Federal Reserve Chair Jerome Powell painted a rosy picture of the U.S. economy ahead of key jobs data due Friday. The strength of the economy is allowing the Fed to be more cautious with interest rates.

What Happened: Speaking at the New York Times DealBook Summit on Wednesday, Powell stressed that the current state of the economy allows the Fed to exercise caution in moving rates back down to a more neutral level.

“The U.S. economy is in very good shape right now. It’s in remarkably good shape, we are sort of the envy of other large economies around the world, and I’m going to do everything I can to keep it there during the rest of my term, and I feel very good about where the economy is and where monetary policy is,” Powell said.

The economy is growing at about a 2.5% clip and inflation has come down from above 7% to around 2.3%, while unemployment remains in check, the Fed chair said.

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

“The good news is that we can afford to be a little more cautious as we try to find neutral.”

If the Fed lowers rates too quickly, it risks undermining the progress the central bank has made on inflation, but if it moves toward neutral too slowly, it could cause unnecessary harm to the labor market.

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Why It Matters: The Fed lowered interest rates by 0.25% in November, bringing the federal funds target range to between 4.5% and 4.75%, marking the lowest levels seen since February 2023.

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

Powell said in mid-November that the Fed was in a position to “carefully” consider the appropriate level of rate cuts and did not need to “hurry,” pushing the odds for another cut in December lower. However, the implied probability moved higher earlier this week after Fed Governor Christopher Waller said he was “leaning toward” a rate cut later this month.

The Fed will get another look at key jobs data on Friday when the Bureau of Labor Statistics reports unemployment figures for November at 8:30 a.m. ET.

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This illustration was generated using artificial intelligence via Midjourney.

Image created using artificial intelligence via Midjourney.