Fed Says Rate Cuts Are Coming

Federal Reserve Chair Jerome Powell has signaled that interest rate cuts are on the horizon, saying “the time has come.”

Powell made the comments at the 2024 Jackson Hole Economic Policy Symposium, addressing the various factors involved, including the inflation and the labor market.

Inflation

Powell acknowledged how difficult high inflation has been on Americans, especially those who have never experienced sustained high inflation before.

“For much of the past three years, inflation ran well above our 2% goal and labor market conditions were extremely tight,” Powell said. “The FOMC’s primary focus has been on bringing down inflation, and appropriately so. Prior to this episode, most Americans alive today had not experienced the pain of high inflation for a sustained period.

“Inflation brought substantial hardship, especially for those least able to meet the higher costs of essentials, like food, housing, and transportation. High inflation triggered stress and a sense of unfairness that linger today.”

Powell went on to tout the results of the Fed’s policies, and the progress made toward bring inflation closer to the 2% goal.

“Our restrictive monetary policy helped restore balance between aggregate supply and demand, easing inflationary pressures and ensuring that inflation expectations remained well-anchored,” Powell continued. “Inflation is now much closer to our objective, with prices having risen 2.5% over the past 12 months.

“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%.”

Employment Sector

Powell went on to discuss the labor market, saying the years prior to the pandemic showed the importance of strong labor conditions.

“Turning to employment, in the years just prior to the pandemic, we saw the significant benefits to society that can come from a long period of strong labor market conditions—low unemployment, high participation, historically low racial employment gaps, and with inflation low and stable, healthy real wage gains that were increasingly concentrated among those with lower incomes.

While acknowledging the labor market has cooled over the past year, Powell pointed out that it still remains relatively strong, historically speaking..

“Today the labor market has cooled considerable from its formerly overheated state,” Powell continued. “The unemployment began to rise over a year ago, and is now at 4.3%. Still low by historical standards, but almost a full percentage point above its level in early 2023. Most of that increase has come over the past 6 months. So far rising unemployment has not been the result of elevated layoffs, as is typically the case in an economic downturn. Rather the increase mainly reflects a substantial increase in the supply of workers, and a slowdown from the previously frantic pace of hiring.

“The cooling in labor market conditions is unmistakable,” Powell added. “Job gains remain solid, but have slowed this year. Job vacancies have fallen, and the ratio of vacancies to unemployment has returned to its pre-pandemic range. The hiring and quits rates are now below the levels that prevailed in 2018 and 2019. Nominal wage gains have moderated and, all told, labor market conditions are now less itght than just before the pandemic in 2019, a year when inflation ran below 2%.

“It seems unlikely 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.”

Interest Rates

Powell said it was necessary to change direction, in terms of rate cuts, in response to the evolving economic situation.

“Overall the economy continues to grow at a solid pace, but the inflation and labor market data show an evolving situation,” Powell said. “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.

“The time has come for policy to adjust. 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 concluded.”

Investors were expecting a rate cut in September, but Powell’s words provided some much-wanted clarity and confirmation that such a cut is coming.

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