Explainer: Why Has Fed’s Powell Declared “No Rush for Rate Cuts”

Following the election, stock indices on Wall Street saw a sharp rally, while 10-year Treasury rates increased, a sign of declining prices. The momentum changed last week, though, when Governor Adriana Kugler and Federal Reserve Chair Jerome Powell warned against anticipating dramatic rate cuts.

According to Powell, the US economy is “back to a good place,” with GDP growth of 3% in 2023 and a “stout 2.5% rate so far this year.” Powell reaffirmed that there will not be an automatic succession of rate reduction to please investors. Strong household balance sheets and rising disposable income have helped to sustain the steady growth in consumer expenditure. Businesses are investing more on intangibles and equipment, and supply circumstances are getting better. The previous five years have seen a faster expansion of the labor force than the two decades before to the pandemic. The rate of inflation is declining.

Powell said he was confident that the job market and economy could remain strong and that inflation could decline steadily to 2 percent with the right policy reorientation. Additionally, he underlined that the Fed is gradually shifting its policies toward a more neutral environment with no predetermined course. Citing Powell’s news conference following the rate cut earlier in November, in which he reaffirmed his determination to serve out his entire term until 2026, regardless of any pressure from President Trump, Governor Kugler emphasized the need of central bank independence.
To put it another way, the Fed has no intention of serving the demands of the markets for lower interest rates. No market, particularly commercial real estate (CRE), wants to hear that they will pledge additional rate cuts. Powell said that a robust economy is allowing the Fed to proceed “carefully” in reducing interest rates.
With the employment market weakening and inflation gradually declining, the Fed is facing a challenging economic environment. The Fed has started to reduce borrowing costs in recent months after raising interest rates in 2022 and 2023 to slow the economy and rein in the fast-rising inflation. Officials are still working to completely stop the rapid inflation, though. Although price hikes have significantly decreased from their peak in 2022, they have not yet fully recovered to the central bank’s target of 2 percent.

Fed officials expect limited progress on inflation in the next few months, as core measures of goods and services inflation, excluding housing, fell rapidly over the past two years and have returned to rates closer to those consistent with the central bank’s goals. They are not declaring victory at a moment when price increases remain slightly elevated.

For investors, the question is whether slightly sticky inflation and strong growth will be enough to prod Fed officials to slow the pace of rate cuts or to prod policymakers to make fewer rate cuts in the longer term. The Fed’s policy-setting committee meets next in mid-December, and while policymakers are expected to lower rates by a quarter point, Fed officials have made it clear that a reduction is not guaranteed.

Fed officials will be closely watching incoming data points, including inflation and jobs data, as they decide what to do. Powell noted that the path for getting there is not preset, and they will carefully assess incoming data, the evolving outlook, and the balance of risks. He suggested there is a clear reason to cut interest rates from their current level of 4.5 to 4.75 percent over the months ahead.