Powell in Jackson Hole: Fed to start cutting rates soon

JACKSON, Wyo. (AP) — With inflation He almost got defeated. With the labor market slowing, the Federal Reserve is preparing to begin cutting its key interest rate from a 23-year high, its chairman Jerome Powell said Friday.

Powell did not say when or how much the rate cuts would begin, but the Fed is widely expected to announce a modest quarter-point cut in its benchmark interest rate when it meets in mid-September.

“The time has come to adjust policy,” Powell said in his keynote address at the Fed’s annual economic conference in Jackson Hole, Wyoming. “The direction is clear, and the timing and pace of rate cuts will depend on incoming data, evolving expectations, and the balance of risks.”

His reference to multiple rate cuts was the only hint that a series of rate cuts was likely, as economists had expected. Powell stressed that inflation, after the worst price rise in four decades that has hurt millions of households, looks set to continue to rise. largely under controlBy the Fed’s preferred measure, inflation fell to 2.5% last month, well below its peak of 7.1% two years ago and only slightly above the central bank’s 2% target.

“I have increased my confidence that inflation is on a sustainable path back to 2%,” he added.

The Fed chairman’s assurance that interest rate cuts are coming helped fuel a rally on Wall Street. Bond yields fell and stocks rose broadly.

“The only question remaining at the Sept. 18 meeting is: How much will the Fed cut rates?” said Joseph LaVorgna, chief economist at SMBC Nikko Securities.

“The August employment report, which will be released on September 6, is definitely crucial,” LaVorgna said. If the report shows weak employment for a second straight month, the Fed could cut its key interest rate by a more aggressive half percentage point.

Most economists expect the Fed to cut rates by a quarter-point at each of its final three meetings this year. But Wall Street traders see a one-in-three chance that the Fed will cut rates by a half-point at one of those meetings, according to futures prices. Lower rates would eventually lower the prices of auto loans, mortgages and other forms of consumer borrowing and could boost stock prices.

In his remarks on Friday, the Fed chairman suggested that cutting interest rates would help extend the long-awaited “soft landing,” in which inflation falls to the Fed’s 2% target without triggering a recession.

Continued growth could boost Vice President Kamala Harris’s presidential campaign, even as most Americans say they are dissatisfied with the Biden-Harris administration’s economic record, largely because median prices remain well above their pre-pandemic levels.

“We will do everything we can to support a strong labor market while making further progress toward price stability,” Powell said.

He said that by cutting interest rates, “there is good reason to believe that the economy will return to 2% inflation while maintaining a strong labor market.”

Cutting rates in mid-September, less than two months before the presidential election, could bring some unwanted political pressure on the Fed, which is trying to avoid getting bogged down in election-year politics. Former President Donald Trump has argued that the Fed should not cut rates so close to the election. But Powell has repeatedly stressed that the central bank will base its interest-rate decisions on purely economic data, without regard to the political calendar.

In his remarks, Powell said the Fed has become concerned about slowing hiring and rising unemployment, even as it still wants to see inflation fall further. This dual focus replaces the Fed’s previous single-minded focus on inflation.

“The slowdown in labor market conditions is unmistakable,” the Fed chairman said. “Job gains remain strong but have slowed this year… We do not seek or welcome further slowdown in labor market conditions.”

In what amounted to a victory lap, Powell noted in his speech that the Fed had successfully overcome high inflation without causing a recession or a sharp rise in unemployment, which many economists had long predicted.

“The soft landing was a big surprise to the profession,” said Brown University economist Joti Eggertson during a presentation Friday at the Jackson Hole conference.

He attributed this result to the unraveling of the disruptions caused by the pandemic in supply chains and labor markets and the decline in job openings, which allowed wage growth to slow.

Powell also noted that Americans, according to opinion polls and financial market measures, never expected high inflation to persist. Such expectations can come true: If people expect inflation to remain high, they tend to demand increasingly higher wages or rush to buy before prices rise further. These moves can perpetuate high inflation.

But “inflation expectations” rose only modestly, and have since largely fallen back to pre-pandemic levels.

“The recovery from the distortions caused by the pandemic, the Fed’s interest rate hikes, and the fact that Americans did not expect inflation to rise have worked together to put inflation on what increasingly looks like a sustainable path toward our 2% goal,” the Fed chairman said.

Powell also addressed criticism that the Fed was too slow to raise interest rates even after inflation began to rise once the pandemic-induced recession ended. Fed officials initially claimed that the pandemic-induced price spike in early 2021 was only “transitory” and would soon fade as supply chain disruptions that left some grocery shelves empty and parking lots emptied healed.

He also acknowledged that the recovery from supply disruptions has taken much longer than the Fed expected — as has continued high inflation.

“The good ship was a crowded one, with most of the traditional analysts and central bankers from advanced economies on board,” Powell said. “I think I see some shipmates there today,” he added in an offhanded remark to the economists and central bankers gathered at the conference.