Federal Reserve Chairman Jerome Powell signaled he is finally ready to start cutting interest rates, saying he believes the central bank is close to whipping inflation and that the job market is cooling.
Powell didn’t say when rate cuts would begin or how large they might be, but the Fed is widely expected to announce a modest quarter-point cut in its benchmark rate when it meets in mid-September. Giddy investors bought stocks on the news, with the Dow surging more than 400 points, or about 1.1%.
“The time has come for policy to adjust,” Powell said in his keynote speech at the Fed’s annual economic conference in Jackson Hole, 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.”
Powell’s reference to multiple rate cuts was the only hint that a series of reductions is likely, as economists have forecast. Powell emphasized that inflation, after the worst price spike in four decades inflicted pain on millions of households, appears largely under control:
Most Americans say they are dissatisfied with the Biden-Harris administration’s economic record, largely because average prices remain far above where they were before the pandemic.
The Fed chair also said that rate cuts should maintain the economy’s growth and sustain hiring, which slowed last month.
“We will do everything we can,” Powell said, “to support a strong labor market as we make further progress toward price stability.”
By cutting rates, he said, “there is good reason to think that the economy will get back to 2% inflation while maintaining a strong labor market.”
Powell’s comments “all but assure” a 25 basis point rate cut next month, according to Glen Smith, chief investment officer at Flower Mound, Texas-based asset management firm GDS Wealth Management.
“While a September rate cut is essentially a done deal at this point, the more important question is whether this will be a one and done rate cut, or if it will be the beginning of a more substantial cutting cycle, and that will be determined by the economic data over the next two to three months,” Smith told The Post.
In what amounted to a claim of victory, Powell noted in his speech Friday that the Fed had succeeded in conquering high inflation without causing a recession or a sharp rise in the unemployment rate, which many economists had long predicted.
The Fed chair attributed that outcome to the unraveling of the pandemic’s disruptions to supply chains and labor markets, and a reduction in job vacancies, which allowed wage growth to cool.
After the government reported this month that hiring in July was much less than expected and that the jobless rate reached 4.3%, the highest in three years, stock prices plunged for two days on fears that the US might fall into a recession.
Some economists began speculating about a half-point Fed rate cut in September and perhaps another identical cut in November.
But healthier economic reports last week, including another decline in inflation and a robust gain in retail sales, partly dispelled those concerns.
Wall Street traders now expect the Fed to cut its benchmark rate by a quarter-point in both September and November and by a half-point in December. Mortgage rates have already started to decline in anticipation of rate reductions.
A half-point Fed rate cut in September would become more likely if there were signs of a further slowdown in hiring, some officials have said.
With the Associated Press
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