Federal Reserve Chair Jerome Powell, in a significant shift, endorsed the imminent start of interest rate cuts during his speech at the Kansas City Fed's annual economic conference in Jackson Hole, Wyoming. Powell emphasized that the U.S. central bank is ready to adjust its policy in response to further cooling in the job market, signaling confidence that inflation is on track to reach the Fed’s 2% target.
"The time has come for policy to adjust," Powell stated, noting that the direction and timing of rate cuts would be determined by incoming economic data and the evolving outlook. This pivot marks a new phase for the Fed, moving from its aggressive stance against inflation to focusing on preventing job losses, especially with the upcoming U.S. presidential election on the horizon.
Powell expressed growing confidence that inflation, which surged to around 7% during the COVID-19 pandemic, is now on a sustainable path back to the 2% target, with upside risks diminishing. However, he pointed out that the slowdown in the labor market is "unmistakable," with the downside risks to employment increasing. The rise in the unemployment rate to 4.3% has been driven mainly by slower hiring rather than a spike in layoffs, but Powell made it clear that the Fed would not tolerate further deterioration in labor conditions.
"We do not seek or welcome further cooling in labor market conditions," Powell said, reinforcing the Fed’s commitment to supporting a strong labor market while continuing to progress toward price stability.
Analysts and financial markets had already expected the Fed to initiate its first rate cut at the upcoming September 17-18 policy meeting. This expectation was strengthened by the Fed’s July meeting minutes, where a "vast majority" of policymakers indicated that policy easing would likely begin in September. Most analysts predict a quarter-percentage-point rate reduction as the starting point for the Fed’s policy easing cycle.
Powell’s new emphasis on protecting the job market, however, raises the possibility of a larger cut, particularly if the August jobs report, due on September 6, reveals further weakening. With the policy rate currently in the 5.25%-5.50% range, Powell highlighted that the Fed has "ample room" to reduce borrowing costs to cushion the economy.
Following Powell's remarks, traders increased their bets on a more significant rate cut, with some now anticipating a half-percentage-point reduction to kick off the easing cycle. There is also growing confidence that at least one substantial rate cut will occur before the end of the year.
"Chair Powell's speech made it clear that there are likely a series of rate cuts on the way, and some could be of the 50-basis-point variety," noted Omair Sharif, president of Inflation Insights. Although some Fed officials may prefer to proceed with 25-basis-point increments, Powell kept the option open for larger cuts if deemed necessary. Markets are currently betting that the Fed's policy rate will drop to the 3.00%-3.25% range by the end of 2025, significantly lower than its current level.
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