Federal Reserve Chairman Jerome Powell signaled on Friday he is ready to begin cutting interest rates, possibly starting next month, to prevent a further deterioration in the labor market while continuing to keep a close eye on inflation.
“The time has come to adjust policy,” Powell said in a highly-anticipated speech at the Fed’s annual symposium in Jackson Hole, Wyoming. He stressed that the pace and timing of rate cuts would depend on data reflecting the changing economic outlook and the balance of risks.
Chairman Powell acknowledged recent progress in showing that inflation is trending downward again after a rally earlier this year.
“There is growing confidence that inflation is on a sustainable path to 2 percent,” he said.
Powell’s comments provided some clarity about the Fed’s near-term plans but left questions about its strategy beyond September. The speech marked a potential turning point in the Fed’s two-year effort to contain inflation, which has come at a time when the labor market has remained strong despite aggressive rate hikes.
The Fed has kept interest rates unchanged at a range of 5.25% to 5.5% — the highest in two decades — over the past year, a measure intended to raise borrowing costs across the economy to curb inflation.
But as inflation nears the Fed’s 2% target, signs of stress are beginning to appear in the labor market, raising concerns among Fed officials that high interest rates could undermine economic stability. Those concerns were exacerbated when the July jobs report showed weaker-than-expected job growth, rattling financial markets.
Also this week, the Labor Department released revised estimates for nonfarm payrolls, revealing that about 818,000 fewer jobs were added than estimated in the monthly jobs report, suggesting that the labor market has started to soften more quickly than expected.
“We do not seek, and do not welcome, a further weakening of labor market conditions,” Powell said, noting that the slowdown in hiring is becoming increasingly evident.
Strategic shift
Chairman Powell’s comments underscore the Fed’s cautious approach to navigating this critical period. After initially being slow to respond to inflationary pressures that arose during the pandemic, the central bank wants to avoid another policy mistake now that price increases are beginning to moderate. The success of this strategy could determine whether the economy achieves a so-called soft landing, where inflation is contained without plunging the economy into recession.
“Our goal was to restore price stability while preserving a strong labor market and avoid the sharp increases in unemployment that have characterized previous disinflationary periods when inflation expectations were less anchored,” Powell said. “While the task is not yet done, we have made substantial progress toward that outcome.”
At the July meeting, most Fed officials suggested a rate cut was likely in September if economic data continued to meet expectations.
Inflation remains above the Fed’s target but is well below a peak expected in 2022. The central bank’s preferred inflation gauge, the personal consumption expenditures price index, rose 2.5% year-on-year in June.
The outlook remains uncertain
Powell’s comments will be welcomed by consumers and businesses facing higher borrowing costs for mortgages, auto loans and other credit. Investors are widely expecting a quarter-point rate cut at the Fed’s next policy meeting on Sept. 17-18.
While many progressives want the Fed to cut interest rates, Powell’s comments may not be well received by Sen. Kamala Harris and Democrats because they highlighted the risk of further weakening in the labor market.
Still, significant uncertainty remains about the Fed’s future course. Another weak employment report could lead to a larger-than-expected 50 basis point rate cut in September. Additionally, debate continues about the pace and size of rate cuts over the coming months. Some analysts expect the Fed to cut rates at its November and December meetings (there is no October meeting), while others believe the Fed will move at a more cautious pace, cutting rates at each meeting to see how the economy adjusts to lower interest rates.
Chairman Powell did not specify what path the Fed would take after the September meeting.
