“The time has come for policy to adjust,” Powell said in a highly anticipated speech to the Kansas City Fed’s annual economic conference in Jackson Hole, Wyoming. “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.”
Opening a new chapter for the central bank, Powell said his “confidence has grown that inflation is on a sustainable path back to 2 per cent,” after rising to about 7 per cent during the COVID-19 pandemic, and the upside risks have diminished.
Meanwhile, he said, a slowdown in the labour market is “unmistakable” and “the downside risks to employment have increased.”
And while slower hiring, rather than a more concerning rise in layoffs, has so far driven the rapid rise in the unemployment rate to 4.3 per cent, Powell was emphatic that the Fed would not countenance further erosion.
“We do not seek or welcome further cooling in labour market conditions,” Powell said. “We will do everything we can to support a strong labour market as we make further progress toward price stability.”
Analysts and financial markets had already widely expected the Fed to deliver its first rate cut at the Sep 17-18 policy meeting, a view that was cemented after a readout of the central bank’s July meeting said a “vast majority” of policymakers agreed the policy easing likely would begin next month.
Powell’s new emphasis on protecting the job market shifts the focus to the size of that first rate cut, which may now largely hinge on the Sep 6 release of the US government’s employment report for August.
With its policy rate currently in the 5.25 per cent – 5.50 per cent range, the Fed has “ample room” to reduce borrowing costs to cushion the labour market, Powell said.
After his remarks, traders moved to price in a better than one-in-three chance that the Fed will start its easing cycle with a half-percentage-point rate cut, and are fully confident of at least one super-sized cut before the end of the year.
“Chair Powell’s speech made it clear that there are likely a series of rate cuts on the way, and some could be of the 50-basis-point variety,” wrote Omair Sharif, the president of Inflation Insights. “While some Fed officials may want to go in 25-basis-point increments, the Chair retained optionality … i.e., ‘we’ll go 50 basis points if we feel like it is needed.'”
Markets are betting the Fed’s policy rate will be in the 3.00 – 3.25 per cent range by the end of 2025, more than 2 percentage points below where it is now.
US stocks jumped after the release of Powell’s remarks, with the benchmark S&P 500 nearing a record high. US Treasury yields dropped and the dollar weakened against a basket of currencies.
