Fed chair signals slow approach to rate cuts likely as mortgage market eyes next steps
Federal Reserve chair Jerome Powell signaled a measured approach to future interest rate cuts, warning that lowering rates too fast could fuel inflation, but waiting too long could hurt the jobs outlook.
Speaking Tuesday in Providence, Rhode Island, Powell said, “If the Fed were to cut rates too aggressively, we could leave the inflation job unfinished and need to reverse course later and raise rates. But if the Fed keeps its rate too high for too long, the labor market could soften unnecessarily.”
Powell’s remarks echoed the caution he expressed after the Fed’s first rate cut of the year last week, when he admitted, “it’s challenging to know what to do.”
The central bank’s decision brought the key rate down to a range between 4.0% and 4.25%, with policymakers signaling the likelihood of two more cuts this year.
Still, Powell gave no indication that further reductions were imminent, highlighting the risks on both sides of the Fed’s dual mandate of maximum employment and stable prices.
Diverging views emerge within the Fed
While Powell struck a cautious tone, other Fed officials have called for a more urgent response to signs of economic cooling.
Fed governor Michelle Bowman warned that policymakers may already be “behind the curve” in responding to a weakening labor market.
“Now that we have seen many months of deteriorating labor market conditions, it is time for the committee to act decisively and proactively to address decreasing labor market dynamism and emerging signs of fragility,” Bowman said.
She argued that “should these conditions continue, I am concerned that we will need to adjust policy at a faster pace and to a larger degree going forward.”
Bowman’s remarks came days after the Fed’s quarter-point rate cut—the first since December. While the move was supported by most officials, some, including new Governor Stephen Miran, pushed for a more aggressive half-point reduction, citing risks to employment and the broader economy.
Inflation and jobs data complicate outlook
Chicago Fed president Austan Goolsbee, speaking on CNBC, argued that the central bank “has some space to cut its interest rate target” if inflation continues to ease.
“I think eventually, at a gradual pace, rates can come down a fair amount if we can get this stagflationary dust out of the air,” Goolsbee said.
He suggested a neutral rate could be “100 to 125 basis points lower” than the current target, ultimately settling around 3% if inflation returns to 2%.
Still, he cautioned, “With inflation having been over the target for four and a half years in a row and rising, I think we need to be a little careful with getting overly upfront aggressive” with cuts.
“The labor market continues to cool at a sort of a mild to modest pace,” Goolsbee said, describing current policy as “mildly restrictive.”
The consumer price index rose 0.4% in August, pushing annual inflation to 2.9%, the highest since January. Meanwhile, the Bureau of Labor Statistics reported only 22,000 jobs added in August, well below expectations, and the unemployment rate edged up to 4.3%.
Mortgage market watches for Fed signals
The mortgage market has been quick to react to the Fed’s shifting stance. Mortgage rates have edged lower in recent weeks, with the average 30-year fixed rate falling to 6.26%, its lowest since October 2024, according to Freddie Mac. The drop has spurred a surge in refinancing, with nearly 60% of mortgage applications now for refis—the highest share since January 2022.
However, uncertainty remains as some Fed officials, such as Atlanta Fed president Raphael Bostic, have cautioned against further cuts, citing persistent inflation as a primary concern. “I am concerned about the inflation that has been too high for a long time. And so I today would not be moving or in favor of it, but we’ll see what happens,” Bostic said.
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