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Federal Reserve chair Jay Powell indicated that the US central bank would contemplate returning to its typical quarter-point reduction in November if economic indicators continued to be strong, following a larger-than-usual half-point decrease earlier this month.
Expressing optimism about the state of the largest economy in the world, Powell stated on Monday that the Federal Open Market Committee was “not in a rush to quickly lower rates”.
Instead, the FOMC’s objective was to gradually shift monetary policy “over time towards a more neutral stance” — a level that neither stimulates nor restrains economic activity.
The decision in November, scheduled just two days after the US presidential election, would be based on the overall data, Powell noted — but he suggested that another substantial cut was not necessary given the economy’s strength.
“From a base case standpoint, we’re looking at it as a process that will play out over some time, not something that we need to go fast on,” he remarked.
Speaking publicly for the first time since the central bank initiated its first easing cycle in over four years with a larger-than-usual half-point cut earlier this month, Powell mentioned, “That decision reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labour market can be maintained in an environment of moderate economic growth and inflation moving sustainably down to our objective.”
Now that inflation has subsided and the economic situation has paved the way for further disinflation, Powell stated that the Fed’s focus would be on protecting the labour market, which remains “solid” despite a significant decline in demand.
“Our goal all along has been to restore price stability without the kind of painful rise in unemployment that has frequently accompanied efforts to bring down high inflation,” Powell mentioned on Monday.
In a moderated discussion following his speech, Powell analyzed the latest “dot plot” of individual projections from Fed officials, which indicated that most policymakers anticipated the benchmark rate to decrease by another half a percentage point over the remaining two meetings of the year. Nearly half of the 19 officials believed the Fed should opt for a lesser reduction.
Powell stated that the “baseline” scenario involved two more quarter-point cuts rather than another half-point reduction.
Policymakers also anticipated the federal funds rate to decrease by another percentage point in 2025, concluding the year between 3.25 per cent and 3.5 per cent. By the end of 2026, it was projected to drop just below 3 per cent.
In an interview with the Financial Times on Friday, Alberto Musalem from the St Louis Fed supported the idea of the central bank gradually lowering rates due to concerns that the economy could react “very vigorously” to looser financial conditions. However, a half-point reduction would still be considered if the labour market weakened more than anticipated — a sentiment echoed by his colleague Raphael Bostic from the Atlanta Fed on Monday.