Powell to Address Fed's Unexpected Rate Cut and Economic Outlook

Powell to Address Fed's Unexpected Rate Cut and Economic Outlook 

Since the Federal Open Market Committee (FOMC) meeting in July, U.S. macroeconomic data has consistently exceeded expectations, signaling a strengthening economy. However, despite the positive outlook, the Federal Reserve made a surprising move on September 18, cutting interest rates by 50 basis points—a measure usually reserved for more severe economic downturns.

The recent economic data, described as indicative of a "soft" or even "no-landing" scenario, has led to a shift in market expectations. Investors now foresee fewer rate cuts in 2024 and 2025, reflecting the Fed's increasingly hawkish stance. This decision, in contrast to earlier forecasts of more aggressive monetary easing, has sparked debates about the Fed's strategy moving forward.

Federal Reserve Chair Jerome Powell is set to address the National Association for Business Economics (NABE) in Nashville, Tennessee, at 1:55 PM Eastern Time. This will be Powell's first public remarks since the unexpected rate cut, and market participants are eager for more insight into the Fed's rationale. Powell is anticipated to provide an explanation for the recent rate decision and offer guidance on how the central bank intends to handle future interest rate reductions through the remainder of this year and into 2025.

Debate around the Fed's decision is already heating up. At a banking conference in South Carolina earlier this week, Federal Reserve Governor Michelle Bowman, who dissented from the September 18 rate cut, expressed her preference for a more modest quarter-percentage-point reduction. Bowman highlighted the recent uptick in the personal consumption expenditures price index, excluding food and energy, for the month of August as a sign of persistent inflationary pressures.

Interestingly, a survey by NABE of 32 professional forecasters found that 39% of respondents cited "monetary policy mistakes" as the greatest downside risk to the U.S. economy over the next year. By comparison, only 23% considered the upcoming U.S. presidential election on November 5 as the biggest risk, while another 23% pointed to potential escalations in the conflicts in Ukraine and the Middle East.

As Powell prepares to speak, the markets are left wondering if he will adopt a more measured tone to counterbalance the market's perception of dovishness, or if he will downplay the recent string of positive economic data. Powell's address, followed by a Q&A session, is highly anticipated by analysts and investors alike.

In his prepared remarks, Powell will likely touch upon the Fed's dual mandate of promoting maximum employment and ensuring price stability. The U.S. economy, he is expected to note, has made considerable progress toward these goals. Although the labor market remains strong, it has cooled from its previously overheated levels. Inflation has eased, and Powell and his colleagues at the FOMC now have greater confidence that inflation is on a path to reach the Fed's target of 2%.

Regarding the labor market, Powell will likely highlight key indicators such as the historically low unemployment rate and the continued strong labor force participation rate, particularly among prime-age workers. He is expected to acknowledge that job openings remain plentiful relative to the number of unemployed workers, but that labor market conditions have moderated over the past year. Importantly, Powell is not expected to argue for further cooling in the labor market to achieve the Fed's inflation goals.

On the inflation front, Powell will probably point out that both headline and core inflation have declined significantly over the past year, with core goods prices and core services (excluding housing) returning to pre-pandemic levels. While housing-related inflation remains somewhat sticky, Powell is expected to express optimism about further disinflation, given broader economic conditions and the continued balance in the labor market.

Powell's discussion of monetary policy will likely underscore the Fed's progress in restoring price stability without inducing a painful rise in unemployment. He may attribute this success to the Fed's patient and restrictive approach to monetary policy, which has helped balance supply and demand in the economy. However, Powell is also expected to emphasize that risks remain balanced, and that the Fed will continue to adjust its policy stance based on evolving economic data.

As Powell's speech nears, all eyes will be on his messaging, as it could shape market expectations for the months ahead. Markets will be particularly attuned to any hints about the pace and timing of future rate cuts, as well as Powell's overall assessment of the U.S. economy's resilience amid ongoing global uncertainties.