By: The Editorial Board – wsj.com – September 18, 2024

Jerome Powell says the economy is strong but still cuts rates by 50 basis points.

Mr. Powell said the Fed is merely “recalibrating” monetary policy as the economy recovers from the inflation shock of recent years. As inflation drifts down toward the Fed’s 2% target, real interest rates will rise if the central bank doesn’t cut its nominal rate. Mr. Powell presented Wednesday’s rate cut as fine-tuning in an economy that remains healthy.

Mr. Powell and the FOMC also stressed that the risks between inflation and unemployment are “roughly in balance.” But the 50-point cut, plus the rapid pace in the Fed’s estimate of future cuts, suggests a sharp tilt toward heading off more unemployment.

In their quarterly economic projections released with Wednesday’s meeting, Fed officials raised their estimate for the unemployment rate to 4.4% this year and next from 4.2% today, an increase since June. They also forecast further interest rate cuts of 50 basis points this year and 100 in 2025.

Yet at his press conference Mr. Powell was all sunny side up. He rightly noted that even a 4.4% jobless rate is low by historical standards and may even represent full employment. He cited optimistic notes on labor participation, job vacancies and employee quits that he said all point to a “strong” labor market.

These contradictory signals highlight the risk the Fed is taking with its new rate-cutting path. Mr. Powell’s bet seems to be that inflation is sufficiently whipped that the Fed can ease aggressively now to forestall a slowdown that hasn’t arrived.

He may be right. But it’s notable that the FOMC registered its first dissent since June 2022, as Fed Governor Michelle Bowman preferred a 25-basis point reduction. If Mr. Powell is wrong about inflation—if it doesn’t continue its deceleration back to 2%—the Fed’s credibility will take another major blow that it can’t afford.

Investors seemed to spy the contradictory Fed notes as they first bid up equities and bond prices, only to backtrack before the close. The dollar fell (before rallying some), no doubt on the Fed’s signals of aggressive easing. This suggests investors heeded the message in what Mr. Powell did rather than what he said.

The difference between a 25 and 50 basis point cut isn’t likely to have an immediate economic impact on the Main Street economy. But coming so close to the election the cut may become a political issue, especially because of recent inflation history. We believe Mr. Powell when he says he’s trying to make an apolitical decision for the good of the economy, although Donald Trump may not agree.

These columns have argued that monetary conditions aren’t as tight as the Fed claims, and easing aggressively in what Mr. Powell says is a strong economy is a gamble. Let’s hope, this time, he’s right about inflation.

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Source: The Federal Reserve Pivots to Fight Unemployment – WSJ