Jerome Powell confirms start of US rate cuts in Jackson Hole: ‘The time has come’ | Economy

Federal Reserve President Jerome Powell confirmed Friday at an economic symposium in Jackson Hole, Wyoming, that interest rates are at a turning point. In his long-awaited speech, Powell showed his commitment to combating the cooling labor market and was as clear as a central banker can be: “The time has come to adjust monetary policy. The direction ahead is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

Jerome Powell has been trying for more than two years to achieve a soft landing for the economy: to control inflation without causing a recession. So far, with good results. The unemployment rate has recovered, but remains at a historically low level (4.3%), and inflation, which had reached 9%, fell below 3% for the first time since 2021. The US economy has resisted raising rates at the most aggressive levels since the 1980s. For more than a year, the Federal Reserve has been inactive. The government decided that doing nothing was the best option, leaving rates unchanged from July 2023.

The Federal Reserve chairman is confident that he can successfully complete this soft landing: “We will do everything we can to support a strong labor market as we continue to move toward price stability. With appropriate monetary easing, there is good reason to believe that the economy will return to 2% inflation while maintaining labor market strength. “The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of an unwelcome further weakening of labor market conditions.”

Some economists believe it may have been delayed too long, increasing the risk of a recession in the economy. Powell was reluctant to declare victory in the fight against inflation too soon. Given the choice, he was always seen as more inclined to come in a little late than to cheapen the money too soon. But now, he acknowledged, “the risks of higher inflation have diminished. And the risks of lower employment have increased.”

Powell acknowledged that the labor market has cooled significantly from its previous overheated state. The unemployment rate began rising more than a year ago, and at 4.3%, it’s nearly a percentage point higher than its rate at the start of 2023. Much of that increase has occurred in the past six months, and like the Fed president, the rise in unemployment so far has not been the result of a large number of layoffs, as typically happens during a recession, but rather reflects a significant increase in the active population. “That said, there is definitely a cooling in labor market conditions,” he acknowledged.

Minutes from the Federal Reserve’s latest Federal Open Market Committee (FOMC) meeting showed Wednesday that some members were already prepared to approve the first 0.25-point rate cut as early as July 31. In addition, a large majority was inclined to approve the cut at its meeting on September 18, which markets are taking for granted.

It would be the first cut since March 2020, when the pandemic led the central bank to flood financial markets with liquidity. Powell was reluctant to give away the pace and scale of the cuts. Before the rate cuts happen, July data on the personal consumption expenditure deflator, the central bank’s preferred inflation gauge, and the August consumer price index are still to be released. But the big news will be August employment data, due Sept. 6.

Disappointing July data shocked markets earlier this month, slowing job creation much more than expected and raising alarm bells about a possible recession — a red light that has been falsely triggered on many occasions over the past two years. Subsequent indicators have shown consumption to be resilient and allayed fears of an imminent recession, but after four straight months of rising unemployment, investors are eagerly awaiting the next data. A downward revision of job creation for the April 2023 through March 2024 period, released Thursday, shows a less buoyant labor market than previously thought, as the 12-month figure for job creation (818,000 jobs) disappeared.

Diagnostic error

The Federal Reserve has been keeping interest rates in the 5.25% to 5.50% range since July 2023. The price of money is the highest since March 2021, after a year and a half of aggressive hikes to combat higher inflation, also in four decades. Powell once again acknowledged his mistake in thinking the 2021 inflation surge was temporary and did not require a quick response, but also indicated that it was a widespread mistake, drawing laughter from those attending the Jackson symposium. Howle: “The good ship Transition was crowded, with most of the leading analysts and central bankers from the advanced economies on board.”

A turning point in monetary policy will come shortly before the presidential election on November 5. Powell has made clear that he is acting for economic, not political, reasons, even as he faces pressure from both Republicans and Democrats. Former President Donald Trump, whose proposals threaten to reduce the central bank’s independence, was particularly critical of him and has used the issue with some regularity on the campaign trail, accusing him of wanting to benefit Democrats.

In fact, if there’s one thing that can be said about the Fed’s mission, it’s that its initial failure to contain inflation has served Republican aspirations. Powell acknowledged Friday that until that episode, most Americans alive today had not experienced the pain of high inflation for an extended period. “Inflation has caused significant hardship, especially for those who can least cope with higher prices for basic goods like food, housing, and transportation. High inflation has created stress and a sense of unfairness that persists today,” he acknowledged.

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