Fed Chair Powell delivers blunt take on interest rates

Inflation doesn’t always give way in a nice, even process. 

In fact, since inflation started to come down after peaking in 2022, the declines have been jerky.

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One inflation report may show a big decline, but the next month, not so much.

Related: Despite interest rate cuts, mortgage rates rise for home buyers

So it’s happened this week. Both the Consumer Price Index and Producer Price Index reports showed small increases when many investors and economic experts were expecting flat results or declines. 

This reality forced Federal Reserve Chairman Jerome Powell to concede the possibility Thursday that the central bank may cut key rates at a slower pace than many expected.

Powell disclosed the possibility during an appearance in Dallas, Tex., sponsored by the Federal Reserve Bank of Dallas and two local groups.

The Standard & Poor’s 500 index had been drifting lower all session and drooped further as Powell answered questions after a short speech. 

The index reached a low of 5,942 before ending at 5,949.17, down 36 points, or 0.6%, on the day. 

The Dow Jones Industrial Average fell 207 points to 43,751. The Nasdaq Composite Index slid 123 points, or 0.6%, to 19,108, its third loss in a row. For the S&P 500 and the Dow, it was their second loss in three days. 

The week’s performance so far is the first pullback since Donald Trump defeated Kamala Harris in the Nov. 5 election. 

Federal Reserve Chairman Jerome Powell may not be able to cut interest rates as quickly as many hope.

Bloomberg/Getty Images

Fed’s Powell suggests there’s no rush to cut rates

Powell did not indicate that interest rates would rise. He suggested that they would go lower in a discussion with Catherine Rampell, an opinion columnist for The Washington Post. 

But he added, “The economy is not sending any signals that we need to lower rates in a hurry.”

Related: CPI inflation sparks Fed interest rate cut bets

The timing is the issue, he said, made more insistent by this week’s inflation reports.  

Thursday’s October Producer Price Index report from the Labor Department showed prices for finished goods was up 2.4% year over year.

The consensus estimate was for a gain of just 2.3%. The core PPI, which excludes food and energy was up 3.1% year over year. Economists had expected 3%. 

The Consumer Price Index for October, issued Wednesday, showed inflation at 2.6% when economists had been looking for 2.3%. 

Inflation is running close to the Fed’s goal of 2% annual inflation, Powell said in his prepared remarks, adding, “But we’re not there yet.”

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When interest rates will fall next

The Fed will likely trim its key federal funds rate by 0.25% at its December 17-18 meeting.

The rate, known as the federal funds rate, is now 4.5% to 4.75%. It had been as high as 5.25% to 5.5% between July 2023 and September 18, when it was cut to 4.75% to 5%.

What happens after the December meeting is an open question. The Fed almost certainly won’t raise rates, but they may choose to trim rates more slowly.

The federal funds rate is what the Fed wants banks to lend money to each other overnight to maintain required reserves. 

It is the foundation level from which all short-term U.S. rates are derived and influences long-term rates as well. Powell’s remarks had little effect on the yield on the 10-year Treasury note. It ended the day at 4.443%, down slightly from Wednesday.

Powell’s words won’t make home buyers happy

Slowing the pace of rate cuts will most affect a sector of the economy: real estate.

Related: Fed officials update interest rate cut outlooks after inflation data

Mortgage rates are holding stubbornly at 6.8% to 7%, up from as low as 6.1% in early September before the Fed began cutting its fed funds rate.

At a 6.1% rate, the monthly payment on a $250,000 mortgage is about $1,515. (Taxes and insurance aren’t included.) At 7%, the payment rises to $1,663.

Home building stocks were higher on the day. 

Lennar  (LEN)  was the leader, up 2.1% to $169.80.

But Home Depot  (HD)  and Lowe’s Companies  (LOW) , the giant building supply retailers, fell. Home Depot dropped 1.1% to $405.72. Lowe’s slipped 0.7% to $270.35.

Separately, Powell was asked how the Fed would deal with the incoming Trump Administration. Fed leaders fiercely defend their independence. 

Powell argued that central banks globally work best when they are independent of political considerations. 

In the Fed’s case, he said, only Congress can overturn one of the central bank’s decisions.

Related: Veteran fund manager sees world of pain coming for stocks