The Fed’s Powell says rates will reach a neutral level “over time,” not set by Reuters

By Howard Schneider

NASHVILLE, Tenn. (Reuters) – The U.S. economy appears poised for a continued slowdown in inflation, which will allow the Federal Reserve to cut its benchmark interest rate and reach a level “over time” that no longer hinders activity, the Fed chairman said , Jerome Powell. said Monday in remarks that showed no apparent inclination toward a faster or slower pace of debt-cost reductions.

“Disinflation has been broad-based, and recent data point to further progress toward a sustained return to 2 percent,” Powell said in remarks at a National Association for Business Economics conference in Nashville, Tennessee.

“If the economy performs broadly as expected, policy will move to a more neutral position over time,” Powell said. “But we are not on a set course. The risks are both sides and we will continue to take decisions meeting by meeting.”

The Fed cut interest rates by half a percentage point at its September 17-18 meeting, narrowing its policy rate range from a 20-year high of 5.25%-5.50%, which it had held for 14 months, currently 4.75. range %-5.00%. Economic projections released at that meeting showed policymakers’ average expectation was for the rate to fall further to a range of 4.25%-4.50% by the end of the year, to a range of 3.25%-3, 50% by the end of 2025 and for politics. easing to end in 2026, with the rate around the long-term estimated “neutral” level of 2.9%.

But investors were divided over whether the U.S. central bank will slide into a quarter-percentage-point rate cut now or be prompted to make another big cut if the labor market weakens or inflation slows more than expected.

Following Powell’s formal remarks, stocks eased slightly and Treasury yields rose. Futures traders leaned toward bets the Fed would deliver a quarter-percentage-point cut rather than a second consecutive half-percentage-point cut in November.

ECONOMY “IN SOLID SHAPE”

Powell’s reference to “two-sided” risks, however, points to an open debate as the data builds, with Friday’s release of the US employment report for September the first of two major labor market reports the Fed will receive before November. 6-7 meeting. The latest inflation data showed a headline rate of just 2.2%, close to the Fed’s target, while a “core” measure that strips out food and energy costs was stuck around 2.6% until at 2.7% for four months.

Powell, however, said he felt “broader economic conditions … are setting the stage for further disinflation.”

Commodity prices have fallen, while once-sticky aspects of the service industry have seen inflation now “close to the pre-pandemic pace,” Powell said.

Progress on housing inflation has been “slow,” the Fed chief said, but “the rate of growth in rents charged to new renters remains low. As long as it remains this way, housing services inflation will continue to decline.”

The labor market remains “solid,” he said, with the unemployment rate of 4.2 percent still low and around what Fed officials see as sustainable over the long term, with inflation at the central bank’s target.

“Overall, the economy is in solid shape; we intend to use our tools to keep it there,” Powell said, adding that the Fed had made “a lot of progress” in reducing inflation without a sharp rise in unemployment.