Powell Sees Stronger Economy, Advocates Caution on Rate Cuts

By Howard Schneider

NEW YORK (Reuters) – U.S. Federal Reserve Chair Jerome Powell on Wednesday said the economy is stronger than it had appeared in September when the central bank began cutting interest rates. This allows policymakers to potentially be more cautious about lowering rates further.

"We can afford to be a little more cautious as we try to find neutral," Powell said at a New York Times event.

His remarks are likely his last before a quiet period for Fed officials prior to the Dec. 17-18 meeting beginning on Saturday. Investors had been anticipating a third straight interest rate cut when the central bank meets in two weeks.

Comments from some of Powell's key colleagues this week suggested this direction; Governor Christopher Waller noted he was "leaning toward" a cut at the upcoming meeting, though others have refrained from making commitments.

Powell's statements align him with a more cautious group of policymakers, reflecting similar views expressed in mid-November when he emphasized that rate cuts need not be rushed. Inflation and jobs data have raised market expectations for a quarter-point cut in the benchmark rate to a range of 4.25% to 4.50%. Powell's comments did little to alter those expectations.

The Fed chair underscored the importance of keeping options open amid increased uncertainty concerning broader economic policies for the coming year. Concerns linger about stalled progress on inflation, although recent data indicates that a feared drop-off in the job market has been avoided.

Earlier on Wednesday, two Fed officials from the regional banks in Richmond and St. Louis also emphasized maintaining flexible options. St. Louis Fed President Alberto Musalem stated at a Bloomberg policy conference that he would evaluate incoming data before deciding on further rate changes.

Richmond Fed President Thomas Barkin expressed optimism about inflation and employment trajectories but indicated that he wouldn't prejudge the outcome before receiving more data.

Although a key inflation measure has been steady at levels above the Fed's 2% target, officials remain cautious about cutting rates too quickly without strong evidence that inflation pressures are easing.

A recent business survey indicated some cooling in the U.S. services sector amid concerns of potential new tariffs from the incoming Trump administration, leading to worries about rising prices. Conversely, auto sales in November marked the highest levels in over three years, signaling healthy consumption patterns.

This mixed economic data keeps Fed officials vigilant and reluctant to provide solid forward guidance. Waller hedged his position on a potential rate cut by noting that forthcoming data could influence his stance. Additionally, critical data on employment, consumer and wholesale inflation, and retail sales are due before the Fed meeting.

He mentioned that the current benchmark rate is "restrictive enough" that an additional cut would not drastically change monetary policy and would allow for later modification of the cut pace as necessary to pursue inflation targets. Nonetheless, Waller is open to maintaining the policy rate if incoming data contradict forecasts of slowing inflation and a still-solid economy.