On a crucial Friday, Federal Reserve Chairman Jerome Powell laid out the groundwork for upcoming interest rate cuts, but gave no details on the expected timing or scope of those cuts.
In his highly anticipated speech at the Federal Reserve’s annual meeting in Jackson Hole, Wyoming, Powell announced, “It’s time to change our approach.” He explained that while the future course is set, the specifics of the timing and size of rate cuts will depend on new data, future economic projections and risk assessments.
Live Update: Chairman Jerome Powell Speaks at Jackson Hole Conference
As financial markets anticipate future monetary policy guidance, Powell focused on dissecting the underlying causes of inflation. This analysis follows a vigorous period from March 2022 to July 2023, during which the Fed implemented a series of 11 rate hikes.
Powell acknowledged the decline in inflation, but stressed the Fed’s renewed commitment to maintaining job stability. “Inflation has come down significantly. The labor market has cooled from its pre-pandemic peak and supply issues have stabilized,” he noted. Powell reassured that the Federal Reserve is committed to supporting a strong labor market and continuing its progress in controlling inflation.
As Powell began his speech, the stock market rallied and Treasury yields fell significantly. Market participants are virtually certain of a rate cut of at least a quarter of a percentage point in September, with growing speculation that a half-percentage point reduction is possible.
Monitoring progress towards economic goals
The speech comes as the inflation rate approaches the Fed’s 2% target, currently sitting at 2.5%, down from 3.2% a year earlier and well below the peak of more than 7% seen in June 2022.
Meanwhile, the unemployment rate has gradually increased, currently at 4.3%, entering a range often seen as a precursor to recession. However, Powell attributed the increase to more people joining the labor force and a slowdown in the pace of hiring, rather than to a rise in layoffs or a broad-based labor market softening.
“Our goal has been to achieve price stability by keeping labor markets strong, avoiding the sharp spikes in unemployment seen in past periods of disinflation,” Powell said. “Our progress has been substantial, but our mission is not yet complete.”
Market expectations are for the Fed to begin cutting rates in September, although Powell did not specify a start date. Insights from the Federal Open Market Committee’s July meeting suggested that most officials favor a September rate cut, barring unexpected changes in the data.
“It looks pretty dovish. It has provided flexibility to adjust as needed next month, which is a clear indication of an easing approach,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities.
In his speech, Powell also spent a lot of time analyzing the origins of the recent surge in inflation, when it peaked, and why it has declined without plunging the economy into recession.
Reflecting on a difficult time
Initially, in early 2021, Powell and his team, along with many economists, believed that the surge in inflation was “transitory,” driven by temporary COVID-related factors.
Powell humorously observed: “The good ship Transitory had many passengers, including mainstream analysts and central bankers from developed economies. It seems that some of them are still here today.”
With inflation rising from goods to services, the Fed shifted gears, raising interest rates by a total of 5.25 percentage points, from near zero, following emergency cuts at the start of the pandemic.
This spike in inflation was global, driven by rapidly increasing demand for goods, tight supply chains, tight labor markets, and sharp increases in commodity prices.
Powell stressed that confidence in the Fed and robust inflation expectations, bolstered by decisive central bank actions, have helped ease inflation without requiring drastic economic slowdowns.
“There is still much to learn from these events,” Powell concluded, inviting different interpretations of the situation.
