(Bloomberg) -- Federal Reserve Chair Jerome Powell led his colleagues to an outsize interest-rate cut designed to preserve the strength of the US economy as risks to the labor market mount, marking an end to their single-minded focus on quashing inflation.
The Fed chief said launching the unwind of its historic tightening campaign with a big move while the US economy is still strong would help limit the chances of a downturn. But he was careful not to commit the Fed to a similar pace going forward, saying future moves would be based on how the economy performs in the months ahead.
The half-point rate cut, which was larger than forecasters had generally anticipated, is Powell’s attempt at ensuring the soft landing he’s long had in his sights.
“The labor market is actually in solid condition, and our intention with our policy move today is to keep it there,” Powell told reporters after the conclusion of the two-day policy meeting. “To me, the logic of this — both from an economic standpoint and also from a risk-management standpoint — was clear.”
His positive spin on the decision also served to beat back the notion that policymakers were going big in an attempt to make up for a late start in cutting rates. The Fed has faced scrutiny for being late to tighten in 2022.
“We don’t think we’re behind,” Powell said. “You can take this as a sign of our commitment not to get behind.”
The decision was not without some controversy. Michelle Bowman cast a dissenting vote in favor of a smaller quarter-point rate reduction, marking the first dissent by a Fed governor since 2005.
Updated projections released alongside the decision also showed that while the median official supported another 50 basis points in cuts over their final two meetings this year, policymakers are still split over how much more to ease before inflation has definitively returned to the central bank’s 2% target: Seven of 19 envisioned only 25 basis points of additional cuts in 2024 and two opposed any further moves this year.
Investors are now pricing in another 70 basis points of rate reductions at the Fed’s November and December meetings, reflecting a far more aggressive stance than policymakers.
“I do not think that anyone should look at this and say, ‘Oh, this is the new pace,’” Powell said. “The economy can develop in a way that would cause us to go faster or slower.”
Stronger Action
But the choice to move big at the start of the easing cycle shows the Fed is willing to take stronger action again if the labor market deteriorates further, said Julia Coronado, the founder of MacroPolicy Perspectives and a former Fed economist.
“Now they have credibility,” she said. “So if they get more weakness in the labor market, we can trust that they will respond.”
Data released since the Fed’s last policy meeting in July — including a weak jobs report released two days after that meeting — confirmed that the labor market has downshifted from the tight conditions seen during the pandemic. The unemployment rate now stands at 4.2%, up from the low of 3.4% seen last year.
Companies over the last three months have added to payrolls at the slowest pace since the onset of the pandemic, and the ratio of job openings to unemployed people — which rose as high as two-to-one in 2022, is now about one-to-one.
Inflation, meanwhile, has continued to cool in line with what officials would like to see: At 2.5%, it’s nearing the Fed’s target.
Powell said the central bank “might well have” begun cutting interest rates in July if it had received the jobs report before the meeting.
Still, other data point to continued strength in the economy. Applications for unemployment insurance show layoffs remain low, and the latest monthly retail sales report published on Sept. 17 illustrated a durable American consumer.
The half-point cut reflects an effort to manage the shifting balance of risks at a potential crossroads for the economy, said William English, professor in the practice of finance at the Yale School of Management and a former division director at the Fed’s Board of Governors.
“Turning points are hard,” he said. “They are hard to judge, the data is complicated.”
--With assistance from Craig Torres.
©2024 Bloomberg L.P.
