Fed chair: 'Time has come' to change policy on rates

Noting that inflation is easing while the job market is weakening, Federal Reserve Chair Jerome Powell provided the strongest signal yet that the central bank plans to begin cutting historically high interest rates in September.

He gave no clues on how much the Fed will lower its key rate, but most forecasters expect a quarter-point reduction.

"The time has come for policy to adjust," Powell said in written remarks he planned to deliver Friday morning at the Fed's annual symposium in Jackson Hole, Wyoming. "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."

He added, "While the task is not complete, we have made a good deal of progress toward that outcome. ... My confidence has grown that inflation is on a sustainable path back to 2%," the Fed's inflation goal.

The language and shift in tone were significant. For months, the Fed has said it would not lower its key rate – still at a 23-year high of 5.25% to 5.5% – until officials were confident that inflation was on a sustained path to 2%. In June, the Fed's preferred inflation measure was at 2.5%, down from a high of 5.6% in mid-2022.

Meanwhile, the torrid post-pandemic labor market is softening.

"The upside risks to inflation have diminished," Powell said. "And the downside risks to employment have increased."

He continued, "It seems unlikely that the labor market will be a source of elevated inflation pressures anytime soon," adding, "we do not seek or welcome further cooling in labor market conditions."

A rate cut would lower borrowing costs for mortgages, credit cards and other consumer and business loans while likely juicing the stock market. It also would reduce bank savings account yields that finally have been generating healthy returns.

Powell's remarks were widely expected after recent reports showed inflation continued to ease last month while the job market weakened. His comments went further than those he made at a news conference early this month after the Fed held rates steady. At that time, he said inflation had eased notably and officials could cut rates in September "if the data support that."

Since then, reports have revealed that, in July, a different inflation measure, the consumer price index, fell to 2.9%, the lowest level in three years. Meanwhile, U.S. employers added just 114,000 jobs last month, well below the 175,000 expected, and the unemployment rate rose from 4.1% to 4.3%, the highest since October 2021.

The figures were so disappointing that the stock market sold off on fears that the nation could be headed for a recession and that the Fed blundered by not lowering rates at its early August meeting or earlier. Many economists predicted the central bank would cut rates by a half-point next month instead of a more typical quarter-point.

But recent strong economic reports have calmed nerves and stocks have rallied, more than making up for the losses several weeks ago. Sturdy retail sales were better than expected in July.