Fed Lays Groundwork for Interest Rate Cuts As Inflation Cools
Federal Reserve Chair Jerome Powell gave a strong signal that interest rate cuts are coming, saying "the time has come for policy to adjust" after over a year of aggressive rate hikes aimed at taming stubbornly high inflation.
In his keynote speech at the Fed's annual Jackson Hole economic symposium on Friday, Powell noted the significant progress made in lowering inflation from last year's peak above 7%. With price pressures easing and the labor market no longer overheating, Powell indicated the central bank can now shift focus to sustaining the economic expansion.
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"Inflation has declined significantly. The labor market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic," the Fed chief said. "The balance of the risks to our two mandates has changed."
While Powell declined to provide specifics on the timing or magnitude of forthcoming rate cuts, markets widely expect the Fed to begin easing at its September meeting. The remarks solidified that expectation, with stocks rallying and Treasury yields dropping as Powell laid out the case for loosening monetary conditions.
However, Powell stressed that the path forward is data-dependent. "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," he cautioned.
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The speech also looked back at the pandemic-driven supply shocks and stronger-than-expected demand that fueled the highest inflation in over 40 years. Powell admitted the Fed was initially wrong to dismiss rising prices as "transitory."
Ultimately, the Fed's "forceful" rate hiking campaign over the past 18 months helped rein in inflation through cooling demand, without sparking the severe economic downturn and job losses seen in previous disinflationary cycles. Powell credited well-anchored inflation expectations for enabling a smoother path to price stability.
As the Fed now pivots to preventing an overly-restrictive policy stance from undermining the labor market's resilience, it must walk a tightrope of engineering a soft landing and sustaining the economic expansion. But with inflation pressures abating, the central bank appears ready to start easing the brakes on its interest rate increases.
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