Fed's Pivot

Sebastien Callebaut -

Fed Chair Powell Signals Rate Cuts at Jackson Hole

Federal Reserve Chair Jerome Powell indicated that the central bank is preparing to cut interest rates soon, aiming to prevent further weakening in the U.S. labor market. Speaking at the annual Jackson Hole economic gathering, Powell stated that the time had come for policy to adjust, marking his clearest hint yet that rate reductions are imminent.

  • Markets responded positively to Powell's comments, with the Dow Jones Industrial Average climbing over 400 points, or 1.1%, and the Nasdaq Composite gaining 1.5%. Treasury yields also declined.
  • Powell’s remarks appear to signal an end to the Fed’s aggressive inflation-fighting campaign, which he first outlined at the same event two years ago, expressing a willingness to endure a recession to control inflation. Now, however, Powell’s focus has shifted toward supporting the labor market.

“Chair Powell’s Jackson Hole speech was as clear a pivot toward supporting the labor market as could be imagined,” said Marc Sumerlin, managing partner at Evenflow Macro, an economic-consulting firm.

Fed chief emphasizes central bank's focus on preventing further labor market decline

The Fed’s next policy meeting is scheduled for Sept. 17-18, where a rate cut is widely anticipated. At its previous meeting in late July, the Fed held rates steady, though some officials advocated for cuts. Just days later, the Labor Department reported that unemployment had risen to its highest level in nearly three years, while inflation continued to decline.

  • “The cooling in labor market conditions is unmistakable,” Powell said. He added that the Fed would take every step necessary to maintain a strong labor market as it continues to work toward price stability.
  • The key question for both financial markets and the Fed is how significant the rate cuts will be in mid-September. The Fed’s current benchmark rate is set between 5.25% and 5.5%, which many believe is dampening economic activity.
  • Analysts are split on whether the Fed will cut rates by 0.25 or 0.5 percentage points at the upcoming meeting, and uncertainty remains about the central bank’s actions in its remaining meetings for the year.

Although Powell was assertive in outlining the Fed's intentions, he avoided specifying the scale of the rate cuts, leaving room for flexibility depending on future economic data.

More Confidence But Questions Remain

Fed officials will receive another monthly jobs report and additional inflation readings before the September meeting, but Powell’s speech suggested a greater degree of confidence compared to his press conference in late July. At that time, he had said the Fed needed more data to be certain that inflation was under control. On Friday, he expressed more assurance in that data.

“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,” Powell said.

The Fed's decisions in the coming months will have major implications for the U.S. economy and Powell's legacy. Powell, who has been at the central bank since 2012, was appointed as Fed chair by President Trump in 2018 and reappointed by President Biden for a second term.

In 2022 and 2023, central bankers raised rates aggressively to combat the highest inflation in 40 years. Despite these higher borrowing costs, the U.S. economy remained resilient, and inflation gradually subsided as the labor market stayed strong. However, recent increases in unemployment—rising from 3.4% in April 2023 to 4.3% in July—have raised concerns about whether that strength will persist.

Powell remained cautiously optimistic about the possibility of a soft landing for the U.S. economy, though he refrained from using the term. He noted, “With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2% inflation while maintaining a strong labor market,”.

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