Federal Reserve Chair Jerome Powell indicated on Monday that additional interest rate cuts are likely on the horizon, as the central bank continues to monitor economic conditions. Powell’s remarks, delivered at the National Association for Business Economics in Nashville, Tennessee, came as the Fed reassesses its monetary policy amid signs of a cooling job market and easing inflation.

Possible Future Cuts

Wall Street investors and economists are now speculating whether the Fed will follow its recent larger-than-usual half-point rate cut with another significant reduction at upcoming meetings in November or December. According to projections from the Fed’s meeting on September 18, officials anticipate two additional quarter-point cuts by the end of 2024.

Currently, the Fed’s key interest rate stands at approximately 4.8%, but Powell signaled a move toward a “neutral stance”—a level that neither stimulates nor restrains the economy. The so-called neutral rate is estimated to be around 3%, well below current levels. The Fed has already taken steps to lower rates, and further cuts are expected as it navigates the current economic environment.

Healthy Economy, Cooling Job Market

In his address, Powell noted that the U.S. economy remains largely healthy, with inflation steadily declining and the labor market showing signs of cooling. Inflation, as measured by the Fed’s preferred gauge, has dropped to 2.2% in August. However, core inflation, which excludes volatile food and energy prices, rose slightly to 2.7%.

Meanwhile, the unemployment rate ticked down to 4.2%, a modest improvement from 4.3% the previous month. However, it remains higher than the historic low of 3.4% recorded last year. Powell acknowledged that hiring has slowed, with job creation averaging just 116,000 new positions per month over the last three months, half the rate of the previous year.

The Fed’s goal, Powell explained, is to keep unemployment from rising too high while maintaining a stable economy. “Overall, the economy is in solid shape,” Powell said. “We intend to use our tools to keep it there.”

Reducing Borrowing Costs

The Fed’s rate reductions are expected to lower borrowing costs for consumers and businesses alike. As rates drop, Americans could see lower costs for mortgages, auto loans, and credit cards, making borrowing more affordable.

“Our decision reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate economic growth and inflation moving sustainably down to 2%,” Powell noted.

Mixed Opinions Among Fed Policymakers

Since the Fed’s latest rate cut, policymakers have expressed varying opinions on the next steps. Austan Goolsbee, president of the Chicago Fed, predicts that “many more rate cuts” will follow in the coming year. In contrast, Tom Barkin, president of the Richmond Fed, has adopted a more cautious stance, advocating for a slower reduction in the Fed’s key rate.

While opinions diverge, the consensus remains that the Fed must balance its dual mandate—achieving stable prices and maximum employment. Powell’s latest comments indicate a shift from the Fed’s previous singular focus on inflation to a more balanced approach, as the central bank navigates a slowing economy.

What’s Next?

As the year comes to a close, all eyes are on the Fed’s upcoming meetings and how its policy adjustments will impact consumers and businesses. With interest rate cuts on the horizon, the broader economic effects remain to be seen. However, Powell’s message is clear—the Fed is committed to fostering a stable and resilient economy.

Credit: AP