Fed’s Powell says ‘time has come’ to cut interest rates

JACKSON HOLE, Wyoming, Aug 23 (Reuters) – Federal Reserve Chairman Jerome Powell said on Friday “the time has come” for the U.S. central bank to cut interest rates as rising risks to the labor market left no room for a further weakness, and inflation fell. in reaching the Fed’s 2% target, providing explicit support for imminent policy easing.

“Positive risks on 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 for politics to adapt. The direction of travel is clear, and the timing and pace of tariff reductions will depend on the data received, the evolution of the outlook and the balance of risks.”

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

While Powell said the nearly one percentage point rise in the unemployment rate over the past year was largely due to increased labor supply and slowing hiring, not increased layoffs, he also emphasized that the Fed wants to prevent any further erosion – his earlier talk of labor market “pain” as needed to control inflation is now a thing of the past.

The current unemployment rate of 4.3 percent is about the level that Fed officials consider consistent with long-term stable inflation.

“We do not seek or welcome further cooling in labor market conditions,” Powell said. “We will do everything we can to support a strong labor market as we make progress toward price stability. With an adequate easing of policy restraint, there is good reason to think the economy will return to 2% inflation while maintaining a strong labor market.”

THE NEW CHAPTER

Powell’s comments are as close as one can get to declaring victory over the burst of inflation that rocked the economy at the start of the pandemic.

The rapid rise in prices prompted the Fed to raise its benchmark rate from near zero to the current range of 5.25%-5.50%, the highest level in a quarter century. It has been there for more than a year, even as the economy has defied frequent recession predictions, inflation has eased and economic growth has continued – the makings of a textbook “soft landing”, with the end of interest rate cuts now set to begin.

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

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 shape views on monetary policy and the economy.

His comments largely cemented a decision the Fed had telegraphed through Powell’s earlier comments and a reading from the central bank’s July meeting that said the “vast majority” of policymakers agreed that interest rate cuts would begin probably next month.

But his emphatic language has now left beyond doubt that the Fed is opening a new chapter in monetary policy.

However, he did not go far in describing how the Fed would weigh its decisions here as it navigates a long-awaited easing of policy.

As in many of his previous Jackson Hole speeches, many of Powell’s remarks were explanatory in nature, in this case revisiting the combination of demand and supply shocks that drove inflation higher at the start of the pandemic, which is why it has persisted longer than he and others. policymakers reasoned that so would the way in which smoothing out these shocks allowed inflation to fall without much initial damage to the labor market.

Fed officials will provide updated economic projections at their Sept. 17-18 meeting, which will provide more details on how they expect the key rate to move from here.