Jerome Powell says the US economy is in “remarkably good shape” and the Fed could be “a little more cautious” on interest rates

Chairman of the Federal Reserve Jerome Powell painted a rosy picture of the US economy ahead of key labor market data due on Friday. The strength of the economy allows the Fed to be more cautious on interest rates.

What happened: Speaking at the New York Times DealBook Summit on Wednesday, Powell stressed that current economic conditions allow the Fed to exercise caution in cutting interest rates to more neutral levels.

“The US economy is currently in very good shape. It is in remarkably good shape, we are the envy of other major economies around the world and I will do everything I can to keep it that way for the rest of my term and I feel very good about the economic situation and where monetary policy is,” Powell said.

The economy is growing at about 2.5% and inflation has fallen from over 7% to about 2.3%, while unemployment remains under control, the Fed chair said.

“We’re not quite there yet on inflation, but we’re still making progress… We’re now on track to bring rates back down to more neutral levels over time,” Powell said.

“The good news is that we can afford to be a little more cautious when trying to find neutrality.”

If the Fed cuts rates too quickly, it risks undermining the central bank’s progress on inflation. However, if it moves too slowly towards neutral, it could cause unnecessary damage to the labor market.

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Why it matters: The Fed cut interest rates by 0.25% in November, increasing the federal funds target range to 4.5% to 4.75%, the lowest level since February 2023.

The Fed is currently in a “quiet” period ahead of its next interest rate decision, which is due on December 18th. The implied probability of a 0.25% rate cut at the Fed’s next meeting is currently 75.5%, according to CME Group’s FedWatch tool. Another rate cut later this month would be the Fed’s third rate cut in a row.

Powell said in mid-November that the Fed was able to “carefully” consider the appropriate size of rate cuts and did not need to “hurry up,” reducing the chances of another rate cut in December. However, the implied probability increased earlier this week following the Fed Governor’s announcement Christopher Waller said he was leaning toward a rate cut later this month.

The Fed will take another look at key labor market data on Friday when the Bureau of Labor Statistics reports November unemployment numbers at 8:30 a.m. ET.

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This illustration was created using artificial intelligence via Midjourney.

Image created with artificial intelligence via Midjourney.