Powell Speech: Stronger Growth, Lower Unemployment Driving Slower Rate-Cut Path

In a recent post-meeting press conference, Federal Reserve Chairman Jerome Powell explained the decision to cut the federal funds rate by 25 basis points to the range of 4.25%-4.5%. The decision, taken after the December meeting, was driven by several factors including stronger economic growth and lower unemployment.

Key Drivers Behind the Rate Cut Decision

Jerome Powell emphasized that the Federal Reserve is significantly closer to achieving a neutral rate, though the stance remains restrictive. He noted that as long as the labor market and overall economy remain solid, the Federal Reserve can afford to be cautious with further rate cuts. The primary drivers for the slower pace of rate cuts include stronger economic growth, lower unemployment, and higher inflation both this year and next year. These factors necessitate a cautious approach to avoid potential economic overheating.

Fed’s Economic Outlook

Powell highlighted that inflation expectations remain well-anchored, and the risks to achieving economic goals are roughly balanced. The Fed remains attentive to risks on both sides, allowing for a cautious approach to rate reduction. Policymaker projections for the policy rate are higher for next year, consistent with expectations of higher inflation. Powell also mentioned that job creation is currently below the level needed to maintain a constant jobless rate, and the inflation trajectory is broadly on track, with housing services steadily declining.

Attentiveness to Market Conditions

The Fed recognizes that reducing policy restraint too slowly could unduly weaken the economy and employment. Therefore, the slower pace of rate cuts reflects the expectation of higher inflation and the need to react to evolving economic data. Powell assured that the Fed is significantly closer to a neutral rate, which justifies the cautious approach to further cuts. As long as the labor market and economy remain solid, the Federal Reserve can carefully consider future cuts.

Balancing Inflation and Employment

Powell’s remarks highlighted that stronger economic growth and lower unemployment are primary factors driving the slower rate-cut path. Additionally, higher inflation this year and next year also contribute to this cautious approach. The Fed aims to balance reducing inflation while supporting employment growth, ensuring that the economy remains robust and stable.

The Federal Reserve’s recent decision to cut the federal funds rate by 25 basis points is underpinned by stronger economic growth, lower unemployment, and higher inflation expectations. Jerome Powell’s emphasis on caution reflects the Fed’s commitment to maintaining economic stability while reacting prudently to economic data. This approach aims to balance the dual mandate of promoting maximum employment and stabilizing prices.