Federal Reserve Chairman Jerome Powell signaled on Friday that the central bank is prepared to begin lowering its key interest rate, likely starting next month, as the Fed seeks to prevent further deterioration in the labor market while continuing to monitor inflation.
“The time has come for policy to adjust,” Powell said in a closely watched speech at the Federal Reserve’s annual symposium in Jackson Hole, Wyoming. He emphasized that the pace and timing of rate cuts will be data-dependent, reflecting the evolving economic outlook and the balance of risks.
Powell acknowledged recent progress on inflation, which has resumed its downward trajectory after a period of resurgence earlier this year.
“My confidence has grown that inflation is on a sustainable path back to 2 percent,” he said.
While Powell’s remarks provided some clarity on the Fed’s near-term plans, they left open questions about the central bank’s strategy beyond September. The speech marked a potential turning point in the Fed’s two-year effort to curb inflation, a campaign that has seen the labor market remain resilient despite aggressive rate hikes.
The Fed has held its benchmark interest rate in a range of 5.25 percent to 5.5 percent—the highest level in over two decades—for the past year, a move designed to elevate borrowing costs across the economy in order to tame inflation.
However, as inflation edges closer to the Fed’s 2 percent target, signs of stress are emerging in the labor market, prompting concern among Fed officials that persistently high rates could undermine economic stability. The July employment report, which showed weaker-than-expected job growth, added to these concerns and rattled financial markets.
As well, this week the Labor Department released revisions to its estimates of nonfarm payrolls that showed the economy added roughly 818,000 fewer jobs than the monthly jobs reports had estimated. This suggests the labor market began to soften earlier than was thought.
“We do not seek or welcome further cooling in labor market conditions,” Powell said, noting that the slowdown in hiring was becoming increasingly evident.
A Strategic Pivot
Powell’s remarks underscore the Fed’s cautious approach as it navigates this critical juncture. After initially being slow to respond to the inflationary pressures that arose during the pandemic, the central bank is now keen to avoid another policy misstep as price increases begin to moderate. The success of this strategy will determine whether the economy can achieve a so-called soft landing, where inflation is brought under control without triggering a recession.
“Our objective has been to restore price stability while maintaining a strong labor market, avoiding the sharp increases in unemployment that characterized earlier disinflationary episodes when inflation expectations were less well anchored,” Powell said. “While the task is not complete, we have made a good deal of progress toward that outcome.”
At their July meeting, most Fed officials indicated that a rate cut would likely be warranted in September if economic data continued to align with their expectations.
Although inflation remains above the Fed’s target, it has declined significantly from its peak in 2022. The central bank’s preferred inflation gauge, the personal consumption expenditures price index, rose 2.5 percent in June compared with a year earlier.
Outlook Remains Uncertain
Powell’s comments are likely to be welcomed by consumers and businesses facing high borrowing costs for mortgages, auto loans, and other credit. Investors are widely anticipating a quarter-point rate cut at the Fed’s next policy meeting on September 17-18.
Although many progressives have called on the Fed to cut, Powell’s words may not be all that welcome by Kamala Harris and Democrats because they emphasized the risk of further weakening of the labor market.
Nonetheless, significant uncertainties remain regarding the Fed’s path forward. Another weak jobs report could prompt a larger-than-expected 50 basis point rate cut in September. Additionally, there is ongoing debate about the pace and size of subsequent rate cuts in the months ahead. Some analysts expect that the Fed will cut at the November and December meetings (there is no October meeting), while others believe the Fed will move at a more measured pace, perhaps cutting every other meeting to see how the economy adjusts to lower rates.
Powell offered no clarification on what path the Fed will take after the September meeting.
