No risk-free path for Fed, says Powell, as future rate cuts remain in question

Fed chairman warns cutting rates aggressively could reignite inflation

A television station on the floor of the New York Stock Exchange broadcasts Fed Chairman Jerome Powell speaking at a press conference. Bloomberg

Federal Reserve Chairman Jerome Powell on Tuesday kept the door open to future US interest rate cuts but warned that moving aggressively could lead to higher inflation.

Mr Powell said the central bank is in a “challenging situation” in which it faces risks to its inflation and employment mandates.

“Two-sided risks mean that there is no risk-free path,” he said in prepared remarks during an event in Rhode Island that reaffirmed comments he made at a press conference last week.

The Federal Reserve reduced interest rates by 25 basis points last week, lowering its benchmark target range to 4 per cent to 4.25 per cent. Mr Powell described this stance as “modestly restrictive”, which suggests there is some room to cut rates.

Most central banks in the Gulf, which mirror the Fed's moves due to the dollar peg, lowered rates after the US announcement.

In his remarks, Mr Powell warned that moving too quickly on cutting rates could force the Fed to change course if inflation rises.

“If we ease too aggressively, we could leave the inflation job unfinished and need to reverse course later to fully restore 2 per cent inflation,” he said.

Mr Powell repeated his belief that tariffs related to inflation will most likely lead to a one-off increase in prices, although the possibility of a more persistent inflationary effect remains.

“Incoming data and surveys suggest that those price increases largely reflect higher tariffs rather than broader price pressures,” he said.

At the same time, he noted payroll job gains have “slowed sharply” in the past three months, with employers adding an average of 29,000 positions. The unemployment rate remains stable despite rising slightly to 4.3 per cent in August.

His remarks underscored the division within the central bank on the best path. Updated forecasts released by the Fed last week showed some policymakers favour more policy reductions this year, while others support no further cuts.

Those decisions were reinforced by public remarks made this week, in which some members showed concern about softening unemployment, while others expressed interest in bringing inflation back down to the Fed's target.

Mr Powell also noted that asset prices are at highly elevated levels after he was asked how much weight the Fed and markets place on risk.

“I think if you look at some prices, then they're elevated relative to historical levels,” he said.

However, he added, “It's not a time of elevated financial stability risks."