Powell says a strong US economy is letting the Fed be ‘cautious' about cutting interest rates

Fed Chair Signals Reserve in Rate Decisions #

Federal Reserve Chair Jerome Powell highlighted the resilience of the US economy, which allows the central bank to exercise caution in cutting interest rates. “The US economy is in very good shape, and there’s no reason for that not to continue. The good news is that we can afford to be a little more cautious about decisions on rate moves.”

The Federal Reserve is on track to lower interest rates for the third time this year, following earlier reductions amid slowing inflation and a cooling job market. Despite these moves, borrowing costs for loans tied to the 10-year US Treasury note remain elevated after a recent yield increase.

Future decisions on interest rates are intertwined with President-elect Donald Trump’s economic policies, which include proposed tariffs on major trade partners. These measures could spur inflation, potentially leading the Fed to pause or reverse rate cuts. The impact of such tariffs, which might include a 25% increase on imports from Mexico and Canada and a 10% duty on Chinese goods, could elevate consumer prices by 0.75% next year and reduce household purchasing power.

Despite uncertainties in trade policy specifics, there is a broad acknowledgment within the Fed of potential productivity and price implications. While the central bank is expected to pursue another rate cut at its December meeting, future policy adjustments will hinge on emerging data influencing inflation trends. “At present I lean toward supporting a cut to the policy rate at our December meeting,” reflected a Fed official, emphasizing the conditional nature of the decision.

As Trump prepares to take office, the Fed faces the added complexity of maintaining its independence amid potential political influence. The preservation of the Fed’s autonomy is deemed crucial for ensuring objective, data-driven monetary policy. “The independence of the Fed is essential to the sanctity of the US dollar.” Powell anticipates fostering a productive relationship with the Trump administration, despite potential challenges ensuring the Fed’s influential role remains unaffected by political maneuvering.