Powell & Co. Confirm Fed Ready to Slow Down

Above: File image of Federal Reserve Chairman Jerome Powell. Image © Federal Reserve.

The Federal Reserve will be more cautious when cutting interest rates, said Chair Jerome Powell and his peers on the rate-setting Federal Open Market Committee (FOMC).

Speaking on Wednesday, Powell said the U.S. economy is "in remarkably good shape", and the growth has been better than previously forecasted.

He added that he feels "very good about where the economy is and where monetary policy is".

The Fed "can afford to be a little more cautious as we try to find neutral," said Powell.

The comments verify market expectations that the central bank will cut interest rates on a handful of occasions in 2025.

This represents a sharp shift from just three months ago, when the Fed was expected to initiate a more aggressive cycle of rate cuts.

The steady shift in expectations has been the driving force behind a strong rally in the Dollar.

Powell's latest comments will underpin those gains, even if he is not offering any further impetus to the trade.

Other FOMC members agree with their boss, with San Francisco President Mary Daly saying that "we do not need to be urgent" when cutting rates.

St. Louis Fed President Alberto Musalem said, "the time may be approaching to consider slowing the pace of interest rate reductions or pausing".

Richmond Fed President Thomas Barkin said he favoured a slower rate cut path to get policy to a “somewhat restrictive level.”

Nevertheless, the Fed is now odds-on to cut interest rates again in December.

Market pricing shows a 77% expectation for such a move, up from approximately 45% at the start of the week.

The shift to favour a December move follows a softer-than-forecast U.S. ISM Services PMI reading, which showed a sharp slowdown in growth from October to November.

The Dollar fell following the data, confirming that the USD outperformance trade has reached a near-term limit. This could potentially set up a December of weakness.

Several other members of the FOMC have spoken recently, and most have said they are inclined to cut interest rates in December if incoming data becomes softer.

"This week's ISM reports have ticked that box, and a soft jobs number on Friday would likely seal the deal even if next week's inflation data remains sticky," says James Knightley, Chief International Economist at ING Bank.

So, although a December cut is now likely, cuts will be sparse in 2025. Until that assessment changes, the Dollar can remain well supported.