Federal Reserve Chairman Jerome Powell indicated Thursday that the central bank may need to take a more measured approach to interest rate reductions than markets previously anticipated, following recent inflation data that came in above expectations.
Speaking at an event in Dallas hosted by the Federal Reserve Bank of Dallas and local organizations, Powell acknowledged that while inflation is moving closer to the Fed’s 2% target, progress has been uneven and more work remains to be done. His comments came in response to this week’s economic reports showing higher-than-expected inflation numbers.
The October Producer Price Index revealed a 2.4% year-over-year increase, exceeding economists’ predictions of 2.3%. The core PPI, excluding food and energy costs, rose 3.1% compared to the anticipated 3%. Similarly, Wednesday’s Consumer Price Index showed inflation at 2.6%, surpassing the expected 2.3%.
During a discussion with Washington Post columnist Catherine Rampell, Powell emphasized that while rate cuts are likely in the future, there’s no urgent need to implement them quickly. “The economy is not sending any signals that we need to lower rates in a hurry,” Powell stated.
Financial markets responded negatively to Powell’s cautious stance. The S&P 500 declined throughout the session, ending down 36 points (0.6%) at 5,949.17. The Dow Jones Industrial Average dropped 207 points to 43,751, while the Nasdaq Composite fell 123 points (0.6%) to 19,108, marking its third consecutive decline.
The Fed’s current federal funds rate stands at 4.5% to 4.75%, down from its recent peak of 5.25% to 5.5% between July 2023 and September 18. While analysts expect a 0.25% rate cut at the December 17-18 meeting, the timeline for subsequent reductions remains uncertain.
The impact of these monetary policy decisions is particularly notable in the real estate sector. Mortgage rates remain elevated at 6.8% to 7%, significantly higher than the 6.1% seen in early September. This increase translates to meaningful differences in monthly payments for homebuyers. For instance, a $250,000 mortgage at 6.1% would cost approximately $1,515 monthly, while the same loan at 7% would require $1,663 per month, excluding taxes and insurance.
The day’s trading saw mixed results in housing-related stocks. While Lennar showed strength with a 2.1% gain to $169.80, major retailers Home Depot and Lowe’s experienced declines of 1.1% and 0.7%
respectively.
When questioned about the upcoming Trump administration, Powell emphasized the importance of central bank independence. He noted that globally, central banks function most effectively when operating independently of political pressures, adding that only Congress has the authority to override Federal Reserve decisions.
The recent inflation data and Powell’s comments suggest a more complex path ahead for monetary policy than many market participants had anticipated. While the direction toward lower rates seems clear, the pace and timing of these reductions may be more gradual than initially expected, as the Fed continues to prioritize price stability and economic balance in its decision-making process.
The yield on the 10-year Treasury note showed minimal reaction to Powell’s remarks, ending the day slightly lower at 4.443%, reflecting the market’s measured response to the Fed’s cautious stance on future rate adjustments.