Powell Defends 0.5% Interest Rate Drop As 'Right Thing For The Economy,' Doubles Down On Fed's Cautious, Data-Driven Approach

Federal Reserve Chair Jerome Powell defended the decision to cut interest rates by 50 basis points Wednesday, calling it “the right thing for the economy” to support a strong labor market and prevent undue harm.

The Fed’s large rate cut, which brought interest rates down to the 4.75%-5% range, marks the first reduction in more than four years.

“The time to support the labor market is when it’s strong, not when you begin to see layoffs,” Powell stated during the press conference, underscoring the importance of preemptive action to safeguard the economy.

Labor Market In Stronger Focus

Powell suggested the Fed is now placing greater emphasis on labor market conditions, as the balance between its dual mandates ? maximum employment and price stability ? has become more closely aligned.

Labor market conditions have softened, he said, noting that payroll job creation has slowed in recent months.

The situation “bears close watching,” Powell said, adding that the labor market, while still relatively strong, has returned to levels similar to those of 2017-2018, rather than the peak strength seen in 2019.

Powell highlighted the Fed’s patient approach to reducing the policy rate, contrasting it with other central banks that have cut rates multiple times.

He said that this cautiousness has paid off, allowing the Fed to have confidence that inflation is “moving sustainably under 2%.”

“We’ve been very patient about reducing the policy rate. We’ve waited … and I think that patience has really paid dividends,” he said.

Fed Sticks To Meeting-By-Meeting Approach

The 50-basis-point rate cut should not be viewed as a signal of a new pace of policy easing, but rather as a necessary adjustment given economic conditions, the Fed chair said.

Powell stressed the importance of a meeting-by-meeting approach, with no preset course for future rate adjustments. He made it clear the September decision does not indicate a rush to lower rates further.

The Fed remains open to adjusting the pace of cuts based on economic data, indicating flexibility to go “quicker if that’s appropriate”; “slower if that’s appropriate”; or even to “pause if that’s appropriate.”

In response to questions about whether the Fed was behind the curve of the rate-cut cycle, Powell defended the timing of the rate cut. “We don’t think we’re behind,” he said.

“We think this is timely, but I think you can take this as a sign of our commitment not to get behind.”

Powell stressed the importance of upcoming labor and inflation data, including two jobs reports and inflation data, in guiding policy decisions ahead of the next November meeting,

Powell Addresses Criticism Of Fed’s Timing

Powell firmly rejected speculations about political motivations behind the larger rate cut, as it comes ahead of the November presidential elections.

“The things we do really affect economic conditions for the most part with a lag.” He reiterated that the Fed’s primary responsibility is to support the economy on behalf of the American people, taking each decision seriously and without political filters.

“We’re not serving any politician, any political figure, any cause, any issue, nothing. It’s just maximum employment and price stability on behalf of all Americans,” he added.

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Photo courtesy of the Federal Reserve.