Jumbo Rate Cut Was To Defend ‘Basically Fine’ Economy, Powell Says

The economy is just how officials at the Federal Reserve want it. Now, they’re trying to keep it that way.

Fed Chair Jerome Powell used his Wednesday afternoon press conference to explain the reasoning behind policymakers’ decision to cut the central bank’s key interest rate by 50 points—a sharper cut than some financial market participants had expected.

“The U.S. economy is in good shape,” Powell said. “It’s growing at a solid pace. Inflation is coming down. The labor market is in a strong place. We want to keep it there. That’s what we’re doing.”

The Fed’s Bold Move: Panic or Prudence?

The central bank typically adjusts its interest rate in quarter-point increments, so Wednesday’s 50-basis point cut was a more decisive move than usual. Powell sought to parry concerns that the Fed has been too slow to cut rates and that the move was a sign that policymakers were in a panic about the job market possibly crashing.

“You can see our 50 basis point move as a commitment to make sure that we don’t fall behind,” he said in response to a reporter’s question. 

Powell and other Fed policymakers have tried to navigate a tightrope with monetary policy. The Fed moves its key interest rate to push borrowing costs for all kinds of loans up or down. Higher rates discourage borrowing and spending, slowing down the economy and reducing inflation pressures. Lower rates do the opposite, boosting the economy.

In historical instances of high inflation, the Fed’s anti-inflation interest rate hikes have caused recessions. This time around, the Fed has sought to guide the economy to a “soft landing” from the post-pandemic burst of inflation and has so far managed to do it without an economic downturn or mass layoffs. Inflation has cooled towards the Fed’s goal of a 2% annual rate, and the unemployment rate has ticked up this year but still isn’t high by historical standards. In other words, things are going as well as Fed officials could hope. 

“The U.S. economy is basically fine If you talk to…business people who are actually out there doing business,” Powell said. 

Economy Still On Track For Soft Landing

Powell came short of declaring victory in that soft-landing effort but said the economy was still on a good trajectory. Some experts agreed with that assessment.

“Although they’re not frightened about it, I think they did 50 to just get ahead,” said Eric McAlley, a professor of finance at Quinnipiac University. “If you slip on employment and the economy, that’s not so easy to turn back around.”

Elyse Ausenbaugh, head of investment strategy at J.P. Morgan Wealth Management, said recent economic data, including resilient retail sales, supported that view. 

“Did the economy need a 50bps cut today to avoid a breakdown? We don’t think so,” she wrote in a commentary. “The labor market is slowing but not crumbling; retail sales data released earlier this week showed a resilient consumer, and the outlook for corporate earnings and profit margins looks solid. The decision, combined with Powell’s messaging, bolsters our optimism in our base case call for a soft landing.”