'The time has come': Fed's Powell sees rate cuts with inflation easing

JACKSON HOLE, Wyoming — Federal Reserve Chair Jerome Powell on Friday offered good news for the economy: The long fight against inflation is ending, and he’s hopeful that the U.S. will avoid recession.

In remarks at the central bank's annual conference that are drawing international attention, Powell said “the time has come” for the Fed to cut interest rates, as his confidence has grown that inflation is tamed. His goal now: safeguarding the job market amid signs that it is slowing.

“We will do everything we can to support a strong labor market as we make further progress toward price stability,” he said at the Fed's annual retreat at Jackson Hole.

His speech marks a striking turning point after the U.S. economy was battered by the worst price spikes in four decades starting in early 2021 — and then by the Fed’s interest rate hikes the following year as it fought to bring inflation to heel. Now, inflation has fallen below 3 percent, close to the Fed's target, and the jobless rate is slowly ticking up from modern-era lows, giving policymakers confidence they can start to ease off on the economy.

His pronouncements come just months away from a presidential election, with heavy significance for both major party candidates: Whoever wins will inherit an economy where inflation is no longer the primary concern.

In the short run, impending rate cuts could boost voters’ views on the economy’s health, which could benefit Vice President Kamala Harris. That's because lower borrowing costs will provide relief for the housing market and boost share prices, with corporate debt costs set to decrease.

But the Fed only has one interest rate meeting scheduled between now and the election — next month — meaning that most of the fallout will come after the voting.

Even so, any move to reduce rates could draw a political backlash, with former President Donald Trump warning that it could amount to election interference that could help Harris.

Powell will now have to decide how fast to lower rates to levels where they are no longer cutting into growth. Failing to act quickly enough could mean more unemployment.

“We do not seek or welcome further cooling in labor market conditions,” he said.

The Fed chief’s comments reinforced investor expectations for a rate cut in September, amid signs that there are fewer opportunities for people seeking work and more financial strain on debt-burdened households. Many economists back Powell’s view that the risk is decreasing that inflation will re-accelerate and the risk is increasing that joblessness could spike.

But that view isn’t universal. Michael Strain, director of economic policy studies at the conservative American Enterprise Institute and an attendee at the Fed conference, called Powell’s clear signal of a September rate cut “premature.”

“I see a strong consumer,” he said. “I see an economy that’s likely growing above potential. I see a labor market where the unemployment rate could be falling this month, and it’s not clear to me why that combination of data would suggest that a data-dependent Fed would begin its cutting cycle in September.”

Goldman Sachs economists in a note following the speech said they too expected the August jobs report to look better than the July one, in which unemployment rose to 4.3 percent, but they expected that to translate to a smaller rate cut, rather than none at all.

“Powell’s speech today — in particular his comments on the labor market and his reiteration that the [Fed] has ‘ample room to respond to any risks we may face’ — reinforces our view that the [Fed’s] tolerance for further signs of softness in the labor market has run out and that it would be quick to act more aggressively if the labor market cools further,” they wrote.