US Fed chief signals rate cut and shifts focus from inflation to unemployment – ​​Firstpost

In a highly anticipated speech at the Jackson Hole Symposium on Friday, Federal Reserve Chairman Jerome Powell said the time had come for the Fed to cut its benchmark interest rate, making clear his intention to prevent a further slowdown in the labor market.

“It is time to adjust policy. 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,” Powell said.

In view of high inflation during the Covid-19 pandemic, the U.S. Monetary Policy Committee, as part of its commitment to restore price stability, raised the federal funds rate by 425 basis points in 2022 and by a further 100 basis points in 2023. It has maintained the federal funds rate at its current restrictive level since July 2023. For most of the past three years, inflation has been well above the Fed's 2 percent target and labor market conditions have been extremely tight.

Inflation in the U.S. peaked in the summer of 2022 and has since fallen by 4 to 4.5 percentage points from its peak. “Our tight monetary policy contributed to a moderation in aggregate demand, which, combined with an improvement in aggregate supply, reduced inflationary pressures while enabling healthy growth,” Powell said.

“After a pause earlier this year, progress towards our two percent target has resumed. I have become more confident that inflation is on a sustainable path back to two percent,” he said.

At its last meeting on July 30 and 31, 2024, the Federal Open Market Committee (FOMC) decided to keep the target range for the federal funds rate at 5.25 to 5.5 percent. During the COVID-19 pandemic, interest rates were close to zero.

Raising interest rates is a monetary policy tool that usually helps dampen demand in the economy and thus reduce the rate of inflation. According to Fed minutes released this week, the majority of Fed members at the last monetary policy meeting indicated a rate cut for the September meeting.

But not everything is good in the US labor market. Powell said the labor market has cooled significantly from its previously overheated state, but is still on the high side.

“The unemployment rate began rising over a year ago and is now at 4.3 percent – still low by historical standards, but almost a full percentage point above the level seen in early 2023 (Figure 2). Most of this increase has occurred in the past six months. So far, rising unemployment has not been the result of increased layoffs, as is typically the case in an economic downturn. Rather, the increase primarily reflects a significant increase in labor supply and a slowdown in the previously frenetic pace of hiring,” Powell explained.