Powell's Jackson Hole Speech: The Time For Rate Cuts 'Has Come!'
2min read In his Jackson Hole speech, Federal Reserve Chairman Jerome Powell laid the groundwork for future interest rate cuts. Still, he refused to reveal the specific timing and magnitude of the cuts.
Powell delivered a highly anticipated keynote speech at the Fed's annual meeting in Jackson Hole, Wyoming, saying, The time has come for policy to adjust. 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.
As the market awaited guidance on the direction of monetary policy, Powell also focused on the causes of inflation, which led to 13 aggressive rate hikes from March 2022 to July 2023.
However, he did note progress in inflation and said the Fed can now turn its attention to the other side of its dual mandate, ensuring the economy remains at full employment levels.
Inflation has declined significantly. The labor market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic. Supply constraints have normalized. And the balance of the risks to our two mandates has changed.
As Powell spoke, inflation was steadily converging towards the Fed's 2% target, although it has not yet reached it. A measure of inflation recently used by the Fed shows an inflation rate of 2.5%, down from 3.2% a year ago and far below the peak of over 7% in June 2022.
Meanwhile, the unemployment rate has been slowly but steadily rising, recently reaching 4.3%, which would otherwise trigger a well-established recession indicator. However, Powell attributed the rise in unemployment to more individuals entering the labor market and a slowdown in hiring, rather than an increase in layoffs or a general deterioration of the labor market.
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. While the task is not complete, we have made a good deal of progress toward that outcome.
The market expects the Fed to start cutting rates in September, but Powell did not mention when he thought the easing of policy would begin. The minutes of the July Federal Open Market Committee meeting released on Wednesday pointed out that the vast majority of officials believe that a rate cut in September would be appropriate as long as there are no unexpected data.
In addition to assessing the current economic conditions, Powell spent a considerable amount of time in his speech assessing the causes of the surge in inflation - reaching the highest level in more than 40 years - as well as the Fed's policy response and why price pressures have eased without a recession.
When inflation first began to rise in early 2021, he and his colleagues - as well as many Wall Street economists - thought it was transitory, caused by factors related to COVID-19, which would subside.
Powell quipped, The good ship Transitory was a crowded one. with most mainstream analysts and advanced economy central bankers on board. I think I see some former shipmates out there today.
As inflation spread from goods to services, the Fed shifted and began to raise interest rates, eventually increasing the benchmark overnight rate by 5.25 percentage points. The benchmark overnight rate had been around zero after emergency rate cuts in the early stages of the pandemic.
Powell said that the rise in the inflation rate was a global phenomenon, the result of rapid growth in commodity demand, supply chain tensions, tight labor markets, and significant increases in commodity prices.
He attributed people's confidence in the Fed, as well as the good expectations that inflation will eventually ease, to the economy avoiding a significant downturn during the tightening cycle.
The FOMC did not flinch from carrying out our responsibilities, and our actions forcefully demonstrated our commitment to restoring price stability. An important takeaway from recent experience is that anchored inflation expectations, reinforced by vigorous central bank actions, can facilitate disinflation without the need for slack.