The many challenges facing Jay Powell as he tries to pull off a soft landing
Jay Powell argued this week that the Fed is not “behind” as it starts a cycle of interest rate cuts.
His main challenge in the coming months is to keep that narrative intact if the job market keeps cooling and the economy deteriorates.
“We don’t think we’re behind,” the Federal Reserve chairman said during a Wednesday press conference following a decision to cut rates for the first time since 2020. “We think this is timely, but I think you can take this as a sign of our commitment not to get behind.”
Some on Wall Street still have their doubts, arguing the jumbo 50 basis point move announced this week is an attempt to play catch up and that the path ahead for rate cuts may be too shallow.
Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve in Washington on Wednesday. (AP Photo/Ben Curtis) (ASSOCIATED PRESS)
The central bank is being “reactionary” instead of proactive, said EY Chief Economist Gregory Daco, who pointed to the fact that Powell acknowledged the Fed might have cut rates in July if its policymakers had seen July’s employment figures first.
Those figures, released just two days after the Fed’s July 31 meeting, showed that the unemployment rate had risen to 4.3%, stoking concerns the Fed had waited too long.
The rate dropped to 4.2% in August, but another rise in the coming months could bring those same fears back.
“It’s essential for Fed policymakers to adopt a robust forward-looking framework and abandon data dependency,” Daco said. “Unfortunately, that’s not the case so far.”
There remain “real risks” that a soft landing for the US economy may not be achieved especially if the labor market deteriorates, Nationwide chief economist Kathy Bostjancic told Yahoo Finance Thursday.
“Chair Powell is trying to get ahead of that…but there is always the risk they have been a little too slow in doing this.”
Fed officials this week predicted the unemployment rate would tick up to 4.4% this year and hold at that level through next year.
Another hurdle for Powell is that Wall Street expects more future cuts than predicted by central bank policymakers, who this week estimated two more smaller cuts of 25 basis points through the rest of 2024 followed by four smaller cuts in 2025.
One Wall Street firm that came out with a more aggressive forecast was BofA Global Research, which raised its call for rate cuts during the remainder of this year to 75 basis points.
JPMorgan Chase chief economist Michael Feroli also said he is still expecting a faster pace of rate cuts than the Fed consensus.
Feroli expects a 50 basis point cut at the next meeting in early November contingent on further softening in the two jobs reports between now and then.
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Luke Tilley, chief economist for Wilmington Trust, said the Fed’s predicted path is too slow for an economy where the job market has normalized and inflation is likely to reach the Fed’s 2% target in the first quarter of 2025.
Tilley thus expects 200 basis points of cuts next year — double the Fed’s projection — and for rates to come down to neutral – the level that neither boosts nor slows growth — by next fall.
“It’s the longer-term path that matters more, and here the Fed is still a bit behind in that the median expectation is for just 100 bps of cuts next year,” he said.
Signs of division
But the Fed expects the economy to continue to show strength, aligning with their shallower rate cut predictions. Officials see the economy expanding at 2% this year, roughly inline with the 2.1% previously forecast, and coasting at that level the next few years.
And the goal is to preserve that economic growth without re-stoking inflation. Officials predict inflation will end the year at 2.6%, down from 2.8% previously, before falling to 2.2% next year.
No matter what happens, Powell will also have to manage signs of internal division over the path ahead.
The Fed’s rate-setting committee is almost evenly split on the number of additional rate cuts expected this year, with seven policymakers favoring one additional 25 basis point rate cut before year end and nine members favoring 50 basis points of additional easing.
Two policymakers expect no more rate cuts.
That path implies several officials could have supported a 25 basis point cut this week but decided to err on the side of caution and not regret further deterioration in the job market.
Fed governor Michelle Bowman even voted against the 50 basis point cut, arguing instead for a smaller quarter point cut. Her dissent was the first for the Fed since 2005.
“The Fed chair is now seen to have significant influence over the FOMC as he managed to convince most officials that front-loading cuts was optimal,” said EY’s economist Daco.
“The bargain is probably that policymakers may be more resistant to rapid easing at the next two policy meetings.”
Bostjancic, the chief economist at Nationwide, said she believes the Fed should cut another 50 basis points at its next meeting in November, even though that is not her firm’s forecast.
But to cut by another 50 “you would really have to have consensus” among Fed officials. “It’s a hurdle and you would have to have broad agreement.”
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