Time has come for rate cuts, Fed Chair Powell says

In his eagerly awaited speech at the central bank conference in Jackson Hole, Fed Chair Powell repeated earlier statements that the risks for inflation have decreased and those for employment have increased. Powell went into detail about the labor market, which has “cooled considerably from its formerly overheated state”. However, he also pointed out that the rise in unemployment was not due to a wave of layoffs (i.e. a cyclically lower demand for labor), but to an increasing labor supply. Powell pointed out that, all in all, the situation on the labor market is less tense today than it was shortly before the pandemic in 2019 – a year in which inflation was below 2%. It therefore seems unlikely that the labor market will lead to increased inflationary pressure in the near future, he concluded. Powell also reiterated his earlier statement that the Fed does not want any further cooling on the labor market. Overall, Powell seemed more concerned about the employment than the inflation mandate.

Powell concluded by saying that it was time to adjust policy. This is a hint that interest rates will be cut at the next meeting in September (although this should come as no surprise to anyone). However, he gave no indication as to whether he has a move of 25 or 50 basis points in mind. He was also vague on the way forward: “The direction is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks [to inflation and employment].” Powell also pointed out that there is “ample” room to adjust policy should the labor market situation deteriorate further. This is an indication that the Fed would not shy away from substantial interest rate cuts in this case.

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