MNI FED WATCH: Powell Leans Against December Cut Expectations

Federal Reserve Chair Jerome Powell indicated Wednesday officials are still unsure about lowering interest rates again in December, pushing back on market pricing that had moved to reflect near certainty of another cut before year end. 

"A further reduction in the policy rate at the December meeting is not a foregone conclusion. That needs to be taken on board," Powell told reporters after this week's policy meeting. "There were strongly differing views about how to proceed in December."

He characterized the quarter-point cut in the federal funds rate range to 3.75-4%, which included dissents in both directions, as risk management. But the chair was non-committal about the need for additional easing.

"Going forward is a different thing," he said. (See: MNI POLICY: Fed Set To Keep Cutting Rates Despite Missing Data)  "If we do wind up resuming rate cuts, at some point we will, but at some point we are trying to get to the end of the cycle with the labor market in a good place, and with inflation on its way to 2%, or at 2%."

Speaking of differences among FOMC policymakers, Powell noted varying forecasts and risk tolerances. 

"There is a growing chorus now of feeling like maybe this is where we should at least wait a cycle, something like that," Powell said. "You have seen it in the September summer projections and public remarks of the FOMC participants, and I am telling you, you can expect that in the minutes. I am telling you, that is what happened in the meeting."

OUTLOOK STEADY

The public- and private-sector data that have remained available suggest the outlook for employment and inflation has not changed much since the Fed's meeting in September, he said. "Conditions in the labor market appear to be gradually cooling, and inflation remains somewhat elevated." 

Powell repeated that the impact of tariffs on inflation should prove short-lived and there is no risk-free path for policy, but suggested rates are now closer to some policymakers' view of the neutral rate. Fed policy is modestly restrictive currently, he said. 

Upside risks to inflation have declined significantly since April, although the impact from tariffs will probably last into the spring, and there are downside risks to employment, he said. Powell suggested that tariffs maybe adding 5 or 6 tenths to inflation, so that core PCE, no including tariffs, might be in the range of 2.3% or 2.4%. 

Job creation is very low, the finding rate is very low, but the unemployment rate is very low as well. Still, "we do not see weakness in the job market accelerating," Powell said.

END OF QT

Money market strains in recent weeks forced the Fed to bring its Covid-era QT program to an end beginning the start of December.

"Our long-stated plan has been to stop balance sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions. Signs have clearly emerged that we have reached that standard," he said. 

"In money markets, repo rates have moved up relative to our administered rates, and we have seen more notable pressures on selected dates along with more use of our standing repo facility. In addition, the effective federal funds rate has begun to move up relative to the rate of interest on reserve balances," Powell said. 

"These developments are what we expected to see as the size of our balance sheet declined and warrant today’s decision to cease runoff."