Mass. economy keeps pace with US growth as resilience clouds rate outlook

But inflation retreated and the economy extended its advance. The job market cooled, but unemployment remained below historical norms.

With the economy holding up far better than anticipated, Fed chair Jerome Powell is cautioning investors that rates might not fall as quickly as they had hoped.

The news: A new report on the Massachusetts economy underscores the strength of the national expansion.

• The state’s gross domestic product grew at a 2.9 percent annualized rate from July through September, up from 1.9 percent in the previous three months, according to MassBenchmarks, a research collaboration between the UMass Donahue Institute and the Federal Reserve Bank of Boston. (US GDP increased 2.8 percent in the third quarter.)
• Local employers boosted payrolls by an annualized 0.7 percent, a modest increase over the second quarter.
• Inflation in the Boston metro region, as measured by the Consumer Price Index, slowed to 3.4 percent for the 12 months through September from 4 percent in the June period, according to MassBenchmarks’ analysis of US Bureau of Labor Statistics data.

“Real output of both the Massachusetts and the US economies continued to grow at healthy rates while at the same time employment growth appears to be slowing and inflation rates declining, outcomes that are consistent with a ‘soft landing,’ ” economist Alan Clayton-Matthews wrote in the MassBenchmarks report.

Why it matters: Against this backdrop of economic resilience, Fed officials are saying they will proceed cautiously after starting to cut interest rates in September.

“The economy is not sending any signals that we need to be in a hurry to lower rates,” Fed chair Jerome Powell said on Thursday. “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.”

Powell’s warning put the brakes on the stock market rally that followed Donald Trump’s election win. On Thursday and Friday, the Standard & Poor’s 500 index gave back half the gains it had posted since Election Day on Nov. 5. US stock futures were mixed on Monday before the open of regular trading.

Between the lines: Fed officials say they have reasons to be deliberate as they weigh additional rate reductions, including:

• Inflation is not yet back to their 2 percent target.
• Powell and his colleagues have been confounded more than once by the twists and turns of the post-pandemic economy.
• Central bankers aren’t sure exactly how far rates need to decline to reach their goal of neither stimulating or holding back growth.

There is also the matter of how President-elect Trump’s economic agenda might affect the economy.

Powell has said it’s too soon for the Fed to make assumptions. But it’s safe to assume officials want to maintain flexibility on rates in case Trump’s plans for tax cuts, tariffs, and immigration curbs turn out to be inflationary, as most economists predict.

Looking ahead: What happens in the job market will be pivotal to how the Fed responds in the months ahead.

• The Massachusetts jobless rate inched up to 3.9 percent in October from 3.8 percent in the prior month, the Executive Office of Labor and Workforce Development said on Friday.
• While still low, unemployment has climbed nearly full point since January as more people have started looking for work. Employers trimmed 8,200 jobs in the past four months, the state’s data showed.
• Nationally, the jobless rate has also climbed amid a hiring slowdown.

The labor market has gone from “overheated two years ago and now is essentially in balance,” Powell told reporters on Nov. 7 after the Fed reduced its main borrowing rate by a quarter point. If the labor market weakens much further, he said, the Fed would get more aggressive with rate cuts.

Final thought: The solid economy here and across the country is proof that the collateral damage from the Fed’s anti-inflation fight was contained.

Of course, there’s plenty of uncertainty ahead with the new administration.

So please remain seated until the plane reaches the gate.

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Larry Edelman can be reached at larry.edelman@globe.com.