Powell says ‘the time has come’ for rate cuts

Federal Reserve Chairman Jerome Powell said Friday that the central bank would soon cut interest rates after years of restrictive monetary policy.

Powell made the remarks during his speech at the Jackson Hole Symposium in Wyoming. The annual address, which has the ability to move global markets, is often a place for the Fed to preview the year ahead or announce changes.

“We do not seek or welcome further cooling in labor market conditions,” Powell said Friday. “The time has come for policy to adjust.”

During the speech, which comes some 4 1/2 years after the economy was disrupted by pandemic-related shutdowns and a very short but severe recession, Powell said inflation, which peaked in June 2022 and has plagued households across the country, is finally coming back down to manageable levels.

“Inflation is now much closer to our objective, with prices having risen 2.5% over the past 12 months,” he said. “After a pause earlier this year, progress toward our 2% objective has resumed. My confidence has grown that inflation is on a sustainable path back to 2%.”

The country’s labor market, which has surprised economists with how robust it has been, has started to cool off in recent months amid the high interest rate environment.

The economy added 114,000 jobs in July, far fewer than expected, and the unemployment rate rose two-tenths of a percentage point to 4.3%, the Bureau of Labor Statistics reported. That was a big miss from expectations that more jobs would be added and that the unemployment rate would remain at 4.1%.

Powell acknowledged the slowdown and noted that while 4.3% is relatively low by historical standards, it has risen by a full percentage point from its level early last year. He said that the “cooling in labor market conditions is unmistakable.”

“All told, labor market conditions are now less tight than just before the pandemic in 2019 — a year when inflation ran below 2%,” Powell said in his address. “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 pointed out that despite the high interest rates, the overall economy is continuing to expand at a “solid pace,” although he said inflation and labor market data show an “evolving situation.”

The economy grew at a robust 2.8% seasonally adjusted annual rate in the second quarter of this year, the Bureau of Economic Analysis reported last month in a preliminary estimate. The consensus among economists was that GDP would increase at a 2% rate.

The Federal Open Market Committee has a dual mandate — price stability, keeping inflation anchored at 2%, and maximum employment. Powell touched on the balancing act the Fed needs to play in keeping the goals in line.

“The upside risks to inflation have diminished. And the downside risks to employment have increased. As we highlighted in our last FOMC statement, we are attentive to the risks to both sides of our dual mandate,” he said.

Economists overwhelmingly expect that the Fed will pivot to finally cutting interest rates at its next meeting in September. Powell gave a strong indication that is the case during his speech.

“The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” Powell said.

Cutting rates will give consumers some relief as high interest rates make things like taking out a loan for a car, buying a house, and taking on credit card debt more expensive.

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The stock market lurched upward in response to Powell’s speech. Wall Street typically likes it when interest rates fall, and the address gave investors more concrete evidence that rate cuts are coming soon. The Dow Jones Industrial Average shot up nearly 400 points, while the tech-heavy Nasdaq expanded by about 1.5%.

“Powell said the time for policy to adjust had come, and the stock market didn’t waste any time,” said Chris Rupkey, chief economist at FWDBONDS. “It isn’t often a Fed chair talks about rate cuts after a couple years of raising interest rates and holding them there at restrictive levels that worsens the outlook for the labor market.”