Analysis – Powell’s Fed not shy of election-year cuts, ready to defend labor market By Reuters

By Howard Schneider

JACKSON HOLE, Wyoming (Reuters) – Federal Reserve Chairman Jerome Powell said on Friday the U.S. central bank would not shy away from cutting interest rates in the final weeks of a presidential election campaign and that protecting the labor market is now his role. top priority.

“The time has come for policy to adjust,” Powell said in a speech at the Fed’s annual Jackson Hole conference in Kansas City, in a strong signal that the central bank will begin cutting interest rates in mid-September by about seven weeks before the November 5 election. .

His remarks — essentially a statement that the Fed’s fight with inflation was over and protecting employment was now at the top of its to-do list — came the morning after Vice President Kamala Harris accepted the Democratic nomination for president, a development that upset a contest that had tilted toward former President Donald Trump, the Republican nominee.

The comments prompt a rate cut at the Fed’s Sept. 17-18 meeting, a move that Trump, who has been highly critical of Powell despite picking him for the top Fed job, and some Republican lawmakers have warned that it would be seen as a partisan effort to juice the economy before the vote.

Powell and his fellow policymakers, including other Trump appointees such as Fed Governor Christopher Waller, have steered steadily over the past four weeks toward a consensus rate cut at next month’s meeting, citing economic data that showed all the more that inflation is falling as risks. on the labor market have increased.

This won’t be the first time the Fed has started a rate-cutting cycle in an election year, and previous election-year policy changes have coincided with both wins and losses for incumbents and challengers. But a rate cut on Sept. 18 would be — about seven weeks — the second-closest policy change before a presidential vote since at least 1976.

Back then, Fed chief Arthur Burns embarked on a brief easing cycle that began just four weeks before an election that featured a race between Republican President Gerald Ford (NYSE: ) and Democratic challenger Jimmy Carter. Ford lost.

“WE DO ALL WE CAN”

Congress has charged the Fed with maintaining the highest level of employment consistent with stable inflation, and the unemployment rate has risen by nearly a percentage point — from 3.4 percent to 4.3 percent — over the past year, Powell said the Fed had seen enough.

“We are not seeking or welcoming further cooling of labor market conditions,” Powell said in his speech at a lodge in Wyoming’s Grand Teton National Park, answering a question that has so far remained open: How much more jobs weakness would tolerate or feel the Fed. was it necessary to wring the last bit of inflation out of the economy? The answer is none, with the measure of inflation the Fed uses for its 2% target now at 2.5% and apparently on the way down.

With price pressures easing and many employment measures beginning to ease, Powell said the central bank will now “do everything we can to support a strong labor market,” a comment that some analysts say opened the door to an initial half-percentage-point cut because unlike the more traditional quarter-percentage-point increments.

It was a significant change in tone from Powell’s comments as inflation picked up in 2021 and 2022. The Fed began raising its benchmark policy rate in March 2022 to what would be the highest level in a quarter of the century, and at the Jackson Hole forum two years ago, he warned that workers and families would feel “pain” in the form of rising unemployment and higher credit costs.

Credit has certainly become more expensive. The average interest rate on a 30-year fixed-rate home loan rose from less than 3 percent in the summer of 2021, before rate hikes began, to nearly 8 percent last October, after the rate Fed policy rate reached 5.25% -5.50% range in July 2023.

But the labor market pain never really materialized. The unemployment rate, which has averaged 5.7% since the late 1940s, stayed below 4% from February 2022 – the eve of the Fed’s rate hike – until last May. Wages continued to rise.

Even the current level of 4.3% is about what the central bank considers to be in line with the Fed’s long-term 2% inflation target.

But it’s bigger than what Powell inherited when he became Fed chief in 2018, the conditions he said he wanted to restore when the COVID-19 pandemic put more than 20 million people out of work in the spring of 2020 and pushed the unemployment rate to a high level. as 14.8%.

A sharp increase from current unemployment levels could weaken Powell’s legacy as Fed chief, who has reoriented monetary policy to put more weight on the central bank’s hiring mandate in the belief that low unemployment rates and stable inflation would could coexist.

He says he remains optimistic.

“With adequate easing of policy restraint, there is good reason to think the economy will return to 2 percent inflation while maintaining a strong labor market,” Powell said. Given that the Fed’s policy rate is a drag on the economy, and arguably well above the “neutral rate” that neither constrains nor stimulates economic growth—and even beyond the “liftoff” level of near zero from 2022 – “our current policy rate level gives us plenty of room to respond,” he said.