Fed Chair Jerome Powell Signals Potential Interest Rate Cuts

the staff of the Ridgewood blog

Ridgewood NJ, in a highly anticipated keynote address at the Federal Reserve’s annual retreat in Jackson Hole, Wyoming, Fed Chair Jerome Powell set the stage for potential interest rate cuts, though he stopped short of providing specific details on timing or scale.

“The time has come for policy to adjust,” Powell stated, indicating a shift in the central bank’s approach. “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.”

The speech comes as markets eagerly await direction on future monetary policy. Powell’s address not only highlighted past inflationary pressures, which led to a series of 11 rate hikes from March 2022 to July 2023, but also underscored the progress made in cooling inflation and stabilizing the labor market.

Powell noted that inflation has significantly decreased, with the Fed’s preferred measure currently at 2.5%, down from 3.2% a year ago and well below its peak of over 7% in June 2022. The labor market, while showing signs of moderation, remains strong with conditions less tight than before the pandemic.

“We have made a good deal of progress toward restoring price stability while maintaining a robust labor market,” Powell said, emphasizing the Fed’s dual mandate. He reassured that the central bank is committed to ensuring the labor market remains strong while continuing to tackle inflation.

Market reactions were swift. Stocks gained and Treasury yields dropped as Powell began his address. Traders now see a nearly certain chance of at least a quarter-point rate cut in September, with the possibility of a half-point reduction rising to about one in three, according to CME Group’s FedWatch.

Economists interpreted Powell’s speech as a signal that the Fed is ready to pivot. “This was essentially Chair Powell turning the page,” said Paul McCulley, a former Pimco managing director, on CNBC’s “Squawk on the Street.” “He’s acknowledging that the inflation battle has largely been won.”

Despite the positive outlook, Powell refrained from specifying when the Fed would implement rate cuts. Minutes from the July FOMC meeting, released earlier this week, suggested a “vast majority” of officials believe a rate cut in September is likely, provided no unexpected data emerges.

In his address, Powell also reflected on the initial misjudgment of inflation as “transitory,” a term many central bankers and economists used early in the pandemic. He humorously acknowledged the error, noting, “The good ship Transitory was a crowded one,” referring to the widespread belief that inflationary pressures would be short-lived.

Powell attributed the inflation surge to a combination of factors including increased demand for goods, strained supply chains, tight labor markets, and rising commodity prices. He commended the Fed’s actions in managing inflation without precipitating a severe recession, attributing this success to well-anchored inflation expectations and the Fed’s commitment to restoring price stability.

As Powell concluded, he emphasized that while much has been achieved, there is still more to learn from the current economic landscape. “That is my assessment of events. Your mileage may differ,” he said, leaving markets and observers to await further developments with keen interest.

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