Powell speech may preview Fed steps Powell may use Jackson Hole speech to hint at how fast and how far the Fed could cut rates

WASHINGTON - Federal Reserve officials said they're increasingly confident they've nearly tamed inflation. Now, it's the health of the job market that's starting to draw their concern.

With inflation cooling toward the Fed's 2% target, the pace of hiring slowing and the unemployment rate edging up, the Fed is poised to cut its benchmark interest rate next month from its 23-year high.

A lower Fed benchmark rate eventually would lead to lower rates for auto loans, mortgages and other forms of consumer borrowing.

Chair Jerome Powell will likely provide some hints about how the Fed sees the economy and what its next steps may be in a high-profile speech Friday in Jackson Hole, Wyoming, at the Fed's annual conference of central bankers. It's a platform Powell and his predecessors often used to signal changes in their thinking or approach.

Powell likely will indicate the Fed grew more confident that inflation is headed back to the 2% target, which it has long said would be necessary before rate cuts would begin.

Economists generally agree that the Fed is getting closer to conquering high inflation, which brought financial pain to millions of households beginning three years ago as the economy rebounded from the COVID-19 pandemic recession. However, few economists think Powell or any other Fed official is prepared to declare "mission accomplished."

"I don't think that the Fed has to fear inflation," said Tom Porcelli, U.S. chief economist at PGIM Fixed Income. "At this point, it's right that the Fed is now more focused on labor versus inflation. Their policy is calibrated for inflation that is much higher than this."

Still, how fast the Fed cuts rates in coming months will depend mainly by whether employers keep hiring and what the economic data shows.

After the government reported this month that hiring in July was much less than expected and the jobless rate reached 4.3%, the highest in three years, stock prices plunged for two days on fears that the U.S. might fall into a recession. Some economists began speculating about a half-point Fed rate cut in September and perhaps another such cut in November.

Healthier economic reports last week, including another decline in inflation and a robust gain in retail sales, largely dispelled those concerns. Wall Street traders now expect a quarter-point Fed cut each in September, November and December, though in December it's nearly a coin-toss between a quarter- and a half-point cut. Mortgage rates already started to decline in anticipation of a rate reduction.

A half-point Fed rate cut in September would be more likely if there were signs of a further slowdown in hiring, some officials said. The next jobs report will be issued Sept. 6, after the Jackson Hole conference but before the Fed's meeting in mid-September.

Raphael Bostic, president of the Fed's Atlanta branch, said in an interview Monday that "evidence of accelerating weakness in labor markets may warrant a more rapid move, either in terms of the increments of movement or the speed at which we try to get back" to a level of rates that no longer restricts the economy.

Even if hiring stays solid, the Fed is set to cut rates this year given the steady progress made on inflation, economists say. Last week, the government said consumer prices rose just 2.9% in July from a year ago, the smallest such increase in more than three years.

Bostic noted the economy changed from just a couple of months ago, when he suggested a rate cut might not be necessary until the final three months of the year.

"I've got more confidence that we are likely to get to our target for inflation," he said. "And we've seen labor markets weaken considerably relative to where they were" last year. "We might need to shift our policy stance sooner than I would have thought before."

Bostic and Austan Goolsbee, president of the Fed's Chicago branch, said that with inflation falling, inflation-adjusted interest rates - which are what many businesses and investors pay most attention to - are rising even as inflation slows. When the Fed first set its key rate at its current 5.3%, inflation - excluding volatile energy and food costs - was 4.7%. Now, it's just 3.2%.

"Our policies are getting tighter with every moment in that type of situation," Bostic said. "We have to be concerned" that rates are so high they could cause an economic slowdown.

Still, Bostic said, for now the job market and the economy appear mostly healthy, and he still expects a "soft landing" - a scenario in which inflation falls back to the Fed's 2% target without triggering a recession.

Given the Fed's focus on economic data, "it will be difficult for Powell to pre-commit to a particular trajectory at Jackson Hole," Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said in a research note.