Powell: “The time has come” for a rate cut, citing the weakening labor market

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Diving certificate:

• Federal Reserve Chairman Jerome Powell signaled the central bank's intention to reduce borrowing costs at the September meeting, citing the cooling of the labor market and progress in limiting inflation to the Fed's two percent target.
• “It is time to reorient politics,” Powell said on Fridaysuggesting that policymakers will cut the benchmark interest rate at their meeting on September 17-18. “Inflation is now much closer to our target,” he said.
• Explaining the impending policy shift, Powell said the Fed is more focused on the health of the labor market than it was earlier this year and wants to avoid the widespread job losses that often occur when monetary policy is tightened. “We do not seek or welcome a further slowdown in labor market conditions,” Powell said.

Diving insight:

Powell did not comment on the extent of an impending rate cut, keeping alive the debate among investors and economists about how far policymakers will cut the benchmark interest rate from its current range of 5.25 to 5.5 percent.

“The direction is clear,” he said, adding that “the timing and pace of rate cuts will depend on upcoming data, the evolving outlook and the allocation of risks.”

After Powell’s speech, traders were in Fed Funds Futures set According to the CME FedWatch tool, the probability that the central bank will cut interest rates by a quarter of a percentage point next month is 66 percent, and that it will only be half a percentage point is 34 percent. On Thursday, the probability of a quarter of a percentage point cut was 76 percent, and that it will be half a percentage point cut was 24 percent.

Several central bank representatives have recently called for an easing of their monetary policy.

“If you look at the level of tightening set by the Fed – Fed funds minus inflation – it's the highest in decades.” Austan Goolsbee, President of the Chicago Fed said after Powell's speech.

“You should only be that strict if you want to cool down an overheated economy, and you can't talk about overheating here,” he told CNBC.

“We also want to be cautious, as Chairman Powell said, on the employment side of the mandate. We are not just fighting inflation now – inflation is on track to reach 2%,” Goolsbee said.

The price index for personal consumption expenditures rose 2.5 percent in the 12 months to June and probably remained at that level last month, Powell said at a meeting of central bankers in Jackson Hole, Wyoming.

“Several” Fed officials saw an argument for reducing credit costs at their most recent meeting on 30 and 31 July, according to the minutes of the meeting published on Wednesday.

“The vast majority” of meeting participants said that if price pressures persist as expected, “it would probably be appropriate to ease monetary policy at the next meeting” in September, the minutes say.

Since the start of 2022, policymakers have made uneven progress in reducing inflation from its highest level in four decades to its target. The consumer price index rose 2.9% year-on-year last month – a three-year low.

“The numbers are starting to move in a direction that suggests that our policies are having an impact and that we can start on the path to a return to a normal political stance,” Raphael Bostic, President of the Atlanta Fed said Friday.

“We can't wait until the rate is 2 percent before we move,” he told CNBC ahead of Powell's speech, noting that the labor market is not in a steep downturn.

“We do not have a crisis in the labor markets,” he said. “I would say they are weakening, but they are not weak.”

The unemployment rate rose to 4.3% last month from 4.1% in June. The number of employees only increased by 114,000. under forecasts and the lowest monthly increase this year.

At the same time, Bostic said policymakers could not declare victory in the fight against inflation.

“If you look at inflation, it's not particularly close to our targets,” he said. “We have a dashboard on our website on underlying inflation, right? It's all still flashing red.”

Goolsbee also pointed to “warning lights” pointing to consumer delinquency rates, small business defaults and parts of the labor market. “On the other hand, there are also great strengths in the economy,” Goolsbee said.