Federal Reserve Chair Jerome Powell on Friday signaled that the central bank plans to start cutting its key interest rate soon, driven in large part by concerns about job growth and the economy.
In a speech at the Kansas City’s Fed’s annual conference in Jackson Hole, Wyoming, Powell said that cooling in the labor market is “unmistakable,” with job gains slowing this year. “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,” Powell said. “The time has come for policy to adjust.”
Powell noted that the battle against inflation appeared to stall earlier this year, but is now back on track. “My confidence has grown that inflation is on a sustainable path back to 2 percent,” he said.
Powell added that the “direction of travel is clear,” indicating that rates will be headed lower, with the “timing and pace” of the cuts to be determined by incoming data and the always evolving outlook.
A change in emphasis: Powell’s comments were notable for their focus on the labor market – the other part of the Fed’s dual mandate, along with price stability – as well as economic growth more broadly.
“Our objective has been to restore price stability while maintaining a strong labor market, avoiding the sharp increases in unemployment that characterized earlier disinflationary episodes when inflation expectations were less well anchored,” Powell said.
Derek Tang, an economist at LH Meyer/Monetary Policy Analytics, told Bloomberg that Powell’s message “was a very definitive turn away from the singular inflation focus the Fed had.” The change in emphasis means the Fed is “actually now tilting more fully towards defending the expansion against recession. It really seems the inflation worry has faded into the background.”
And maybe a victory lap: Famous for his understated approach, Powell gave no sign that he was declaring victory in the Fed’s war against inflation, and he has said in the past that there would be no moment at which he would declare that a soft landing of low inflation and low unemployment had been achieved. But some analysts saw something like a triumphant moment on Friday nonetheless.
“This was a valedictory of essentially Chair Powell turning the page, saying the mission, which has been focused on inflation for the last two years, has been successful,” economist Paul McCulley told CNBC.
What comes next: The next meeting of the rate-setting Federal Open Market Committee is scheduled for September 17-18, and at this point it seems that the only question is how large the rate cut will be. Stephen Brown of Capital Economics said Friday that the “dovish speech from Chair Jerome Powell at the Jackson Hole Symposium suggests that the Fed will be choosing between a 25bp [basis point] and a 50bp cut at its meeting in September.” The size of the cut will depend in part on the employment numbers for August, which Fed policymakers will review shortly before their next meeting.
