No hope for a significant rate cut? Powell expects two more 25 basis point rate cuts this year

According to the Wise Finance APP, Federal Reserve Chairman Powell stated that the U.S. economy is expected to achieve a soft landing, a process that will be driven by the gradual reduction of interest rates by the Federal Reserve. He pointed out in his speech on Monday that the rate cut in September has already initiated this process, and further "recalibration" will be based on changes in economic data.

Speaking at the National Association for Business Economics (NABE) annual conference in Nashville, Tennessee, Powell said, "By appropriately recalibrating our policy stance, the strong performance of the labor market can be maintained in an environment of moderate economic growth and sustainable decline in inflation."

He added, "Overall, the economic conditions are good, and we intend to use our tools to maintain this situation." Powell expects two more 25-basis-point rate cuts this year if the economy continues on its current trajectory. However, the market has been betting on a more aggressive rate-cutting cycle.

At the meeting on September 18, the Federal Open Market Committee (FOMC) voted to lower the target range for the federal funds rate by 50 basis points to between 4.75% and 5.0%, marking the first rate cut since July 2023 when the Fed had kept rates unchanged. There has been a wide discussion among investors and economists about whether this rate cut should start at 25 basis points or 50 basis points.

Earlier on Monday, the interest rate futures market predicted a 62% probability of a 25-basis-point rate cut at the November meeting, with the remaining possibilities leaning towards a larger cut. Additionally, futures pricing indicates that the rate cut in 2025 will be significantly larger than what Fed officials had anticipated in their latest economic projections in September. At that time, the Fed projected a target range for the federal funds rate of 3.25% to 3.5% by the end of next year.

Following Powell's speech, futures market pricing shows a target rate range of 3.0% to 3.25% by the end of 2025, up 25 basis points from earlier in the day. Meanwhile, the yield on the U.S. two-year Treasury note rose by 0.1 percentage point to 3.66%.

Powell emphasized, "We do not have a preset policy path, risks are two-sided, and we will continue to make decisions based on the circumstances of each meeting."

Currently, there are no signs of the U.S. economy needing emergency assistance. The Atlanta Fed's GDPNow model estimates an annualized growth rate of 3.1% for the U.S. economy in the third quarter. Consumer spending remains strong except in some interest rate-sensitive areas, business bankruptcy filings are low, and U.S. stock indices are nearing historical highs. Regardless of which party wins control of Washington in the November elections, fiscal policy will support economic growth.

Powell noted, "We do not believe that labor market conditions need to cool further to achieve the 2% inflation target."

The core personal consumption expenditures (PCE) price index favored by the Fed rose 2.7% year-on-year in August, but the recent pace of inflation has slowed. If the inflation rate of the past three months continues for a year, the core PCE index will be below the Fed's 2% annual target.

Meanwhile, the labor market has significantly cooled from the overheated levels seen during the rebound from the COVID-19 pandemic. The unemployment rate in August was 4.2%, higher than the half-century low of 3.4% last year Despite the slowdown in monthly job growth, it still remains positive. Powell and other Fed officials have stated that they do not want to see further weakness in the labor market.

Powell also mentioned the recently released annual revisions to past Gross Domestic Product (GDP) data, showing an upward revision in economic growth for 2022 and 2023. This upward revision is mainly attributed to increases in consumer income and spending, as well as moderate improvements in productivity. He concluded, "When the economy is performing so strongly, it does give you more confidence when you see a cooling in the labor market."