Jackson Hole., The time has come
to cut interest rates, as Upside risks to inflation have diminished, and downside risks to employment have increased
said US Federal Reserve (Fed) Chairman Jerome Powell in his opening remarks at the annual economic conference in Jackson Hole, Wyoming.
With inflation on track to be brought under control and the labor market cooling in the world’s largest economy, the Fed is set to begin cutting its key interest rate from its current range of 5.25 percent to 5.5 percent, where it has remained for more than a year, the highest point in a quarter-century.
The time has come to tighten monetary policy. 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 in his long-awaited speech at the annual meeting of central bankers, organized by the Kansas City Fed.
Referring to the two objectives that Congress has entrusted to the Fed – keeping inflation under control and stimulating employment – Powell assured that his Confidence has grown that inflation is on a sustainable path back to 2 percent
after having risen to its peak of 7.1 percent in the wake of the Covid-19 pandemic, the highest inflationary level in 40 years.
The Fed’s benchmark measure of inflation, the personal consumption expenditures price index, is running at an annual rate of 2.5 percent. The unemployment rate is 4.3 percent, a level that Fed officials consider consistent with stable inflation over the long term.
While Powell said the nearly 1 percentage point jump in the unemployment rate over the past year was largely due to rising labor supply and slowing hiring, not rising layoffs, he was also emphatic that the Fed is seeking to prevent further erosion.
Powell did not say when the rate cuts would begin or how large they would be, but the Fed is expected to announce a modest quarter-point reduction in its benchmark rate when it meets in mid-September.
Towards a new chapter
Powell’s comments are the closest he is likely to come to declaring victory over the bout of inflation that roiled the global economy at the start of the Covid-19 pandemic.
Rapidly rising prices prompted the Fed to raise its benchmark rate from near-zero in March 2022 to the current range of 5.25-5.5 percent, where it has remained for more than a year, even as the economy defied frequent recession predictions. Inflation fell and economic growth continued—the makings of a soft landing
textbook, with rate cuts now about to begin.
The Fed chairman also said that while the U.S. economy continues to grow at a solid pace, rate cuts should maintain growth and support hiring, which slowed last month.
Continued economic growth could boost Vice President Kamala Harris’ presidential campaign, even as most Americans say they are dissatisfied with average prices that remain well above their pre-pandemic levels.
Former President Donald Trump has argued that the Fed should not cut rates so close to an election, but Powell has repeatedly stressed that the central bank will make its decisions based on economic data, regardless of the political calendar.