JACKSON, Wyo. — Speaking in his most closely watched speech of the year, Jerome Powell, the chair of the Federal Reserve, clearly signaled Friday that the central bank was poised to cut interest rates in September.
And while Powell stopped short of giving a clear hint at just how large that move might be, he forcefully underscored that the central bank stands prepared to adjust policy to protect the job market from weakening further and to keep the economy on a path for a soft landing.
“The time has come for policy to adjust,” Powell said during the Kansas City Fed’s annual conference at Jackson Hole in Wyoming. “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.”
He then added: “We will do everything we can to support a strong labor market as we make further progress toward price stability.”
Powell’s speech was his firmest declaration yet that the Fed is turning a corner in its fight against inflation. After more than a year of holding interest rates at 5.3%, the highest level in more than two decades, officials finally have enough confidence to change their stance by cutting rates at their Sept. 17-18 meeting.
Policymakers have been using those high rates to try to cool the economy and, by doing so, wrestle down rapid inflation. But as price increases slow substantially and the job market shows signs of wobbling, officials no longer need to hit the brakes quite so hard.
The big question now is just how big a September rate cut will be, and how rapidly the Fed will lower borrowing costs in the months that follow. Policymakers will meet again in November and December.
Powell did not provide a clear outline for the path ahead, but by focusing on risks to the labor market, he did clearly hint that central bankers are willing to cut interest rates quickly rather than gradually if the job market appears to be at risk.
“We do not seek or welcome further cooling in labor market conditions,” he said, later adding that a strong labor market could be maintained with “an appropriate dialing back of policy restraint.”
The unemployment rate jumped in July, and Fed officials will receive August jobs data on Sept. 6, just before their next meeting. Powell was clear that central bankers are keenly focused on the possibility of a job market slowdown.
“The upside risks to inflation have diminished,” Powell said in his speech. “And the downside risks to employment have increased.”
Markets rallied Friday, with the S&P 500 index posting a gain that pushed it closer to a fresh record high. Government bond yields fell as investors priced in the possibility of steeper Fed rate cuts in the future.
The Fed’s looming decision about how much to cut interest rates — and how quickly to proceed with reductions after September — comes at a fraught political moment. The central bank is poised to begin lowering interest rates just weeks before the presidential election in November.
Fed officials insist they do not pay attention to politics when they are setting interest rates.
Instead, they focus on what is happening in the economy.
In recent months, data have suggested that they are making progress toward their big policy goal: Price increases seem to be coming under control. The consumer price index inflation measure has cooled to 2.9% as of last month, down sharply from 9.1% at its peak in the summer of 2022.
The July reading of the Fed’s preferred inflation measure, the personal consumption expenditures index, will be released Aug. 30. That too has been falling back toward the central bank’s 2% inflation goal.
Some economists even think the Fed might be on the verge of nailing a “soft landing,” in which inflation and the economy cool down sustainably without major pain. Powell voiced optimism about the central bank’s chances during his speech Friday.
“While the task is not complete, we have made a good deal of progress toward that outcome,” he said.
There’s plenty of reason for hope. Even as inflation moderates, growth and consumer spending have remained solid. While shoppers have become pickier and more sensitive to prices, they are still opening their wallets.
But at the same time, serious risks have begun to appear. The job market is a pivotal barometer of the strength of the overall economy, so its recent weakness was concerning, especially given that survey data also suggests that labor conditions are deteriorating.
While the weakness in the July report may have been driven by a hurricane and other weather events, it has left officials on edge, warily awaiting the next report on Sept. 6.
The unemployment rate is “still low by historical standards, but almost a full percentage point above its level in early 2023,” Powell said Friday, noting also that the increase was mainly coming as hiring slowed and new applicants took time to land work — not as people lost jobs. “Even so, the cooling in labor market conditions is unmistakable.”
Even as he voiced caution, Powell also used his speech to review how far the Fed has come in its inflation fight. He noted that the Fed thought that inflation would fade quickly in 2021, when it first took off. Back then, Fed officials often called inflation “transitory,” something they have been widely criticized for in the time since.
“The good ship Transitory was a crowded one, with most mainstream analysts and advanced-economy central bankers on board,” Powell said, defending the central bank’s stance.
When price increases did not fade, the Fed reacted by jerking rates higher in 2022, and Powell warned that economic pain might result. Many economists thought a recession was all but assured.
With inflation now fading in earnest, though, a more benign possibility — one in which the economy simply settles back into a normal pattern — has come into view.
“High inflation triggered stress and a sense of unfairness that linger today,” Powell acknowledged. But he later added that Fed officials “did not flinch from carrying out our responsibilities, and our actions forcefully demonstrated our commitment to restoring price stability.”
This article originally appeared in The New York Times.
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