On Friday, August 23rd, Federal Reserve Chairman Jerome Powell stated that it is time to cut interest rates and indicated that the Fed intends to take action to prevent further weakness in the labor market.
Speaking at the annual global central bank symposium in Jackson Hole, he clearly stated that “the time for policy adjustment has come, and the direction of policy is clear.”
Two years ago, Powell stated that the Fed was willing to accept an economic downturn as a cost of lowering inflation. His remarks on Friday indicate that the Fed will end the long-standing anti-inflation stance of keeping interest rates high for over two decades.
“We neither seek nor welcome further cooling of the labor market,” he said. “The timing and pace of rate cuts will depend on subsequent data, changes in outlook, and risk balance.”
Following Powell’s remarks, all three major US stock indexes rose, and bond yields fell. Investors had previously anticipated a rate cut by the Fed in September.
The next policy meeting of Federal Reserve officials is scheduled for September 17th to 18th.
Regarding the extent of the rate cut expected in September, whether it will be a 0.25 percentage point decrease or a 0.5 percentage point decrease, Powell did not reveal more details.
The Wall Street Journal stated that if signs of further weakness in the labor market emerge in the coming weeks, Powell’s comments today may have left room for further rate cuts.
Powell’s speech on Friday almost guaranteed a rate cut in September, with wording much clearer than during the press conference on July 31st.
At the end of July, the Federal Reserve decided to maintain the interest rate at 5.25% to 5.5%. Two days later, the US Department of Labor reported that the unemployment rate had reached its highest level in nearly three years. While the inflation rate remains above the Fed’s 2% target, it has been steadily declining in recent months.
“The cooling of the labor market conditions is obvious,” Powell said. “We will do our utmost to support a strong labor market while further achieving price stability.”
He expressed increasing confidence in reaching the target inflation rate of 2%. He also believed that the job market seemed unlikely to be a source of resurgence in inflation.
Powell stated that the risk of inflation picking up is diminishing, while the risk of cooling in the job market is increasing.
He mentioned that he hopes for the US economy to achieve an elusive “soft landing” soon, despite not using that precise term.
“By appropriately reducing policy constraints, we have good reason to believe that the economy will recover to a 2% inflation rate while maintaining a strong labor market,” he said.