The Federal Reserve Chair, Jerome Powell, announced at the annual economic conference in Jackson Hole, Wyoming that the Fed is prepared to start cutting its key interest rate from its current 23-year high. The decision comes as inflation is under control and the job market is cooling down, signaling a shift in focus towards economic growth and employment. Powell did not specify when rate cuts would begin or how large they might be, but it is widely expected that the Fed will announce a modest quarter-point cut at its upcoming meeting in mid-September.
Powell’s assurance of rate cuts coming soon led to a rally on Wall Street, with bond yields falling and stock indexes rising. Economists anticipate that the Fed will lower its benchmark rate by a quarter-point at each of its final three meetings this year. While the exact timing and magnitude of the cuts are yet to be determined, the move is expected to lead to lower rates for consumer borrowing, including auto loans and mortgages, as well as potentially boosting stock prices. Powell emphasized that the rate cuts are intended to support a strong labor market and bring inflation back to the Fed’s 2% target level.
The timing of the rate cuts, less than two months before the presidential election, may invite political scrutiny on the Fed. Former President Donald Trump has argued against rate cuts so close to an election, but Powell has emphasized that the decisions will be based on economic data rather than the political calendar. Powell acknowledged concerns about slower hiring and rising unemployment rates, indicating a dual focus on economic growth and inflation control. He noted the success of the Fed in managing high inflation without causing a recession or sharp rise in unemployment, attributing it to external factors like the unraveling of supply chain disruptions caused by the pandemic.
Powell addressed criticism regarding the Fed’s delayed response to surging inflation after the pandemic recession, admitting that the supply chain disruptions took longer to heal than anticipated. Despite initial expectations of transitory price spikes, high inflation persisted, prompting the Fed to adjust its strategy and focus on managing inflation expectations. Powell highlighted the importance of maintaining inflation at a sustainable level while supporting a strong labor market. The Fed’s rate cuts are aimed at achieving a soft landing, where inflation falls back to the desired target without causing a recession.
In a separate context, Andrew Bailey, governor of the Bank of England, expressed cautious optimism about declining inflation in the UK but warned that the job was not yet completed. The Bank of England recently cut its key rate for the first time in four years, reflecting a similar approach to managing inflation and economic growth as the Federal Reserve. Both central banks are navigating the delicate balance between controlling inflation, supporting employment, and stimulating economic growth amidst ongoing uncertainties. Powell’s announcement of rate cuts signals a strategic shift in the Fed’s policy direction, aiming to sustain economic expansion while keeping inflation in check.
