Federal Reserve Chairman Jerome Powell signaled he is finally ready to start cutting interest rates, saying the central bank believes inflation is close to being contained and the job market is cooling.
Powell did not say when the Fed would start cutting rates or how big the cuts would be, but the central bank is widely expected to cut rates by a small quarter of a percentage point when it meets in mid-September. Investors responded to the news by buying stocks, sending the Dow Jones Industrial Average soaring more than 400 points, or about 1.1%, in the process.
“The time has come to adjust policy,” Powell said in a keynote speech at the Fed’s annual economic conference in Jackson Hole, Wyoming. “The direction to move is clear, and the timing and pace of rate cuts will depend on upcoming data, the evolving outlook, and the balance of risks.”
Powell’s reference to multiple rate cuts was the only hint that a series of cuts was likely, as economists have predicted. Powell stressed that inflation appears largely under control after the worst price rise in four decades inflicted pain on millions of families.
A majority of Americans say they are dissatisfied with the Biden-Harris administration’s economic performance, largely because average prices remain well above pre-pandemic levels.
The Fed chairman also said the rate cuts should help sustain economic growth and employment, which slowed last month.
“We will do all we can to support strong labor markets as we make further progress toward price stability,” Powell said.
He said there is “every reason to believe that lowering interest rates could help the economy return to 2 percent inflation while maintaining a strong labor market.”
Powell’s comments “all but guarantee” a 25-basis-point rate cut next month, said Glenn Smith, chief investment officer at Flower Mound, Texas-based asset manager GDS Wealth Management.
“A September rate cut is effectively set in stone at this point, but the bigger question is whether this is a one-off or the start of a larger cycle of rate cuts, which will depend on economic data over the next two to three months,” Smith told the Post.
In what amounted to a victory speech on Friday, Powell said the Fed had succeeded in overcoming high inflation without triggering the recession and spike in unemployment that many economists had long predicted.
The Fed chairman attributed the results to slowing wage growth as disruptions to supply chains and labor markets caused by the pandemic were easing and job openings fell.
Stocks plummeted for two days on fears the U.S. could slip into recession after the government said this month that July employment had fallen far short of expectations and the unemployment rate had hit a three-year high of 4.3 percent.
Some economists have begun to speculate that the Fed may cut interest rates by half a percentage point in September and then again in November.
But healthier economic data released last week, including a further decline in inflation and a strong increase in retail sales, helped to partially allay those concerns.
Wall Street traders currently expect the Fed to cut interest rates by a quarter percentage point in September and November, and by a half percentage point in December. Mortgage rates have already started to fall in anticipation of the cuts.
Some officials have said signs of a further slowdown in hiring could make a half-point Fed rate cut more likely in September.
Associated Press
