Time to cut interest rates, Powell says

Jackson Hole. Federal Reserve Chairman Jerome Powell said Friday that “the time has come” for the U.S. central bank to cut interest rates as rising risks to the labor market leave no room for further weakness and inflation is near the Fed’s 2 percent target.

This provides explicit support for an imminent easing of monetary policy.

“Upside risks to inflation have diminished, and downside risks to employment have increased,” Powell said in a highly anticipated speech at the Kansas City Fed’s annual economic conference in Jackson Hole, Wyoming.

“The time has come to tighten monetary policy. 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.”

Referring to the two goals Congress has tasked the Fed with achieving, Powell said his “confidence has grown that inflation is on a sustainable path back to 2 percent,” after rising to around 7 percent during the Covid-19 pandemic while unemployment is rising.

While Powell said the nearly 1 percentage point jump in the unemployment rate over the past year was largely due to rising labor supply and slowing hiring, not rising layoffs, he was also emphatic that the Fed wanted to prevent further erosion; his previous statement about labor market “pain” being necessary to tame inflation is now a thing of the past.

The current unemployment rate of 4.3 percent is roughly at the level that Fed officials consider consistent with stable inflation over the long run.

“We neither seek nor welcome a further cooling of labor market conditions,” Powell said. “We will do everything possible to support a strong labor market while making further progress toward price stability. With appropriate easing of monetary policy tightening, there is good reason to believe that the economy will return to 2 percent inflation while maintaining a strong labor market.”

New chapter

Powell’s comments are the closest he is likely to come to declaring victory over the bout of inflation that roiled the economy at the start of the pandemic.

Rapidly rising prices prompted the Federal Reserve to raise its benchmark policy rate from near-zero to the current range of 5.25-5.50 percent, the highest in a quarter-century.

It has remained in that spot for more than a year, even as the economy defied frequent recession predictions, inflation fell and economic growth continued — the ingredients of a textbook “soft landing,” with the end of rate cuts now about to begin.

“While the task is not complete, we have made significant progress” toward restoring price stability, Powell said. The Fed defines price stability as 2 percent inflation as measured by the personal consumption expenditures price index. The index is currently running at an annual rate of 2.5 percent.

Powell is speaking at Jackson Lake Lodge in Wyoming’s Grand Teton National Park before a gathering of central bankers and economists that has become a global platform for officials to outline their views on monetary policy and the economy.

His comments largely cement a decision the Fed has telegraphed through previous statements from Powell and a readout from the central bank’s July meeting that said a “large majority” of policymakers agreed rate cuts would likely begin next month.

But his emphatic language has left no doubt that the Federal Reserve is opening a new chapter in monetary policy. He did not, however, go much further in describing how the Fed would weigh its decisions from now on as it navigates a long-awaited easing of the benchmark rate.

As in previous speeches at Jackson Hole, many of Powell’s comments were explanatory in nature, in this case repeating the combination of supply and demand shocks that caused inflation to rise at the start of the pandemic, and why it persisted longer than he and other policymakers thought, and how the recovery from those shocks allowed inflation to fall without much initial damage to the labor market.

Federal Reserve officials will provide updated economic projections after their Sept. 17-18 meeting that will provide more detail on how they expect the benchmark policy rate to evolve from here.