Federal Reserve Chairman Jerome Powell said the “time has come” for the central bank to adjust its monetary policy and suggested that interest rate cuts could soon lower borrowing costs for American consumers and businesses.
Powell, speaking at an annual meeting of central bankers in Jackson Hole, Wyoming, did not provide details on when a rate cut might come or how much it would be, although economists have planned a cut for the Fed’s Sept. 18 meeting. The benchmark interest rate is currently in a range of 5.25 to 5.5 percent, the highest in 23 years.
Powell indicated that the Fed would likely begin cutting its benchmark interest rate, citing some softening in the labor market and progress in battling high inflation. A drop in hiring and a rise in the unemployment rate last month heightened fears that the Fed could make a mistake in the other direction by keeping rates too high for too long, slowing growth and pushing the economy into recession.
“We do not seek or welcome a further slowdown in the labor market,” Powell said in his speech.
“The direction is clear and the timing and pace of rate cuts will depend on upcoming data, the evolving outlook and the allocation of risks,” he said.
Powell also signaled that the Federal Reserve is increasingly confident that inflation will continue to cool and eventually reach the bank’s 2% annual target, even as borrowing costs are reduced. In previous speeches, Powell had expressed concerns that rate cuts could stoke inflation and undo the Fed’s success in curbing the sharpest price increases in four decades.
“There are good reasons to believe that with an appropriate withdrawal of policy restraint, the economy will return to 2 percent inflation while the labor market remains strong,” Powell said.
After Powell’s comments, Wall Street rose sharply. The Dow Jones Industrial Average rose 378 points or 0.9 percent to 41,091. The S&P 500 gained 1.1 percent and the technology-heavy Nasdaq Composite rose 1.5 percent.
“Powell has given the green light to the tightening cycle,” said Seema Shah, chief strategist at Principal Asset Management, in an email. “The Federal Reserve is now very confident about the path of inflation – it is time to move to the other side of the dual mandate, and labor market risks now have their full attention.”
How big will the interest rate cut be?
One question that Powell’s speech left unanswered was the potential magnitude of a rate cut in September. Currently, about three out of four economists surveyed by financial services provider FactSet are forecasting a cut of 0.25 percentage points.
However, if August’s employment data is weaker than expected, it could increase the likelihood of a larger cut by 0.5 percentage points, experts said. The August employment report will be released on September 6.
“We continue to expect a cautious rate cut (0.25 percentage points), but Powell underscored our view that the Fed has room to increase the pace of rate cuts if labor market conditions worsen unexpectedly,” Nationwide chief economist Kathy Bostjancic noted in an email, referring to basis points.
She added that she expects further rate cuts before the end of the year, bringing the total cut to 0.75 percentage points. “However, we see the possibility of further rate cuts if employment growth slows abruptly,” she added.
What impact will this have on mortgage interest rates?
Mortgage interest rates have already fallen to the lowest level in 15 months, ahead of expectations that the Federal Reserve will cut its benchmark interest rate next month for the first time in four years.
However, a rate cut of 0.25 to 0.5 percentage points is likely to make little difference to borrowing costs for consumers, noted Ted Rossman, senior industry analyst at Bankrate, in an email. Nevertheless, mortgage rates will could fall furtherEspecially if inflation continues to fall and the labor market shows some weakness, experts point out.
“From a consumer perspective, it is important to note that lower interest rates will be a gradual process,” he said. “The downward trend is likely to be much slower than the series of rate hikes that quickly pushed the federal funds rate up 5.25 percentage points in 2022 and 2023.”
Although mortgage rates have already fallen, there have been no significant changes in interest rates on credit cards or car loans, he added.
– With reporting from the Associated Press.
