Fed chief Jerome Powell: Time to start cutting interest rates

JACKSON HOLE, Wyoming (AP) — With inflation almost defeated and the cooling of the labor market, the Federal Reserve is prepared to cut its key interest rate from the current 23-year high, Chairman Jerome Powell said on Friday.

Powell did not say when the rate cuts would begin or how large they might be, but the Fed is widely expected to announce a modest quarter-point cut in rates at its mid-September meeting.

“The time has come for policy adjustment,” Powell said in his keynote address at the Fed’s annual economic conference 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 balance of risks.”

His reference to multiple rate cuts was the only indication that a series of cuts is likely, as economists have predicted. Powell stressed that after the worst price spike in four decades hurt millions of households, inflation largely under control:

“My confidence has grown,” he said, “that inflation is on a sustainable path back to 2%.”

According to the Fed’s preferred measure, inflation fell to 2.5% last month, well below the peak of 7.1% two years ago and only slightly above the central bank’s target level of 2%.

The Fed chairman also said interest rate cuts should maintain economic growth and support employment, which slowed last month. Sustained growth could boost Vice President Kamala Harris’ presidential campaign, even as most Americans say they are dissatisfied with the Biden-Harris administration’s economic performance, largely because average prices remain well above predate the pandemic.

“We will do everything we can,” Powell said, “to support a strong labor market as we make further progress toward price stability.”

By cutting rates, he said, “there is good reason to think the economy will return to 2% inflation while the labor market remains strong.”

A mid-September rate cut, coming less than two months before the presidential election, could create some unwanted political tension for the Fed as it tries to avoid getting caught up in election-year politics. Former President Donald Trump has argued that the Fed should not cut rates so close to the election. But Powell has repeatedly underlined that the central bank would make its interest rate decisions based solely on economic data, without taking into account the political calendar.

In what amounted to a claim of victory, Powell noted in his speech on Friday that the Fed had managed to overcome high inflation without causing a recession or a sharp rise in unemployment, which many economists had long predicted.

The Fed chairman attributed that outcome to the resolution of the pandemic’s disruptions to supply chains and labor markets, as well as a decline in job openings, which allowed wage growth to cool.

After the government reported this this month hiring in July was much lower than expected and the unemployment rate reached 4.3%the highest in three years, stock prices fell for two days on fears the US could enter a recession. Some economists began speculating about a half-point Fed rate cut in September and perhaps another identical cut in November.

But healthier economic reports from last week, including another one decrease in inflation and a solid profit retailhas partially addressed these concerns. Wall Street traders now expect the Fed to cut rates by a quarter point in both September and November, and by half a point in December. Mortgage rates have already started to fall in anticipation of rate cuts.

A half-point Fed rate cut in September would become more likely if there were signs of a further slowdown in hiring, some officials say.