In a significant address, Federal Reserve Chair Jerome Powell indicated that the time has come for the monetary policy committee to initiate the process of lowering its benchmark lending rate. However, he emphasized that the timing and extent of any potential policy easing will hinge on forthcoming economic data.
This statement was made during the Kansas City Fed-sponsored economic symposium held in Jackson Hole, Wyoming. The Federal Open Market Committee (FOMC), in its effort to combat inflation, raised interest rates by a staggering 525 basis points between March 2022 and July 2023. Since then, the committee has kept monetary policy steady, marking its latest pause late last month.
"The time has come for policy to adjust," Powell stated. He later elaborated that the direction of monetary policy is clear, though specifics regarding timing and the pace of rate cuts will depend on incoming data, changing outlooks, and the overall balance of risks. Powell also articulated that the upside risks associated with inflation have noticeably diminished.
This commentary coincides with a positive movement in US stock markets, where markets were buoying in intraday trading. The Nasdaq Composite, S&P 500, and the Dow Jones Industrial Average all enjoyed gains exceeding 1% each, despite closing lower the previous Thursday. Currently, inflation has edged closer to the FOMC's target of 2%, having risen by 2.5% over the past year.
Powell expressed a growing confidence that inflation could return to a sustainable trajectory towards that goal. Recent minutes from the FOMC's meeting on July 30-31 disclosed that a significant majority of policymakers deemed a rate cut appropriate in September should subsequent data align with expectations. Nonetheless, Powell acknowledged an uptick in downside risks concerning employment.
Official data released earlier this month revealed that the US economy generated fewer jobs than anticipated in July, alongside a surprise rise in the unemployment rate, which stirred concerns about an impending recession. However, Powell reassured that the rising unemployment is primarily due to an increase in the supply of workers, coupled with a deceleration from the previously high hiring rates, rather than significant layoffs which typically characterize a recession. He characterized the economy as continuing to grow steadily.
The labor market, he stated, is not expected to become a catalyst for heightened inflationary pressures in the near future. Powell asserted, "We do not seek or welcome further cooling in labor market conditions." Current estimations indicate that the likelihood of a 25-basis-point rate cut on September 18 has reduced to roughly 66%, down from 76% the previous day.
In contrast, the outlook for a more aggressive 50-basis-point cut has increased to 34% from 24%, as per the CME FedWatch tool. TD Senior Economist James Orlando commented in a note to clients that while Powell's remarks did not provide substantial insight into the pace of potential cuts, a significant 50-basis-point reduction does not appear justified at this moment.
The brokerage anticipates the FOMC will implement 25-basis-point cuts in each of its next three scheduled meetings this year..