Why Powell says inflation is still on track: Morning Brief

This is the conclusion of today’s Morning Brief, which you can read Sign in Delivered to your inbox every morning, along with:

The Fed’s rate cut came as expected, but 2025 appears to feel more like a pause as officials expect half the rate cuts seen in September.

The labor market is cooling, but there is no cause for concern. Inflation forecasts are increasing, but overall progress is stable. In making final policy decisions before the second Trump administration, Fed Chairman Powell tried to make sense of conflicting storylines and conflicting data. And despite all the uncertainty, the central bank chief announced one final slogan: caution.

“When the path is uncertain, you go a little slower,” Powell said during Wednesday’s press conference. “It’s no different than driving on a foggy night or walking into a dark room full of furniture. You just slow down.” (Someone give this silver-haired gift-giver a glowing reindeer!)

To listen to Powell, the falling inflation story is actually intact. Even as the Fed announced a third interest rate cut in a row, equivalent to a full percentage point, monetary policy remains restrictive. That’s because officials still expect inflation to be an ongoing challenge under the next administration. Compared to previous estimates, central bankers forecast that inflation will end higher than expected this year and remain at higher levels next year.

Blame it on COVID. Or the economic turmoil that followed the public health crisis.

“The story is still that we are recovering from these major shocks that the economy suffered in 2021 and 2022,” Powell said.

If price pressures remain persistent, the risks of a deteriorating labor market – the other side of the Fed’s mandate – appear to have abated. As are the risks that the labor market will contribute to higher prices. Powell said the job market is where it should be, looser than before the pandemic and still cooling, but not enough to raise alarm bells. That means the Fed has cut its unemployment forecasts for the end of this year from 4.4% to 4.2% and next year from 4.4% to 4.3%.

Read more: What the Fed’s interest rate cut means for bank accounts, CDs, loans and credit cards

Bloomberg noted that the market’s initial reaction was to pull back, giving stocks their worst hour since the COVID crisis.

Fewer expected cuts mean another year of “longer-term higher interest rates,” which seemed to trump Powell’s cautious optimism. But as Neil Dutta, head of economic research at Renaissance Macro, noted, the Fed may have lowered the bar for future cuts by revising its inflation forecasts upward and its unemployment estimates downward.

The story continues