JACKSON, Wyoming (AP) 鈥� With inflation and the job market cooling, the Federal Reserve is prepared to start cutting its key interest rate from its current 23-year high, Chair Jerome Powell said Friday.
Powell did not say when rate cuts would begin or how large they might be, but the Fed is widely expected to announce a modest quarter-point cut in its benchmark rate when it meets in mid-September.
鈥淭he time has come for policy to adjust," Powell said in his keynote speech at the Fed's annual economic conference in Jackson Hole, Wyoming. 鈥淭he 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.鈥�
His reference to multiple rate cuts was the only hint that a series of reductions is likely. Powell stressed that inflation, after the worst price spike in four decades inflicted pain on millions of households, appears . According to the Fed鈥檚 preferred measure, inflation fell to 2.5% last month, far below its peak of 7.1% two years ago and only slightly above the central bank鈥檚 2% target level.
鈥淢y confidence has grown," he said, 鈥渢hat inflation is on a sustainable path back to 2%.鈥�
Powell鈥檚 assessment signaled that the Fed is making a fundamental shift from its 2 1/2-year fight against inflation, toward a broader effort to keep the economy growing and employers hiring.
The Fed chair's assurance that rate cuts are coming helped fuel a rally on Wall Street. Bond yields fell, and stock indexes were broadly higher.
鈥淭he only question remaining for the Sept. 18 meeting is: By how much will the Fed be cutting?鈥� said Joseph LaVorgna, chief economist at SM小蓝视频 Nikko Securities.
鈥淭he outcome of the August employment report," which will be reported Sept. 6, LaVorgna said, "is obviously critical.鈥� If that report shows a second straight month of weak hiring, the Fed may cut its key rate by a more aggressive half-point.
Most economists expect the Fed to cut its benchmark rate by a quarter-point at each of its final three meetings this year. Wall Street traders, though, foresee a one-in-three likelihood that the Fed will cut by a half-point at one of those meetings, according to futures prices. A lower Fed benchmark rate will lead eventually to and could also boost stock prices.
In his remarks Friday, the Fed chair suggested that rate cuts should help extend the much sought-after 鈥渟oft landing,鈥� whereby inflation falls back to the Fed鈥檚 2% target without a recession occurring.
Continued growth could boost Vice President Kamala Harris' presidential campaign, even as most Americans say they're dissatisfied with the Biden-Harris administration's economic record, largely because average consumer prices remain far above where they were before the pandemic.
鈥淲e will do everything we can," Powell said, 鈥渢o support a strong labor market as we make further progress toward price stability.鈥�
By cutting rates, he said, 鈥渢here is good reason to think that the economy will get back to 2% inflation while maintaining a strong labor market.鈥�
A rate cut in mid-September, coming less than two months before the presidential election, could bring some unwelcome political heat on the Fed, which seeks to avoid becoming entangled in election-year politics. Former President Donald Trump has argued that the Fed shouldn鈥檛 cut rates so close to an election. But Powell has repeatedly underscored that the central bank would make its rate decisions based purely on economic data, without regard to the political calendar.
In his remarks, Powell said the Fed has grown concerned about slower hiring and a rising unemployment rate, even while it still wants to see inflation fall further. That dual focus is replacing the Fed's previous singular focus on inflation.
鈥淭he cooling in labor market conditions is unmistakable,鈥� the Fed chair said. 鈥淛ob gains remain solid but have slowed this year. ... We do not seek or welcome further cooling in labor market conditions."
In what amounted to something of a victory lap, Powell noted that the Fed had succeeded in conquering high inflation without causing a recession or a sharp rise in unemployment, which many economists had long predicted.
The soft landing "did come as a big surprise to the (economics) profession,鈥� Gauti Eggertson, an economist at Brown University, said during a presentation Friday at the Jackson Hole conference. He attributed that outcome to the unraveling of the pandemic's disruptions to supply chains and labor markets and a reduction in job vacancies, which allowed wage growth to cool.
Powell noted that, according to surveys and financial market gauges, Americans never really expected high inflation to stick. Such expectations can become self-fulfilling: If people expect inflation to stay high, they typically demand ever-higher pay or they accelerate their purchases before prices rise still further. Those steps can perpetuate higher inflation.
But 鈥渋nflation expectations鈥� rose only modestly and have since largely fallen back to pre-pandemic levels.
鈥淭he healing from pandemic distortions,鈥� the Fed鈥檚 rate hikes and the fact that Americans did not expect higher inflation, 鈥渉ave worked together to put inflation on what increasingly appears to be a sustainable path to our 2% objective,鈥� the Fed chair said.
Powell also addressed criticism that the Fed was too slow to raise rates even after inflation had begun surging once the pandemic recession ended. Fed officials had initially argued that the price spikes coming out of the pandemic in early 2021 were merely 鈥渢ransitory鈥� and would soon fade as the supply chain disruptions that left some grocery shelves bare and auto lots empty had healed.
Powell acknowledged that the healing of supply disruptions took much longer than the Fed had expected 鈥� and so did the persistence of high inflation.
鈥淭he good ship transitory was a crowded one, with most mainstream analysts and advanced-economy central bankers on board,鈥� he said. 鈥淚 think I see some shipmates out there today,鈥� he said in an ad-libbed remark addressed to the economists and central bankers assembled for the conference.
Separately, Andrew Bailey, governor of the Bank of England, expressed some optimism that inflation in the United Kingdom is also steadily declining. But Bailey took a much more cautious approach than Powell about what the central bank may do next. Early this month, the Bank of England for the first time in four years.
Bailey said the U.K. will likely be able to tame inflation without a jump in unemployment or a hit to the economy. But he warned that inflation wasn't fully defeated.
鈥淚t is too early to declare victory,鈥� he said. 鈥淲e need to be cautious because the job is not completed.鈥�
Christopher Rugaber, The Associated Press
