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Powell signals likely rate cut in September

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By stating that inflation is easing while the labor market is weakening, Federal Reserve Chairman Jerome Powell sent the clearest signal yet that the central bank intends to begin cutting historically high interest rates in September.

He gave no indication of how much the Fed will cut its benchmark interest rate, but most forecasters expect a quarter-percentage point cut.

“It is time to adjust policy,” Powell said in a written speech he will deliver at 10 a.m. at the Fed's annual symposium in Jackson Hole, Wyoming. “The direction is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the allocation of risks.”

He added: “While the task is not yet complete, we have already made great progress toward that outcome… I am confident that inflation is on a sustainable path back toward 2 percent,” which is the Fed's inflation target.

The language and tone shift are significant. For months, the Fed has said it would not cut its benchmark interest rate – currently at a 23-year high of 5.25% – to 5.5% until officials were confident inflation was on a sustainable path to 2%. In June, the Fed's preferred inflation measure was 2.5%, down from a peak of 5.6% in mid-2022.

At the same time, the labor market, which experienced record job growth and strong wage increases after the COVID pandemic, is easing again.

“The upside risks to inflation have diminished,” Powell said. “And the downside risks to employment have increased.”

“It appears unlikely that the labor market will be a source of increased inflationary pressures in the near future,” he added. “We do not seek or welcome a further slowdown in labor market conditions.”

After a report earlier this month showed unusually weak job growth in July and stock markets plunged, many forecasters said the Fed might cut interest rates by half a percentage point. Since then, however, strong economic reports have allayed concerns and markets have recovered.

Fed rate cuts would lower borrowing costs for mortgages, credit cards and other consumer and business loans and would likely boost the stock market. They would also lower returns on bank savings accounts, which have recently returned to healthy returns.

Powell's comments were widely expected after recent reports showed inflation continued to fall last month while the labor market weakened. His comments went beyond those he made at a press conference earlier this month after the Fed left interest rates unchanged, when he said inflation had fallen significantly and policymakers could cut rates in September “if the data supports it.”

Since then, reports have shown that another inflation indicator, the consumer price index, fell to 2.9% in July, the lowest level in three years. Meanwhile, U.S. employers added just 114,000 new jobs last month, far below the 175,000 expected, and the unemployment rate rose from 4.1% to 4.3%, the highest since October 2021.

The numbers were so disappointing that stock markets plunged on fears of a recession. And the Fed made a mistake by not cutting interest rates at its meeting in early August or earlier. Many economists predicted the central bank would cut rates by half a percentage point next month, rather than the usual quarter of a percentage point.

The Fed raises interest rates to reduce borrowing and economic activity and to curb inflation. It lowers interest rates to stimulate the economy and the labor market and to avert or lead the country out of a recession.

But recent positive economic reports calmed nerves and stock prices rebounded, more than making up for losses from a few weeks ago. Robust retail sales were better than expected in July. And initial jobless claims – a reliable indicator of layoffs – have fallen sharply in recent weeks after a sharp rise last month.

Still, forecasters have said a weak August jobs report could necessitate a half-percentage-point cut, especially if inflation continues to ease this month.

And more broadly, the labor market is slowing significantly as employers are hiring less and investing less following the Fed's historic rate hikes. While employers still added a solid 170,000 jobs over the past three months, that's down from the 227,000 jobs added from January to April.

By the end of the year, futures markets now expect the Fed to cut its short-term key interest rate three times by a total of up to one percentage point.

From March 2022 to July 2023, the Fed raised its benchmark interest rate from near zero to a 23-year high of 5.25% to 5.5% to contain the largest rise in inflation in 40 years.

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