Jerome Powell says 'time has come' to cut US interest rates

Fed chairman says cooling in labour market is 'unmistakable'

Federal Reserve Chairman Jerome Powell on Friday gave his strongest indication yet that US central bank is on the cusp of cutting interest rates, pointing to a decline in inflation and an “unmistakable” cooling of the American labour market.

“The upside risks to inflation have diminished. And the downside risks to employment have increased,” he said during his keynote address at the Jackson Hole Symposium in Wyoming.

“The time has come for policy to adjust. The direction of travel is clear.”

While he offered no further clues on the pace of rate cuts, Mr Powell's remarks at the annual gathering of central bankers cemented expectations of a rate cut when the Fed holds its next two-day meeting in September.

Markets had already locked in a September rate cut, an initial cut of 25 basis points after Mr Powell's remarks.

New phase in inflation battle unfolds

His remarks also marked the beginning of a phase in the Fed's quest to restore price stability, following the 2022 post-pandemic inflation surge.

The Fed began raising rates that year up its target range from near-zero to its current range of 5.25 to 5.50 per cent. The Fed has held rates steady for more than a year.

The Fed's preferred inflation metric has since fallen from its 2022 peak of 7.1 per cent to its current 2.5 per cent level, not far off from its 2 per cent target.

“My confidence has grown that inflation is on a sustainable path back to 2 per cent,” Mr Powell said.

Although he did not outright declare victory, his remarks on Friday might have come the closest to it.

“While the task is not complete, we have made a good deal of progress,” he said.

Change in tone

One notable difference in Mr Powell's address was his current assessment of the US labour market.

With the inflation issue more or less settled, the Fed is now focused on the other side of its dual mandate, which is maximum employment.

Data from recent months shows that the labour market, once a source of inflationary pressures, is now cooling. The unemployment rate has ticked up from 3.7 per cent at the start of the year to 4.3 per cent – still low by historical standards – while job gains have slowed.

Mr Powell, like many economists, said the increase in unemployment was the result of more workers in the labour force rather than permanent layoffs.

“Even so, the cooling in labour market conditions is unmistakable,” Mr Powell said, adding that he will not tolerate any further softening in the jobs market.

“We do not seek or welcome further cooling in labour market conditions,” he said.

Derek Tang, co-founder of the LHMeyer firm in Washington, said Mr Powell's assessment of the US jobs market was much “darker” than how he viewed it before the July employment report.

“And you know that that darker tone, I think translates into … more possibility that the Fed could cut rates more quickly than what it originally said,” Mr Tang said.

Minutes released by the Federal Open Market Committee on Wednesday already showed that some members were open to a rate cut in July, but a vast majority were supportive of cutting rates next month. Those minutes “add credence to our view that September will mark the start of the monetary easing cycle,” Wells Fargo economists wrote to clients.

August's jobs report could determine just how fast the Fed moves.

While there is a range of perspectives among other members on the policy-setting FOMC, Mr Powell is “quite worried that the kind of slowdown in the labour market is going to speed up,” Mr Tang added.

Mr Powell also said he believes it remains possible to return inflation to 2 per cent while maintaining a strong labour market.

“We will do everything we can to support a strong labour market as we make further progress towards price stability.”

Mr Powell and his colleagues at the central bank have been trying to engineer a soft landing, whereby they bring inflation back down to 2 per cent without bringing the economy into a recession. Only once in the last 60 years has that feat been achieved.

Powell addresses Fed criticism

The Fed chairman also took time during his speech to address criticism the central bank has faced of having been too slow to initially respond to the 2022 inflationary surge.

Mr Powell once described those initial inflation readings as “transitory”, meaning that inflation was not part of a longer-term trend and did not require aggressive rate increases.

But he and his colleagues were proven wrong as supply-chain bottlenecks and a rush of workers joining the labour force coincided with a sustained increase in prices.

“The good ship Transitory was a crowded one,” he said, adding off the cuff that “I think I see some former shipmates out there today”.

“The global nature of inflation was unlike any period since the 1970s. Back then, high inflation became entrenched – outcome we were utterly committed to avoiding,” he said, revisiting a previous Jackson Hole speech in which he said the Fed's path to restoring price stability would likely require a downturn.

The Fed holds its next two-day meeting from September 17-18.