Powell Says Future Cuts Would Require Fresh Inflation Progress

Bumpy Inflation

Policymakers have now lowered their benchmark lending rate by a full percentage point since mid-September, when they began cuts with an aggressive half-point move. At the time, they were encouraged by falling inflation and worried the labor market was approaching a dangerous tipping point.

Since then, the landscape has shifted. The labor market has proved resilient, with payrolls growing by an average 173,000 over the last three months. The unemployment rate ticked up to 4.2% in November, but remains low by historical standards.

Powell said earlier this month that downside risks to the labor market appear to have receded.

Policymakers now see the unemployment rate 4.3% in 2025, updated projections show. They also slightly raised their forecast for economic growth in 2025 to 2.1%.

Meanwhile, recent price data has raised concerns that inflation may be stalling above the Fed’s 2% target, prompting a number of Fed officials to say they’d prefer to slow the pace of cuts.

Some have done so while voicing confidence that inflation will continue to decline, pointing to factors such as an anticipated slowdown in housing costs.

Others, like Fed Governor Michelle Bowman, have emphasized that inflation remains uncomfortably above the Fed’s goal.

Xem thêm : The Fed is set to cut rates again despite inflation rise. Here’s why.

The median projection for inflation at the end of next year jumped to 2.5%, from 2.1% in September.

Neutral Estimates Higher

Officials again raised their median estimate of where the policy rate will settle over the long run to 3% from 2.9%. Officials have said there is substantial uncertainty over where that so-called neutral rate, which neither promotes nor inhibits economic activity, lies following the Covid-19 pandemic.

Some have suggested the neutral rate has moved higher, meaning officials can reach it with fewer cuts than previously anticipated.

Trump’s proposed policies on trade, immigration and taxation add another element of uncertainty to the inflation outlook. Depending on how they are structured, those could put upward pressure on inflation and constrain the labor market, according to some estimates.

Powell has said the Fed is modeling and evaluating Trump’s proposals, but not yet incorporating them into decisions because it’s unclear what specific form the policies will take.

The Fed also announced it would reduce the rate it pays lenders using its overnight reverse repurchase facility by 30 basis points. That effectively lowers the RRP rate by five basis points relative to the fed funds target range, aligning it with the lower bound.

The facility is designed to help put a floor under the Fed’s target for the federal funds rate by soaking up cash from outside the banking system. The move may be aimed at preempting tightness in money market rates. It may also provide extra room for the Fed to shrink its balance sheet further by driving more money into bank reserves.

–With assistance from Alex Harris, Chris Middleton, Liz Capo McCormick, Matthew Boesler, Robert Jameson, Vince Golle and Laura Curtis.

(Updates with fresh market reaction in eighth paragraph.)

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