MNI FED WATCH: Higher Bar For Cuts In 'New Phase' Of Cycle
MNI (WASHINGTON) - The Federal Reserve has entered a new chapter in its monetary easing cycle where the bar for additional interest rate cuts has risen, particularly as inflation proves longer-lasting than expected, Fed Chair Jerome Powell said Wednesday.
"Its a new phase and we are going to be cautious about further cuts," he said in a press conference after the central bank cut interest rates by another quarter point.
Powell said he is "looking for further progress on inflation as well as continued strength in the labor market" as the FOMC considers pushing borrowing costs lower.
The Fed's action lowered the fed funds rate to a range of 4.25% to 4.5%, the third straight meeting of cuts. Policymakers also trimmed their median forecast for the number of rate cuts next year to two from four in September.
"With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive," said Powell.
CLOSER CALL
Cleveland Fed President Beth Hammack dissented in favor of holding steady and the central bank's Summary of Economic Projections showed three other officials also preferring the policy rate to remain still. Equity markets sold off after the Fed meeting and futures markets priced in less than a full 25 basis point cut through the middle of 2025.
"Today was a closer call, but we decided it was the right call because we thought it was the best decision to foster achievement of both of our goals, maximum employment and price stability," said Powell Wednesday.
Of 19 policymakers, 5 see 3 or more cuts next year and 10 see rates converging at around 3.9%. Officials expect their preferred inflation gauge to end 2025 at 2.5%, up from 2.1% in the September forecasts.
Headline and core PCE are not expected to reach the central bank's 2% goal until 2027, after Powell's term as Fed chair ends.
The Chair said officials had different approaches to modelling the effects of President-elect Donald Trump's policies into economic projections. Some officials started to incorporate future policies in the SEP, some didn't, and others did not say, he said.
The Fed's estimates of longer-run neutral interest rates again edged higher. The median inched up from 2.9% in September to 3.0%, the highest since 2018. Estimates of the neutral rate of interest range from 2.4% to 3.9%.
DARK ROOM OF FURNITURE
Powell noted "it might take a year or two from here" to get down to 2% inflation and 12-month inflation has been moving sideways. Still, the broad story of inflation coming down to target is "broadly on track," he said. (See: MNI: Fed's Inflation Fears Back On Rise, Even Before Tariffs)
There is policy uncertainty and that is adding to the uncertainty around inflation, said Powell, also calling the US economy "remarkable."
"The point about uncertainty is, it's kind of common sense thinking that when the path is uncertain, you go a little bit slower," the Chair said. "It's not unlike driving on a foggy night or walking into a dark room of furniture - you just slow down."