Fed’s Jerome Powell Signals Rate Cut: ‘Time Has Come for Policy to Adjust’

Business Matters August 23

Employment and inflation data have depicted an evolving situation in the U.S. economy, indicating that “the time has come for policy to adjust,” says Federal Reserve Chair Jerome Powell.

Speaking at the central bank’s annual Jackson Hole Economic Symposium, Powell gave the green light to change the institution’s monetary policy stance. He stopped short of announcing the timing and pace of interest rate cuts, reiterating that the Fed will be data-dependent.

“The time has come for policy to adjust,” Powell stated. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

The Fed chief offered reasons for altering policy: Inflation has eased, the job market is “no longer overheated,” and the global supply chain has “normalized.”

“And the balance of the risks to our two mandates has changed,” he added.

The Fed maintains a dual mandate of price stability and maximum employment.

Powell’s speech comes as the Fed’s preferred inflation gauge—the personal consumption expenditure (PCE) price index—slowed to 2.5 percent.

At the same time, the unemployment rate rose to 4.3 percent in July, the highest level since October 2021. Powell attributed the sudden jump in joblessness to more individuals entering or returning to the workforce and a slower pace of hiring.

“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.”

Market Reaction

The U.S. financial markets responded favorably to Powell’s Jackson Hole address.

Leading benchmark indexes rallied as much as 1.8 percent during his speech.

U.S. Treasury yields were mostly red across the board, with traders pricing in rate cuts. The benchmark 10-year yield sank below 3.8 percent. The 2-year yield tumbled underneath 4 percent.

The U.S. dollar index, a measure of the greenback against a basket of currencies, tanked by 0.4 percent toward 101.00.

Ted Rossman, the senior industry analyst at Bankrate, says Powell’s remarks primarily conveyed the message that inflation is fading into the background while the job market has slowed.

“The main theme of Powell’s speech was that inflation continues to fade, and while fighting inflation has been the Fed’s primary objective over the past couple of years, now it’s time to put more attention on the other side of the Fed’s dual mandate—maximum employment,” Rossman said. “Powell signaled that the job market has weakened, and while it’s still in pretty good shape, the Fed doesn’t want it to get any worse.

“Rate cuts are coming, almost certainly to begin next month, although the pace and depth of these cuts in the months and years to come remains uncertain.”

Fed’s Bostic May Support Multiple Rate Cuts This Year

Atlanta Fed President Raphael Bostic told CNBC ahead of Powell’s speech that his support of more than one rate cut by the end of the year is “in play.”

Citing data that have begun “to move in a direction which suggest that [the Fed’s] policy has had its effect,” Bostic stated that the central bank “can start the pathway back to a normal policy posture.”

“We can’t wait until inflation is at 2 percent itself to start moving,” Bostic said. “The data has come in in a way that would suggest that it’s going to be appropriate to be closer to moving [interest rates] than further, and for me, I just want to make sure the next couple of data points are consistent with that.”

Bostic had previously projected one rate cut in the fourth quarter.

Philadelphia Fed President Patrick Harker was more forthcoming, telling the business news network on Aug. 22 that the Fed can “start a process of moving rates down” in September.

Though he is neither in the camp of lowering rates by 25 or 50 basis points, Harker noted that the institution should ease “methodically and signal well in advance.”

The Fed’s next two-day policy meeting will take place on Sept. 17 and 18.