MNI: Powell Says Time Has Come For Fed Rate Cuts

Federal Reserve Chair Jerome Powell declared Friday the U.S. central bank is finally ready to begin lowering interest rates, having made significant progress in its battle against inflation and now facing growing concern over a weakening labor market.

He offered little guidance on how quickly or deeply the FOMC will cut rates, promising only to do everything in the committee's power to support jobs while completing the last mile on inflation. (See: MNI INTERVIEW: Fed's Harker Ready To Start 'Methodical' Cuts)

"The time has come for policy to adjust. 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 chair said from Jackson Hole, Wyoming, where global central bankers have gathered for the Kansas City Fed’s annual conference

"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. The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions."

COOLING JOBS

Upside risks to inflation have diminished while the downside risks to employment have increased, Powell said.

The unemployment rate has risen quickly over the past few months and now stands at 4.3%, "still low by historical standards" but a full point higher than in 2023, he noted. Hiring and quits rates are below pre-pandemic levels and wage growth has moderated.

"Labor market conditions are now less tight than just before the pandemic in 2019 — a year when inflation ran below 2%," he said. "It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon."

"We do not seek or welcome further cooling in labor market conditions," he said. "We will do everything we can to support a strong labor market as we make further progress toward price stability."

SOFT LANDING HOPES

The Fed's price stability objective has also come into view, Powell said. Prices rose 2.5% over the past 12 months and inflation has continued to slow after moving sideways early in the year.

"My confidence has grown that inflation is on a sustainable path back to 2%," Powell said.

Powell's speech offered a detailed account of how the Fed battled inflation levels not seen in a generation, from its early judgement that supply-driven spikes in prices would pass quickly without the need for a monetary policy response, before data dashed the hopes of those aboard "the good ship Transitory," to the Fed's rapid rate-hiking campaign in 2022 and 2023.

"The FOMC did not flinch from carrying out our responsibilities, and our actions forcefully demonstrated our commitment to restoring price stability," he said.

"An important takeaway from recent experience is that anchored inflation expectations, reinforced by vigorous central bank actions, can facilitate disinflation without the need for slack."