WASHINGTON– US Federal Reserve Chairman Jerome Powell indicated on Friday that the central bank would soon begin cutting interest rates.
At an annual meeting in Jackson Hole, Wyoming, Powell said it was “time” for the Fed to adjust its interest rate policy. The announcement comes after years of efforts to fight inflation with sharply increased interest rates.
Powell did not say when the rate cuts would begin or how large they might be. However, it is widely expected that the Fed will announce a modest quarter-percentage point cut in its benchmark interest rate at its meeting in mid-September.
His reference to multiple rate cuts was the only indication that a series of cuts is likely, as economists have predicted. Powell stressed that inflation appears largely under control after the worst price increase in four decades hit millions of households:
“My confidence has grown,” he said, “that inflation is on a sustainable path back to two percent.”
According to the Fed’s preferred measure, inflation fell to 2.5 percent last month, well below its peak of 7.1 percent two years ago and just above the central bank’s target of 2 percent.
The Fed chair also said interest rate cuts should keep the economy growing and sustain hiring, which began to slow 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 record, especially because average prices remain well above pre-pandemic levels.
“We will do everything we can,” Powell said, “to support a strong labor market while we continue to make progress toward price stability.”
By lowering interest rates, he said, “there are good reasons to believe that the economy will return to a 2 percent inflation rate while maintaining a strong labor market.”
A rate cut in mid-September, less than two months before the presidential election, could bring unwelcome political pressure to the Fed, which wants to avoid getting caught up in election-year politics. Former President Donald Trump argued that the Fed should not cut rates so close to an election, but Powell has repeatedly stressed that the central bank will make its rate decisions based solely on economic data and without regard to the political calendar.
Powell said in his remarks that the Fed is increasingly concerned about the declining hiring rate and the rising unemployment rate, although it still aims to continue to lower inflation. This dual focus replaces the Fed’s previous sole focus on inflation.
“The slowdown in the labor market is unmistakable,” the Fed chairman said. “Employment gains remain solid but have slowed this year. … We are not seeking, nor do we welcome, a further slowdown in the labor market.”
In a victory lap of sorts, Powell noted in his speech on Friday that the Fed had succeeded in getting high inflation under control without triggering a recession or a sharp rise in the unemployment rate, as many economists had long predicted.
The Fed chairman attributed this result to the elimination of supply chain and labor market disruptions caused by the pandemic, as well as a decline in job openings, which led to a slowdown in wage growth.
Powell also addressed criticism that the Fed had raised interest rates too slowly, even though inflation had already begun to rise after the end of the pandemic recession. Higher interest rates are intended to curb borrowing and spending, slow the economy and dampen price increases.
Fed officials had initially argued that the pandemic-related price increases in early 2021 were merely “temporary” and would soon subside once the supply chain disruptions that had led to empty supermarket shelves and empty car parking lots were overcome.
Powell acknowledged that it had taken much longer to resolve supply bottlenecks than the Fed expected – and the same was true for the continuation of high inflation.
“The good ship was crowded, with most of the mainstream analysts and central bankers from the developed world on board,” Powell said. “I think I see some shipmates out there today,” he said in an impromptu remark to the economists and central bankers gathered for the conference.
After the government announced this month that July hiring was much lower than expected and the unemployment rate hit 4.3%, the highest in three years, stocks plunged for two days on fears the U.S. could slide into recession. Some economists were already speculating about a half-percentage-point Fed rate cut in September and perhaps another cut of the same amount in November.
But more positive economic reports last week, including a further decline in inflation and a sharp rise in retail sales, partially eased those worries. Wall Street traders now expect the Fed to cut its benchmark interest rate by a quarter of a percentage point in September and November and by half a percentage point in December. Mortgage rates have already started to fall in anticipation of rate cuts.
A half-percentage-point Fed rate cut in September would be more likely if there were signs of a further decline in hiring, some policymakers said.
The Associated Press and ABC News contributed to this report.
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