Powell Signals Fed’s Intent to Scale Back Interest Rates at Jackson Hole

In Jackson Hole, Wyoming, Federal Reserve Chair Jerome Powell announced on Friday that with inflation largely under control and the job market showing signs of slowing down, the central bank is gearing up to reduce its key interest rate from a 23-year high. Powell did not specify the timing or size of the rate cuts but indicated that the Fed is likely to announce a modest quarter-point cut in its benchmark rate at the upcoming mid-September meeting. He emphasized that the pace and magnitude of rate cuts would be dependent on incoming data and the evolving economic outlook.

Powell explained during his keynote speech at the annual economic conference that the Fed’s confidence in inflation returning to a sustainable path towards the 2% target has increased. Despite inflation falling to 2.5% last month, just slightly above the central bank’s goal, Powell highlighted the importance of rate cuts to uphold economic growth and support hiring, which experienced a slowdown recently. The Fed’s efforts to maintain a strong labor market and progress towards price stability have the potential to impact Vice President Kamala Harris’ presidential campaign positively, especially amid dissatisfaction with the Biden-Harris administration’s economic performance due to high prices following the pandemic.

While a rate cut in September would coincide closely with the presidential election, Powell underscored the Fed’s commitment to basing rate decisions solely on economic indicators, distancing the central bank from election-year politics. Mentioning the Fed’s achievement in curbing high inflation without inducing a recession or significant uptick in unemployment, Powell credited the resolution of pandemic-related disruptions in supply chains and job markets for this outcome. Despite concerns of a potential recession following disappointing July hiring data and a spike in the jobless rate to 4.3%, healthier economic reports have somewhat alleviated these worries.

Wall Street analysts now anticipate the Fed to lower its benchmark rate by a quarter-point in September and November, followed by a half-point reduction in December. Speculation regarding a half-point cut in September heightened with considerations of a further hiring slowdown. The anticipation of rate cuts has already started impacting mortgage rates, prompting a decline. Despite uncertainties surrounding the economic outlook, the Fed aims to navigate the challenging terrain with strategic rate adjustments focused on sustaining growth and employment levels.