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federal reserve chairman jerome powell hinted at further interest rate cuts on monday, but insisted that the fed was "not following any preset path" and poured cold water on expectations that the fed would cut interest rates by another 50 basis points at its next meeting. powell did not disclose specific next steps.

powell dampens market expectations for steep rate cut

powell said in a speech at the annual meeting of the national association of business economics (nabe) in nashville,the recent 50 basis point rate cut should not be interpreted as a sign that future actions will take a similarly aggressive approach.

powell is working withmorgan stanleyeconomist ellen zentner said during a question-and-answer session following monday’s speech:if economic data holds up, two more rate cuts are likely this year, but they will be smaller, at 25 basis points. this is consistent with what the fed’s september dot plot showed,however, this is in stark contrast to market expectations for more aggressive easing policies:

overall, the economy is in good shape, and we intend to use our tools to keep it that way. fed officials are focused on lowering interest rates to a level that neither stimulates nor weakens economic activity.

to stave off market expectations that the fed may continue to cut interest rates sharply, powell cited economic forecasts they released two weeks ago. the forecast shows most officials expect two more rate cuts this year, by a quarter of a percentage point each. the fed has two more meetings this year.

this is not a committee eager to cut rates quickly. if the economy performs as expected, that would mean further interest rate cuts this year, two cuts for a total of 50 basis points.

powell is confident in the u.s. economy and believes inflation will continue to cool.he said that u.s. economic conditions provide the possibility for further slowdown in inflation, and the policy stance will become neutral over time. he and his colleagues will seek to balance lowering inflation with supporting the labor market and let data guide future moves:

looking ahead, if the u.s. economy develops broadly as expected, policy will move toward a more neutral stance over time.

but we don't have any preset course, which means if there is a greater deterioration in the job market, deeper rate cuts are likely.

the risk goes both ways and we will continue to make decisions at every meeting.

fed officials have said they want to achieve a so-called soft landing, which would reduce inflation without significantly increasing unemployment. powell’s latest statement:

while the mission is not yet complete, we have made great progress toward the goal of a soft landing.

referring to september's decision to cut interest rates by 50 basis points, powell said it reflected policymakers' view thatit’s time to “recalibrate” policy, to better reflect the current situation:

our decision to cut interest rates by 50 basis points in september reflects our growing confidence that, through appropriate adjustments to our policy stance, labor market strength can be sustained in an environment of moderate economic growth and continued decline in inflation toward our target.

we do not believe we need to see further cooling in the labor market for inflation to reach 2%.

powell reiterated his hope that the labor market will no longer weaken. we do not believe labor market conditions need to cool further than they already are.

perhaps the most stubborn area of ​​current u.s. inflation is the component related to housing costs, which rose another 0.5% in august. but,powell’s latest statement is that he believes the data will eventually cool down as rental renewals occur:

housing services inflation continues to fall, but slowly. growth in rents from new tenants remains low. as long as this continues, housing services inflation will continue to fall. broader economic conditions also set the stage for further cooling in inflation.

powell pointed to last week's revisions to gdp and consumer personal income released by the commerce department. these figures have been revised upwards. powell called the revenue revision "very large," which removed "downside risks to the economy":

the revised savings rate is not as low as thought, and a higher savings rate "suggests that (consumer) spending can continue to remain at healthy levels."

productivity now looks to be improving due to the revision posted last week. however, powell was cautious in his q&a about the sustainability of the productivity recovery. he said it was "too early" to say that productivity would continue to pick up.

the labor market generally provides a better real-time signal than gdp data. there is more evidence to support the reliability of the gdp data we obtained. this helps to an extent. but that won’t stop us from watching the labor market very carefully. many believe that in some cases the labor market may be a better reflection of real-time conditions than gdp data.

powell cited previous recessions, predicting that those recessions were not based on gdp data but on labor force data. positive gdp data helped to some extent, but labor was the key focus, he said.

"the new fed news service"

nick timiraos, a well-known financial journalist known as the "new federal reserve news service" commented,powell said fed officials will continue to cut interest rates from two-decade highs to maintain solid economic growth, but they currently see no reason to cut rates as sharply as they did at the most recent meeting.

timiraos pointed out that since the most recent fomc meeting, several fed officials have suggested that the fed may continue to cut interest rates in more traditional, smaller quarter-percentage-point increments. ahead of the fed's november meeting, officials will have two months of employment data and one month of inflation data.

as inflation has fallen sharply over the past two years, fed officials have turned their attention to seeking to prevent past rate hikes from further weakening the u.s. labor market because they no longer see the risk of persistently high inflation.

analysis and interpretation

starting in march 2022, the fed will begin to combat soaring inflation. policymakers have recently turned their attention to what powell calls a solid labor market, even though it has cooled significantly over the past year.

powell mentioned in his speech that the current unemployment rate of 4.2% is within the estimated range of the "natural" unemployment rate, which naturally refers to an unemployment rate consistent with non-inflationary growth. powell repeated many of the contents of his speech at the press conference after the fed announced interest rate cuts in september. he rated both the economy and the labor market as solid, but noted that the labor market has cooled over the past year.

powell reiterated this time that he hopes the labor market will no longer weaken. the commentary pointed out that because u.s. inflation is already expected to fall back to 2%, the fed does not welcome a further decline in employment growth. powell mentioned that the fed intends to use the tool of cutting interest rates to keep the economy sound. when powell said economic conditions set the stage for further moderation in price pressures, he was saying that inflation is expected to cool further.

less than two weeks ago, the federal reserve's fomc lowered the central bank's key overnight borrowing rate by half a percentage point, or 50 basis points, at its september meeting. although the market expected a 50 basis point rate cut, the move is still unusual because the fed has rarely cut interest rates by such a large amount for the first time in its history, such as during major crises such as the 2020 covid-19 epidemic and the 2008 financial crisis. that's why there was a big interest rate cut.

the market generally believes that powell did not make any remarks to stimulate market bets that the fed will cut interest rates by another 50 basis points, but he made it clear that the fed will act based on data.

market reaction

after powell's speech, the two-year u.s. treasury yield rose from 3.6% to above 3.65% in the short term, and the overall increase during the day expanded to nearly 10 basis points during powell's speech. the dollar rose 1% against the yen to 143.65 yen. the s&p 500 fell 0.2%, the dow fell more than 200 points or 0.5%, the nasdaq fell 0.2%, and the philadelphia semiconductor index fell 1.5%.

futures market pricing suggests the fed is more likely to err on the side of caution and cut interest rates by 25 basis points at its nov. 6-7 meeting. however, traders believe december's rate cut will be more aggressive, with a 50 basis point cut.