Federal Reserve Chair Jerome Powell said that although the government shutdown has led to a significant drop in the Fed’s expectations for the economy, the Fed still expects to cut interest rates by a quarter of a percentage point again later this month.
Powell said in a speech at the National Association for Business Economics’ annual meeting on Tuesday that the economic outlook seems unchanged since policymakers met in September to cut interest rates and project two more rate hikes this year.
“An interest rate cut in October is now a certainty,” said Julia Coronado, founder of research firm MacroPolicy Perspectives and a former Fed economist. “The view that there are still downside risks to the labor market has not changed.”
Powell has repeatedly pointed out the slow pace of hiring and suggested that the pace of hiring may weaken further.
“The further reduction in job vacancies at present is likely to be reflected in the unemployment rate,” Powell said in the question-and-answer session following his prepared remarks. “You’ve had a period of a straight decline, but I think you’ll eventually reach a point where the unemployment rate starts to rise.”
After Powell’s speech, market expectations for a rate cut in October remained largely unchanged. According to federal funds futures contracts, investors believe the probability of a rate cut is almost 100%.
The Federal Reserve is scheduled to hold another meeting on October 28th and 29th. Last month, the median forecast of the 19 policy makers of the Federal Reserve indicated that there would be two more interest rate cuts this year. However, nine officials believed that one or fewer rate cuts would be appropriate.
Diane Swonk, chief economist at KPMG, said that the differences among policymakers also made Powell more cautious about the interest rate trend next year. “All of these are hints that ‘we really don’t know where the long-term target is,'” she said.
Due to the lack of complete official economic data, people are more worried that the Federal Reserve cannot clearly understand the economic situation, thereby increasing the possibility of policy mistakes.
Powell also hinted that the central bank might halt the reduction of its balance sheet in the coming months, which is an important shift necessary to maintain liquidity in the overnight funding market.
Powell said in a speech on Tuesday: “Our long-standing plan is to stop the balance sheet reduction when reserves are slightly above the level we judge to be consistent with adequate reserve conditions. We may approach this level in the coming months, and we are closely monitoring various indicators to make this decision.”
