– Leaves Timing and Amount of Rate Cuts In Doubt
– Says Inflation Risks Receding While Employment Risks Rising.
By Steven K. Beckner
(MaceNews) – Federal Reserve Chair Jerome Powell left no doubt Friday that he and his fellow monetary policymakers will begin lowering interest rates next month, but was far less clear about how much cutting they will do in September and in subsequent months.
Powell strongly indicated that on Sept. 18 the Fed’s rate-setting Federal Open Market Committee will begin lowering its federal funds rate target from 5.25-5.50%, where it’s been since last July, declaring that “the time has come for policy to adjust.”
But he left in doubt the size and frequency of rate cuts in coming months, saying, “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.”
Powell, addressing the Kansas City Federal Reserve Bank’s annual Jackson Hole symposium, said his “confidence has grown” that inflation is headed sustainably toward the Fed’s 2% target, while at the same time his concern has mounted about the “maximum employment” side of the Fed’s “dual mandate” in wake of a series of disappointing labor market data.
As the Fed chief put it: “The upside risks to inflation have diminished. And the downside risks to employment have increased.”
After the FOMC left rates unchanged at its July 31 meeting, Powell told reporters the FOMC had shifted to focusing on “risks to both sides of its dual mandate”; that it was “getting closer” to “dial(ing) back the restriction in our policy rate,” and that an initial rate cut would be “on the table” at the Sept. 17-18 meeting.
Two days later, a disappointing July employment report and other worrisome economic indicators triggered a Wall Street sell-off and heightened speculation that the FOMC might have to cut rates more aggressively to stave off recession. But since then, markets have rallied as fears of economic weakness diminished.
In his anxiously awaited Jackson Hole speech, Powell made clear that the FOMC is ready to start unwinding some of the 525 basis points of monetary tightening it implemented after leaving the zero lower bound for its policy rate in March 2022.
“Our restrictive monetary policy helped restore balance between aggregate supply and demand, easing inflationary pressures and ensuring that inflation expectations remained well anchored,” he told an all-star assemblage of central bankers, including other Fed officials and staffers, and prominent economists.
“Inflation is now much closer to our objective, with prices having risen 2.5% over the past 12 months,” he continued. “After a pause earlier this year, progress toward our 2%t objective has resumed.”
“My confidence has grown that inflation is on a sustainable path back to 2%.” he added, thereby citing an important precondition for easing that he and his colleagues had laid down for months.
On the employment side of the Fed’s mandate, Powell observed that “the labor market has cooled considerably from its formerly overheated state.”
“The unemployment rate began to rise over a year ago and is now at 4.3%—still low by historical standards, but almost a full percentage point above its level in early 2023….,” he continued.
“The cooling in labor market conditions is unmistakable,” Powell went on, adding that that tight labor market conditions no longer seem to be a source of wage-price pressures for the Fed.
“It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon,” he said. “We do not seek or welcome further cooling in labor market conditions.”
Using the central bank jargon of “risk management,” Powell asserted, “The upside risks to inflation have diminished. And the downside risks to employment have increased.”
“As we highlighted in our last FOMC statement, we are attentive to the risks to both sides of our dual mandate,” he added.
Given that backdrop of diminishing inflation fears and increasing labor market concerns, Powell told the symposium attendees, “The time has come for policy to adjust.”
But whether the FOMC will cut rates by 25 basis points on Sept. 18 or by 50 basis points as some have advocated, and whether the FOMC will cut rates again in November and December remains undecided, or at least unclear from Powell’s remarks.
“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 said.
“We will do everything we can to support a strong labor market as we make further progress toward price stability,” Powell elaborated. “With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2 percent inflation while maintaining a strong labor market.”
As he has said many times before, Powell said, “the current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions.”
Powell’s remarks come two days after the Bureau of Labor Statistics announced a startling 818,000 downward revision to non-farm payrolls for the 12 months through March, demonstrating the job market was considerably softer than assumed and upping odds of Fed rate cuts. The same day, minutes of the late July FOMC meeting showed Fed officials were already more concerned about downside risks to employment and less worried about upside risks to inflation.
The minutes say, “the vast majority vast majority observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting.”
The theme of this year’s Jackson Hole symposium is “Reassessing the Effectiveness and Transmission of Monetary Policy.” Officials will discuss academic presentations on that topic — aptly enough as the Powell Fed prepares to relax credit in a bid to preserve and prolong progress against inflation while preventing recession – the elusive “soft landing.” Ever conscious of the “long and variable lags” with which monetary policy impacts the economy, the FOMC must calibrate how much and how quickly to lower rates.
With nearly four weeks to go before the FOMC meets, Fed officials have become more open to rate cutting, but have avoided sending strong easing signals. Reputedly dovish Chicago Federal Reserve Bank President Austan Goolsbee said early this week that a September rate cut is not “a certainty.” San Francisco Fed President Mary Daly said it’s time to consider adjusting rates slower, but advocated a “prudent” course of “gradualism.”
On the more hawkish side, Fed Governor Michelle Bowman said she will “remain cautious in (her) approach to considering adjustments to the current stance of policy.” Calling inflation still “somewhat elevated” and citing “some upside risks to inflation,” she said the Fed “need(s) to pay close attention to the price-stability side of our mandate while watching for risks of a material weakening in the labor market.”
Minneapolis Fed President Neel Kashkari indicated he’s become more open to cutting rates, saying, “The balance of risks has shifted, so the debate about potentially cutting rates in September is an appropriate one to have.”