RPT-MNI FED WATCH: No Hurry To Cut, Easing Starts With A Bang

The Federal Reserve is not in a rush to get interest rates lower but would be willing to reduce borrowing costs more rapidly if a still-solid economy were to weaken unexpectedly, Fed Chair Jerome Powell said Wednesday after the central bank jumpstarted the monetary easing cycle with an aggressive half point cut. 

The Fed's Summary of Economic Projections showed significant uncertainty about the path ahead: Nine of 19 officials see another 50bps of cuts this year, while seven want just another quarter point and two think the Fed is done for the year. One official sees 75bps of additional cuts in 2025.  

"We're recalibrating our policy to a stance that will be more neutral," Powell told reporters in his press conference. "There is nothing in the SEP that suggests the committee is in a rush."

Powell indicated the central bank is striving for an economic soft landing by lowering rates in an effort to prevent any further deterioration in labor market conditions, which he depicted as balanced. 

"It should send a signal that we are committed to coming up with a good outcome here," he said.

The Fed has two more meetings in the year, in November and December. The median official sees rate cuts to about 4.4% by year end and 3.4% by the end of next year. 

The FOMC sees risks to the outlook are in balance but Powell acknowledged risks to the Fed's labor market mandate. "We do not think we are behind [in cutting rates],” Powell said. “But you can take this as a sign of our commitment to not get behind.” He suggested the central bank "might well have" cut in July if it had the data in hand showing a jump in unemployment rate that month. 

NEUTRAL RATE

Powell said the neutral rate is probably "significantly higher" than it was before the pandemic. "We have begun the cutting cycle." The median Fed official upped the neutral rate in fresh projections to 2.9% from 2.8%. 

"I don't see anything in the economy right now that suggests that a likelihood of a recession - of a downturn - is elevated," he said. "You see growth at a solid rate, you see inflation coming down, and a labor market at very solid levels." 

But Powell also said if the labor market were to weaken or inflation were to fall more quickly than expected, then the Fed would be prepared to respond. "We are not on a preset course. We will continue to make decisions meeting by meeting." 

Officials' estimates for the unemployment rate at the end of 2025 range from 4.2% to 4.7%, a fourth tenths of a percentage point jump. The median official sees unemployment rising to 4.4% by the end of year and holding there next year. 

They also see a more benign inflation backdrop, with PCE falling back to 2.1% next year and to target in 2026. The median estimate for core inflation was revised lower to 2.6% for this year, before falling to 2.2% and 2% over the next two years. 

CONTINUINING QT 

Despite slashing interest rates at a faster clip, the Federal Reserve continued to roll off assets from its balance sheet. 

Powell indicated the program is likely to continue, noting that reserve levels have been stable and haven't come down much. "Reserves are still abundant and expected to remain for some time," he said. "We're not thinking about stopping runoff because of this. We know that tease two things can happen side by side," Powell said.