Mortgage originators across the U.S. should tighten their belts over the end-of-year holiday because the Federal Reserve has pushed back from the rate-cut table, throwing down its napkin with one last 25-basis-point belch. Now, it’s time for the market to digest this autumn’s easing.
“Happy Holidays, Mr. Chairman,” one reporter began his question. “I think it’s pretty clear we’ve avoided a recession,” Powell responded, putting that question to bed.
The government’s benchmark borrowing rate will rest in the range of 4.25%-4.5% for now, 100 basis points lower than September. The committee projects only two rate cuts through 2025.
Heading into 2025, Federal Reserve Chairman Jerome Powell says the central bank will “make responsible choices as we go,” however that did not prevent the room of reporters from needling the U.S. economy’s Forecaster in Chief for reasons why any rate cutting should occur in 2025.
“The markets need a little more clarity,” one reporter insisted. “The goal posts are pretty wide.”
“Our policy works with long and variable lags,” Powell shrugged, suggesting that it might be healthier for markets to operate with a degree of manageable uncertainty. “It’s not possible to confidently predict where the economy’s going to be in three years.” But, why?
Consumers are not feeling the effects of high inflation, Powell said, but high prices. The central bank also cut its benchmark borrowing rate by 25 basis points in early November. The pandemic-driven inflation surge set a new “price level” that will take longer for restrictive policy to lower, Powell explained.
When asked if looseness in global financial conditions could present a different kind of risk to the central bank’s position, Powell noted that “very low” housing activity in the U.S. amidst strong economic growth is actually a symptom of the committee’s policy in effect.
Mortgage rates have barely eased since November’s cut, and though some prices on consumer goods have dropped, services remain elevated.
Powell also noted that the U.S. economy “is performing very, very well. The outlook is very bright for our economy.” That being said, the labor market is cooling, leading Powell to note that central bank policymakers “see ourselves as still on track to continue to cut.”
Powell cited a narrowing jobs-to-workers gap, “low unemployment” at 4.2% in November, and median projections for unemployment at 4.3% “over the next few years” as giving the committee confidence in today’s decision to cut.
Can the labor market hold its strong position without further cuts, or does it need the support of further easing, another reporter asked? Powell dodged that question in more words than was necessary to say, “The labor market is cooling and we’re keeping an eye on it.”
Powell also pushed back against insinuations that uncertainty concerning the incoming Trump administration’s policy agenda presented the primary upside risk to a speedier pace of rate cuts in 2025. Instead, he cited two recent months of accelerating inflation, and the reality that today’s cuts moved the Fed’s benchmark rate “significantly closer to neutral” by 100 basis points.
Particularly vexing to those assembled was the committee’s projection that core inflation would decline, while headline inflation may rise. Geopolitical tensions affecting supply chains for commodities like energy and food could rise, fall, and rise again, providing a poor measure of the U.S. economy’s overall tightness or looseness.
The committee’s median projections for the target benchmark rate is 3.9% at the end of 2025, and 2.4% at the end of 2026, “somewhat higher” projections than were published at the Fed’s September meeting. “Today was a closer call, but the right call,” Powell said.
