How Low Will Interest Rates Go? Powell Speech Monday Could Give Clues

The Federal Reserve’s key interest rate is headed down in the coming months, but how far, and how fast? Fed Chair Jerome Powell may shed some light on the trajectory of rates in a speech Monday that is sure to be closely watched by financial market participants.

Powell is scheduled to speak at the annual meeting of the National Association for Business Economics in Nashville. The title of the speech, “A View from the Federal Reserve Board,” offers few clues about what he might say, but it will be his first major speech since Sept. 18, when the Fed’s policy committee made the pivotal decision to sharply cut the central bank’s key interest rate for the first time since 2020.

Fed officials, including Powell, have signaled the central bank intends to lower the fed funds rate in the months ahead, which will put downward pressure on borrowing costs for mortgages, credit cards, and all kinds of other loans. But It’s unclear how quickly they’ll do it.

Traders Betting on Another Big Rate Cut

Financial markets are split on whether the Fed will make its standard 25 basis point cut when the Federal Open Market Committee next meets Nov. 6-7, or whether they’ll follow up the super-sized September cut with another 50-point move. As of Friday afternoon, investors were pricing in a 55% chance of a larger cut, according to the CME Group’s FedWatch tool, which forecasts interest rate movements based on fed funds futures trading data.

Powell and other policymakers at the Fed have said their next moves will be informed by economic data on inflation, and especially the labor market. The Fed is aiming to calibrate rate cuts to encourage borrowing and spending enough to accelerate the economy and bolster the job market, but not cutting rates so much that it reignites high inflation. In recent months, inflation has fallen steadily while the unemployment rate has risen, putting pressure on the Fed to cut rates faster than they had previously anticipated.

Powell Has Some Explaining To Do

Powell may also use the speech to assert the Fed’s credibility, and assure the public that the Fed is determined to keep inflation in check no matter what.

At a post-meeting press conference this month, Powell faced questions from reporters about why the Fed had cut interest rates sharply at a time when inflation was still running above the central bank’s 2% target and the unemployment rate was still relatively low by historical standards. At least one member of the Fed’s policy committee shared those concerns: Fed governor Michelle Bowman voted against the steep September rate cut, preferring a smaller cut instead.

Since the decision, new economic data has strengthened the case that the U.S. economy is chugging along at a steady rate, not plunging into a recession and widespread job losses. 

A scheduled revision to the Gross Domestic Product (GDP) figures for the second quarter Thursday confirmed the economy was growing at a healthy 3% rate. Gross Domestic Income (GDI), another measure of economic growth, also grew steadily at an upwardly revised rate of 3.4%, according to the Bureau of Economic Analysis.

 “There is less uncertainty about where the economy has been with both GDP and GDI now telling the same story of robust economic growth over the last year,” Conrad DeQuadros, senior economic advisor at Brean Capital, wrote in a commentary. “ However, markets are unmoved by these data and are still pricing in 40 bps of rate cuts on November 7, which suggests that market participants do not see Fed policy as data dependent. Fed Chair Powell needs to give a strong performance at NABE next week exploring these issues.”