Powell says Fed can afford to be a little more cautious

By Howard Schneider

NEW YORK (Reuters) - U.S. Federal Reserve Chair Jerome Powell on Wednesday said the economy is stronger than it had appeared in September when the central bank began cutting interest rates, allowing policymakers to potentially be more cautious in lowering rates further.

"We can afford to be a little more cautious as we try to find neutral," Powell said at a New York Times event.

His remarks are likely his last before a quiet period for Fed officials prior to the Dec. 17-18 meeting beginning on Saturday. Ahead of his appearance, investors had been leaning into an expectation for a third straight interest rate cut when the central bank meets in two weeks.

Comments by some of Powell's key colleagues this week pointed in that direction, with Governor Christopher Waller saying on Monday he was "leaning toward" a cut at the upcoming meeting even as others decline to pre-commit to that outcome.

Powell's remarks on Wednesday appear to align him with that more cautious bloc of policymakers and largely echoed his last public appearance in mid-November, when he said the Fed could "carefully" deliberate over its rate cuts and need not be in a hurry.

Inflation and jobs data since then, and Waller's comments in particular, have substantially pushed up market expectations of another quarter-point cut in the benchmark rate to a range of 4.25% to 4.50%. Powell's comments on Wednesday did little to change that.

The Fed chair has pressed on the need for the central bank to keep its options open at a time of increased uncertainty about the shape of broader economic policy in the coming year, some concern that its progress on inflation has stalled, and evidence that a feared drop-off in the job market has been avoided.

Earlier on Wednesday, two other Fed officials - the heads of the regional banks in Richmond and St. Louis - hewed to that keep-all-options-open approach.

"I'm keeping all my options open," St. Louis Fed President Alberto Musalem said at a Bloomberg monetary policy conference, adding he will look at incoming data before deciding whether rates need to come down again in two weeks.

Richmond Fed President Thomas Barkin said at the CNBC CFO Council he believes both inflation and employment are heading in the right direction, but with more data to come before the meeting, he won't prejudge the outcome.

A key measure of inflation, the personal consumption expenditures price index excluding food and energy costs, has run sideways in a range of from 2.6% to 2.8% since May, well above the central bank's 2% target. While Fed officials routinely say they feel price pressures are still set to ease, with housing costs in particular slowing in real time but not yet reflected in lagging government data, they also will want proof of that before cutting rates much further.

Ahead of Powell's appearance, a key business survey showed some cooling in the vast U.S. services sector and businesses fretting about the likelihood of a new round of tariffs on imports from the incoming Trump administration early next year, which they worry could mean higher prices ahead. At the same time, auto sales in November were the highest in more than three years, showing consumption remains healthy.

It's that ongoing mix of hot-and-cold data that is keeping Fed officials on guard and reluctant to offer much by way of concrete forward guidance.

Waller, for one, hedged his "leaning toward" a rate cut this month with a proviso that data ahead of the meeting could alter his posture. Beyond this Friday's employment report, next week brings readings of consumer and wholesale inflation and retail sales for November are due the day the Fed meeting begins.

The current benchmark rate "is restrictive enough that an additional cut at our next meeting will not dramatically change the stance of monetary policy and allow ample scope to later slow the pace of rate cuts, if needed, to maintain progress toward our inflation target," Waller said this week. "That said, if the data we receive between today and the next meeting surprise in a way that suggests our forecasts of slowing inflation and a moderating but still-solid economy are wrong, then I will be supportive of holding the policy rate constant."

(Reporting by Howard Schneider and Ann Saphir; Editing by Dan Burns and Andrea Ricci)