Fed Chair Powell Signals Gradual Rate Cuts Amid Slowing Inflation

The U.S. Federal Reserve appears to be preparing for a gradual reduction in its benchmark interest rate, as Federal Reserve Chair Jerome Powell indicated during a speech at the National Association for Business Economics conference in Nashville, Tennessee. Powell emphasized that the central bank is not committed to any fixed schedule for rate cuts, underscoring the Fed’s data-dependent approach as the U.S. economy navigates slowing inflation and fluctuating economic activity.
In his prepared remarks, Powell mentioned that the Federal Reserve sees room for two more rate cuts, totaling 50 basis points by the end of the year, should the economy perform as expected. However, he stressed that adjustments could be made at a slower or faster pace depending on how economic conditions evolve. “The risks are two-sided,” Powell noted, signaling the Fed’s flexibility in addressing the challenges ahead.
This outlook follows the Fed’s recent decision to cut interest rates by 50 basis points during its September meeting, reducing the range of the federal funds rate from a 20-year high of 5.25%–5.50% to the current 4.75%–5.00% range. The move was made after maintaining a high interest rate for 14 months to combat inflation, which has shown signs of easing in recent months.

Market Reactions
Powell’s comments triggered immediate reactions in financial markets. The S&P 500 extended slight losses to close at -0.23%, while bond yields rose. The U.S. 10-year Treasury note yield climbed to 3.80%, and the 2-year note yield increased to 3.651%. Meanwhile, the dollar index showed a 0.39% gain, reflecting a mixed but notable market response.
Investors interpreted Powell’s remarks as a signal of caution, dampening expectations for rapid rate cuts in the near term. Wasif Latif, President and Chief Investment Officer at Sarmaya Partners in Princeton, New Jersey, noted, “Powell’s ‘over time’ comments put a wet blanket on the market’s enthusiasm for rapid-fire rate cuts.”

Economic Outlook and Fed Strategy
Several analysts highlighted Powell’s balanced approach, with the central bank keen to prevent economic overheating while ensuring inflation continues to ease. Greg Faranello, Head of U.S. Rates Strategy at AmeriVet Securities in New York, observed that Powell is managing expectations, explaining, “The Treasury market is backing off these levels a little bit. We had priced in a lot of rate cuts… A little bit of consolidation here makes sense.”
Steve Englander, Head of Global G10 FX Research at Standard Chartered Bank, pointed out the Fed’s acknowledgment of improved economic conditions. He emphasized the upward revision in the U.S. savings rate, which climbed to nearly 5%, allowing consumers to continue spending and driving economic growth. “He’s talking about upside risks in a way he didn’t talk at the FOMC,” Englander said, noting that Powell’s comments hinted at potential economic resilience.
Quincy Krosby, Chief Global Strategist at LPL Financial, echoed this sentiment, stating that Powell is confident in the strength of the U.S. labor market and the ongoing reduction in inflation. “The Fed appears to be on tap for another rate cut in the November meeting,” Krosby remarked, suggesting that the economy remains solid despite the cautious pace of monetary policy easing.

Looking Ahead: Navigating Two-Sided Risks
As Powell reiterated, the Federal Reserve is determined to adjust policy based on evolving data, reflecting the delicate balance between controlling inflation and avoiding a stifling of economic growth. The Fed’s decision-making will be informed by key indicators such as inflationary trends, employment figures, and overall economic activity.
With Powell’s remarks signaling a “meeting by meeting” approach, the financial markets are likely to remain sensitive to upcoming economic reports and Fed communications. Investors and businesses alike will be closely watching for signs of when the central bank might further reduce rates and how the broader economy responds.
In conclusion, Powell’s tempered message reflects a cautious optimism, with the Fed poised to take a gradual approach to rate cuts while navigating the complexities of inflation, economic growth, and financial stability.