“It's time” for the US Federal Reserve to cut interest rates, says Powell | US economy

“The time has come,” the chairman of the US Federal Reserve said, to cut interest rates, welcoming progress in the fight to reduce inflation from its highest levels in a generation.

With price growth now on a “sustainable” path back to normal levels, Jerome Powell signaled that the central bank is ready to begin cutting interest rates next month.

The US labour market – which quickly recovered from the damage in the early months of the Covid-19 crisis and created millions of new jobs – now faces greater “downside risks”, he acknowledged. Unemployment rose slightly last month.

However, Powell expressed confidence that there were “good reasons” to believe that inflation could continue to decline without harming the world's largest economy – if the Fed acted now.

“It is time to adjust policy,” Powell said Friday at an annual symposium for central bankers 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.”

Two years ago, as inflation soared during the pandemic, Fed policymakers sought to cool the U.S. economy by raising interest rates to two-decade highs. Now price growth is declining—it rose 2.9% on an annualized basis in July, after peaking at 9.1% in June 2022—and they are preparing for, but not yet implementing, rate cuts.

Politicians hope to lead the US to a so-called “soft landing” in which inflation is normalized and a recession is avoided. The Fed's inflation target is two percent.

The central bank's next interest rate meeting is scheduled for September, when it is widely expected to cut interest rates for the first time since the outbreak of the Covid-19 pandemic four years ago.

In recent months, critics have accused the Fed of to derail the U.S. economy over concerns about its direction. A weaker-than-expected July jobs report, released a day after the Fed's renewed decision to keep interest rates unchanged, sparked a fleeting global sell-off.

There is an “unmistakable” slowdown in the labor market, Powell said on Friday in Jackson Hole. He pointed out that job creation has slowed, the number of job openings has declined and wage growth has slowed. “We do not seek or welcome a further slowdown in the labor market.”

The Fed will “do everything it can” to support the labor market while cutting interest rates, he said. “With an appropriate reduction in monetary policy restraint, there are good reasons to believe the economy can return to 2% inflation while maintaining a strong labor market.”

As he spoke, stock prices rose. The S&P 500 index rose 0.8 percent, while the technology-focused Nasdaq Composite rose 1 percent.

On Wall Street, analysts and economists have been trying for months to predict how quickly and how much the Fed will ultimately cut interest rates.

The Fed has “waited far too long,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. He described the central bank's change in tone since its June meeting – when it also left interest rates unchanged – as “surprising.”

“Today's speech is welcome, but it would have been much better for the economy if the Fed had given a little less weight to some disappointing inflation data and eased in June,” Shepherdson said. “March would have been even better, but policymakers were so determined not to be surprised by unexpected inflation again that they waited until the risk had become vanishingly small.”

In his speech on Friday, Powell recalled 2021, when he – and many economists – argued that inflation was a “transitory” consequence of supply and demand fluctuations caused by the pandemic, restrictions and lockdowns.

“The good ship Transitory was fully occupied, most of the mainstream analysts and central bankers from the developed world were on board,” he recalled. Central banks like the Fed were criticized for their early analysis of the rise in inflation.