Time ‘to adjust’ on interest rates, Powell says, hinting at cuts to come

“The time has come for policy to adjust.”

With those words, Federal Reserve Chair Jerome Powell confirmed what the financial markets and monetary policy watchers were expecting in his speech Friday at the Kansas City Fed’s annual conference: interest rate cuts are clearly in the cards beginning in September.

Just how much and how frequent the cuts will be stayed a mystery, as always, but Powell indeed sent the strongest signal yet that the Fed will trim interest rates for the first time in more than four years. The Fed has held rates steady at the record elevated level of 5.3% for more than a year, as it tried to cool the economy and battle back inflation. Much of that pressure has been alleviated and Powell seems close to carrying out the Fed’s stated “soft landing” goal of 2% inflation without pushing the economy into recession.

“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,” Powell told the audience at the annual meeting in Jackson Hole, Wyoming. “We will do everything we can to support a strong labor market as we make further progress toward price stability.”

'Unmistakable' cooling

The job market is still a concern, though.

“So far, rising unemployment has not been the result of elevated layoffs, as is typically the case in an economic downturn,” Powell said. “Rather, the increase reflects a substantial increase in the supply of workers and a slowdown from the previously frantic pace of hiring. Even so, the cooling in labor market conditions is unmistakable. Job gains stayed solid but have slowed this year.”

Powell added: “The upside risks to inflation have diminished, and the downside risks to employment have increased.”

There were nearly twice as many job openings as unemployed persons from March 2022 through the end of the year, signaling a severe labor shortage. Inflation peaked at 7.9% in June 2022, compared to its current rate of just above 2%.

“Some argued that getting inflation under control would require a recession and a lengthy period of high unemployment,” Powell said. “And I expressed our unconditional commitment to fully restoring price stability and to keeping at it until the job is done.”

The job still is not done, Powell said, but he added that the Fed acted appropriately and conditions are improving without a lot of pain.

“I think the key point is that the Fed is confident that it can maintain a strong job market without worrying about increasing the inflation,” said Venkat Balakrishnan, managing vice president and head of asset allocation at Mission Square Retirement in Washington D.C. “That’s important because the Fed has the flexibility to size the rate cuts based on the strength of the jobs report and all the economic releases.”

The Fed raised its policy rate by 425 basis points in 2022 and another 100 basis points in 2023, to its current level. A change in the opposite direction will have an impact on financial services and the consumers it serves.

“The summer of 2022 proved to be the peak of inflation,” Powell said. “The 4.5 percentage point decline in inflation from its peak two years ago has occurred in a context of low unemployment, a welcome and historically unusual result.”

Evolving data drives action

Balakrishnan said what the Fed does next all depends on the evolving data.

“It actually makes the next jobs report very important, even though they say it is not data point dependent, it is data dependent,” he said. “But this particular jobs report [in September] is going to be very, very critical in the Fed making that decision.”

Balakrishnan said the impact of any rate cuts would show up almost immediately in job reports, retail sales figures, mortgage, and housing activity.

“If you're an investor, you have to pay attention to those economic releases and jobs reports,” he said.

The stock markets, which were already factoring upcoming rate cuts, rallied in response to Powell’s comments, with the Dow Jones, NASDAQ and S&P averages all up nearly 1% headed into mid-day trading.

According to Greg McBride, chief credit analyst for Bankrate, savers should lock in attractive yields right now, before the expected rate cuts begin.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].