed may continue to cut rates by a more traditional and smaller quarter-point increment. Before the November Fed meeting, officials will have two months of employment data and one month of inflation data.

With inflation having fallen significantly over the past two years, Fed officials have shifted their focus, seeking to prevent past rate hikes from further weakening the U.S. labor market, as they no longer see sustained high inflation as a risk.

Analysis and Interpretation

Starting from March 2022, the Fed began to combat soaring inflation. Policymakers have recently shifted their focus to what Powell calls a stable labor market, despite the labor market cooling significantly over the past year In his speech, Powell mentioned that the current unemployment rate of 4.2% is within the estimated range of the "natural" unemployment rate, which refers to the unemployment rate consistent with non-inflationary growth. Powell reiterated many of his remarks from the press conference after the Fed's rate cut announcement in September. He assessed that the economy and labor market are both strong, but noted that the labor market has cooled over the past year.

Powell reiterated his hope that the labor market will not soften further. Analysts point out that since U.S. inflation is expected to fall to 2%, the Fed does not welcome further declines in job growth. Powell mentioned that the Fed intends to use rate cuts to maintain economic stability. Powell described the economic environment as laying the foundation for further slowing of price pressures, indicating an expected further cooling of inflation.

Less than two weeks ago, the Fed's FOMC cut the key overnight borrowing rate by half a percentage point, or 50 basis points, at the September meeting. Although the market had expectations for a 50 basis point rate cut, the move was still considered unusual because the Fed has rarely taken such a large rate cut at the first sign of easing, only doing so during major crises such as the COVID-19 pandemic in 2020 and the 2008 financial crisis.

The market generally believes that Powell did not make any comments to spark speculation that the Fed will cut rates by another 50 basis points, but he explicitly stated that the Fed will act based on data.

Market Reaction

After Powell's speech, the short-term U.S. Treasury yield rose from around 3.6% to above 3.65%, with an overall increase of nearly 10 basis points at the time of Powell's speech. The U.S. dollar rose 1% against the Japanese yen to 143.65 yen. The S&P 500 index fell by 0.2%, the Dow fell by over 200 points, a decrease of 0.5%, the Nasdaq fell by 0.2%, and the Philadelphia Semiconductor Index fell by 1.5%.

Futures pricing indicates that the Fed is more likely to act cautiously with a 25 basis point rate cut at the meeting on November 6th to 7th. However, traders believe that the rate cut in December will be more aggressive, with a 50 basis point cut