Powell Signals Imminent Rate Cuts Amid Evolving Labor Market and Inflation Progress

On Friday, Federal Reserve Chairman Jerome Powell delivered a highly anticipated speech at the annual economic conference in Jackson Hole, Wyoming. He provided the most explicit indication to date that the time for policy adjustment has arrived. Emphasizing the dual mandate and acknowledging progress on inflation, Powell identified the need to avoid further cooling of the labor market as a catalyst for imminent rate cuts.


The annual Jackson Hole meeting, a crucial platform for global central banks to discuss monetary policy and economic outlooks, witnessed significant announcements in the past, including adjustments to the monetary policy framework and balance sheet reduction plans. Now, a new round of easing is about to begin.


Powell’s remarks largely aligned with market expectations. "Overall, the economy continues to grow at a solid pace, but inflation and labor market data indicate that conditions are evolving. As we emphasized in our last FOMC statement, the risks of rising inflation have decreased, while the risks to employment have increased."


The rapid rise in prices led the Fed to raise the benchmark policy rate from near zero in 2021 to 5.25%-5.50%, one of the highest levels this century. Powell stated, "While the task is not yet complete, we have made significant progress in restoring price stability." The Personal Consumption Expenditures (PCE) Price Index rose 2.5% year-over-year in June, approaching the 2.0% medium-term target.


Following Powell’s comments, market analysts noted that his latest message significantly reinforced recent Fed officials' statements and meeting minutes, indicating that there is a substantial consensus within the committee regarding rate cuts. Undoubtedly, the Fed is embarking on a new chapter in monetary policy.


Market forecasts show that the Federal Reserve is expected to cut interest rates by 25 basis points in September, with a slight increase in the probability of a 50 basis points cut to around 32%.


The July non-farm payroll data, which led to market volatility, showed a rise in the unemployment rate, sparking concerns about a recession and fueling discussions of an emergency 50 basis points rate cut. Multiple data points released this week indicated that the job market is no longer as strong as it was last year.


The Labor Department’s revision of employment data for the twelve months ending in March showed a reduction of 818,000 jobs. The August PMI survey by S&P indicated that labor demand cooling has accelerated, with manufacturing hiring stagnating.


The job market has increasingly gained the Fed’s attention, as changes in labor supply and demand are vital economic indicators crucial for achieving a soft landing. The unemployment rate rose from a low of 3.3% in 2023 to 4.3% in July 2024, while the number of job seekers increased by 1.2 million, typically considered a positive economic signal but potentially leading to a higher unemployment rate.


Powell remarked that the rise in unemployment over the past year was mainly due to increased labor supply and slower hiring, rather than increased layoffs. However, there are indications that despite a net growth in the labor force, businesses have scaled back hiring, lagging behind the surge in labor supply.


Minneapolis Fed President Kashkari earlier this week expressed openness to lowering rates at the central bank's next meeting due to an increasingly weak labor market. Chicago Fed President Goolsbee echoed this sentiment, emphasizing that overly tight monetary policy could problematic for the Fed’s employment mandate.


Current unemployment levels at 4.3% are roughly consistent with what Fed officials believe is compatible with long-term stable inflation. Historically, spikes in unemployment and recessions seldom provide policymakers enough time to react proactively.


In summary, Powell reiterated, "We do not seek nor welcome further cooling of the labor market. With further progress on price stability, we will do everything possible to support a strong labor market. By appropriately relaxing policy constraints, we have ample reason to believe that the economy will return to a 2% inflation rate while maintaining a strong labor market."