chairman Jerome Powell said now the time has come federal Reserve They decided to cut their key policy rate, reinforcing expectations that officials will begin lowering borrowing costs next month, and made clear their intention to prevent further slack in the labor market.
“The time has come to adjust policy,” Powell said in a speech Friday to the Fed's annual conference in Jackson Hole, Wyoming, Kansas City. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”
The Fed chief also acknowledged recent progress on inflation, which has begun to ease in recent months after remaining steady at the start of the year: “My confidence has grown that inflation “It's on track to get back to a sustainable rate of 2%,” he said, referring to the central bank's inflation target.
US Federal Reserve Chair Jerome Powell during the Jackson Hole Economic Symposium in 2019.
Treasury yields fell and the S&P 500 index of U.S. stocks rose, while the dollar declined.
Swap traders held steady their pricing for an overall rate cut at around 98 basis points through the end of 2024. Odds for a quarter-point cut in September also remained steady.
While these comments provided some clarity for financial markets on the near term, they provided little indication of how the Fed will proceed after its September meeting.
Still, the speech confirmed that the Fed is at a turning point in its two-year battle against inflation. For most of that time, the labor market proved surprisingly strong, allowing officials to focus firmly on driving inflation toward the central bank's 2% target.
To support this goal, the Fed has kept its benchmark rate in a range of 5.25%-5.5% over the past year — its highest level in more than two decades — thereby raising borrowing costs across the economy.
Still, as inflation neared its target, cracks began to appear on the employment front, leading many Fed officials to worry that higher rates now pose a threat to the economy's continued strength. Warning signs included July's disappointing jobs report that roiled financial markets.
“We neither desire nor welcome a further deterioration in labor market conditions,” Powell said, adding that the slowdown in the labor market is “clear.”
Policy pivot
After delaying raising rates in response to a surge in inflation during the Covid-19 pandemic, Powell’s remarks underscore that Fed officials are now hoping to avoid another policy error while price growth is subsiding. Their success or failure will determine whether there will be a so-called soft landing, the rare feat of suppressing an inflationary burst without tipping the economy into recession.
“Our objective is to restore price stability while maintaining a strong labor market, avoiding the sharp rises in unemployment that characterized earlier disinflationary episodes when inflation expectations were less well anchored,” Powell said. “While the task is not done, we have made considerable progress toward that outcome.”
At its previous meeting in July, a “majority” of Fed officials felt it would be appropriate to cut rates in September if economic data continued to come in as expected.
While inflation remains above the Fed's target, it has retreated significantly from its recent peak of 7.1% in 2022. The central bank's preferred inflation gauge, the personal consumption expenditures price index, rose 2.5% in June from a year earlier.
The way forward
Powell's comments will likely be well received by Americans with high price indexes. Interest Rates The rate is tied to mortgage, auto, credit card and other borrowings. Investors are widely expecting a quarter-point rate cut at the Federal Open Market Committee's next meeting on Sept. 17-18.
Questions remain about the Fed's path forward, and Powell did not provide any additional clarity.
Investors are pondering whether another negative jobs report will force the Fed to cut rates by a greater than usual 50 basis points in September. Another key consideration is how policymakers might proceed with the pace and size of rate cuts in the coming months.
Powell said policymakers would “do everything possible to support a strong labor market as we move toward price stability.”
“The time has come to adjust policy,” Powell said in a speech Friday to the Fed's annual conference in Jackson Hole, Wyoming, Kansas City. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”
The Fed chief also acknowledged recent progress on inflation, which has begun to ease in recent months after remaining steady at the start of the year: “My confidence has grown that inflation “It's on track to get back to a sustainable rate of 2%,” he said, referring to the central bank's inflation target.
US Federal Reserve Chair Jerome Powell during the Jackson Hole Economic Symposium in 2019.
Treasury yields fell and the S&P 500 index of U.S. stocks rose, while the dollar declined.
Swap traders held steady their pricing for an overall rate cut at around 98 basis points through the end of 2024. Odds for a quarter-point cut in September also remained steady.
While these comments provided some clarity for financial markets on the near term, they provided little indication of how the Fed will proceed after its September meeting.
Still, the speech confirmed that the Fed is at a turning point in its two-year battle against inflation. For most of that time, the labor market proved surprisingly strong, allowing officials to focus firmly on driving inflation toward the central bank's 2% target.
To support this goal, the Fed has kept its benchmark rate in a range of 5.25%-5.5% over the past year — its highest level in more than two decades — thereby raising borrowing costs across the economy.
Still, as inflation neared its target, cracks began to appear on the employment front, leading many Fed officials to worry that higher rates now pose a threat to the economy's continued strength. Warning signs included July's disappointing jobs report that roiled financial markets.
“We neither desire nor welcome a further deterioration in labor market conditions,” Powell said, adding that the slowdown in the labor market is “clear.”
Policy pivot
After delaying raising rates in response to a surge in inflation during the Covid-19 pandemic, Powell’s remarks underscore that Fed officials are now hoping to avoid another policy error while price growth is subsiding. Their success or failure will determine whether there will be a so-called soft landing, the rare feat of suppressing an inflationary burst without tipping the economy into recession.
“Our objective is to restore price stability while maintaining a strong labor market, avoiding the sharp rises in unemployment that characterized earlier disinflationary episodes when inflation expectations were less well anchored,” Powell said. “While the task is not done, we have made considerable progress toward that outcome.”
At its previous meeting in July, a “majority” of Fed officials felt it would be appropriate to cut rates in September if economic data continued to come in as expected.
While inflation remains above the Fed's target, it has retreated significantly from its recent peak of 7.1% in 2022. The central bank's preferred inflation gauge, the personal consumption expenditures price index, rose 2.5% in June from a year earlier.
The way forward
Powell's comments will likely be well received by Americans with high price indexes. Interest Rates The rate is tied to mortgage, auto, credit card and other borrowings. Investors are widely expecting a quarter-point rate cut at the Federal Open Market Committee's next meeting on Sept. 17-18.
Questions remain about the Fed's path forward, and Powell did not provide any additional clarity.
Investors are pondering whether another negative jobs report will force the Fed to cut rates by a greater than usual 50 basis points in September. Another key consideration is how policymakers might proceed with the pace and size of rate cuts in the coming months.
Powell said policymakers would “do everything possible to support a strong labor market as we move toward price stability.”