JACKSON, Wyoming (AP) — With inflation Almost defeated and a cooling job market, the Federal Reserve is poised to cut its key interest rate from its current 23-year low, Chairman Jerome Powell said Friday.
Powell did not say when the rate cuts would start or how big they would be, but the Fed is widely expected to announce a modest quarter-point cut in its benchmark rate when it meets in mid-September.
“The time has come to adjust policy,” Powell said in his keynote speech at the Fed’s annual economic conference in Jackson Hole, Wyoming. “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.”
His reference to multiple rate cuts was the only reference to a series of cuts, as economists had predicted. Powell insisted that inflation appears after the worst price hikes in four decades hurt millions of families. Mostly under control. Inflation eased to 2.5% last month, according to the central bank’s preferred measure, well below the peak of 7.1% two years ago and slightly above the central bank’s 2% target level.
“My confidence has increased that inflation is on a steady path to 2%,” he said.
The Fed chief’s assurances that rate cuts are coming helped fuel a rally on Wall Street. Bond yields fell and stock indexes rose broadly.
“The only question left for the Sept. 18 meeting: How much will the Fed cut?” said Joseph Lavorgna, chief economist at SMBC Nico Securities.
“The outcome of the August employment report,” which will be released on Sept. 6, “is obviously important,” LaVorgna said. If that report shows weak hiring for a second straight month, the central bank could cut its key rate by a more radical half-point.
Most economists expect the central bank to cut its benchmark rate in each quarter of its final three meetings this year. Still, Wall Street traders see a one-in-three chance the Fed will cut a half-point rate cut at one of those meetings, according to futures prices. A lower Fed benchmark rate could eventually lead to lower rates for auto loans, mortgages and other consumer loans and boost stock prices.
In his comments on Friday, the central bank chief suggested that rate cuts should help extend the much-coveted “soft landing” that would allow inflation to return to the central bank’s 2% target without triggering a recession.
Continued growth could boost Vice President Kamala Harris’ presidential campaign, even as most Americans say they are dissatisfied with the economic record of the Biden-Harris administration, largely because average prices are higher than they were before the pandemic.
“We will do everything we can,” Powell said, “to support a strong labor market as we move further toward price stability.”
By cutting rates, he said, “there is good reason to think the economy will return to 2% inflation while maintaining a strong labor market.”
The mid-September rate cut, which comes less than two months before the presidential election, could bring unwanted political heat to the central bank, which wants to avoid getting caught up in election-year politics. Former President Donald Trump argued that the Fed should not cut rates so close to the election. But Powell has repeatedly underscored that the Fed makes its rate decisions based purely on economic data, regardless of the political calendar.
Powell said in his comments that the central bank is concerned about slow hiring and a rising unemployment rate, even as it wants to see inflation fall further. That dual focus replaces the Fed’s previous single focus on inflation.
“There’s nothing wrong with cooling labor market conditions,” the Fed chief said. “Job gains have been solid, but have slowed this year. … We neither seek nor welcome further cooling in labor market conditions.
In something of a victory lap, Powell noted in his speech that the Fed had succeeded in beating high inflation without causing a recession or a sharp rise in unemployment.
The soft landing “came a big surprise to (the economy) industry,” Brown University economist Gouty Eggertson said during a presentation Friday at the Jackson Hole conference.
The pandemic’s disruptions to supply chains and labor markets and reduced job vacancies have allowed wage growth to cool, he said.
Powell also noted that Americans don’t really expect high inflation to stick around, according to surveys and financial market gauges. Such expectations can be self-fulfilling: if people expect inflation to be higher, they usually always demand higher wages or they speed up their purchases before prices rise even further. Those measures may perpetuate higher inflation.
But “inflation expectations” rose only modestly and then largely returned to pre-pandemic levels.
“Recovery from the contagion,” the central bank’s rate hikes and the fact that Americans don’t expect high inflation “have worked together to put inflation on what increasingly appears to be a steady path to our 2% goal,” the Fed chairman said. .
Powell also addressed criticism that the Fed was too slow to raise rates even after inflation began to pick up once the pandemic recession ended. Fed officials initially argued that price spikes from the pandemic in early 2021 were only “transitional” and that supply chain disruptions that left some grocery shelves bare and vehicles empty would soon fade.
He acknowledged that it took longer than expected for the central bank to heal the supply disruptions – and the level of high inflation.
“The good ship was crowded, and most of the major analysts and advanced economic central bankers were on board,” Powell said. “I think I see some shipmates today,” he said in an announcement to economists and central bankers gathered for the conference.
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