Rates will over time reach neutral level, says US Fed chief Powell

“If the economy evolves broadly as expected, policy will move over time toward a more neutral stance,” Powell said. “But we are not on any preset course. The risks are two-sided, and we will continue to make our decisions meeting by meeting.” The Fed cut rates by half a percentage point at its Sept.

 

17-18 meeting, lowering the range of its policy rate from a 20-year high of 5.25 per cent-5.50 per cent, which it had maintained for 14 months, to the current 4.75 per cent-5.00 per cent range. Economic projections released at that meeting showed the median policymaker expectation was for the rate to decline further to the 4.25 per cent-4.50 per cent range by the end of the year, to the 3.25 per cent-3.50 per cent range by the end of 2025, and for policy easing to end in 2026 with the rate around the longer-run estimated “neutral” level of 2.9 per cent.

 

But investors have been divided over whether the US central bank will slip into a series of quarter-percentage-point cuts now or perhaps be prompted to make another large cut if the job market weakens or inflation slows more than expected.

 

Powell’s reference to “two-sided” risks, however, points to an open debate as data accumulate, with the release on Friday of the US employment report for September being the first of two major labor market reports the Fed will receive before its Nov.

6-7 meeting. The most recent inflation data showed a headline rate of just 2.2 per cent, near the Fed’s target, while a “core” measure stripped of food and energy costs has been stalled around 2.6 per cent to 2.7 per cent for four months.

 

Powell, however, said he felt that “broader economic conditions … set the table for further disinflation.” Goods prices have been declining, while the once-sticky aspects of the service industry saw inflation now “close to its pre-pandemic pace,” Powell said.

 

Progress on housing inflation has been “sluggish,” the Fed chief said, but “the growth rate in rents charged to new tenants remains low. As long as that remains the case, housing services inflation will continue to decline.”

 

The job market remains “solid,” he said, with a 4.2 per cent unemployment rate still a low level and around that which Fed officials consider sustainable in the long run with inflation at the central bank’s target.

 

First Published: Sep 30 2024 | 11:44 PM IST