Federal Reserve Chair Signals Interest Rate Cuts Ahead

By Howard Schneider

JACKSON HOLE, Wyoming (Reuters) – Federal Reserve Chair Jerome Powell made it clear on Friday that the U.S. central bank would not hesitate to pivot to interest rate cuts during the final weeks of the presidential election campaign, emphasizing that protecting the job market was now its top priority.

“The time has come for policy to adjust,” Powell stated during his speech at the Kansas City Fed’s annual Jackson Hole conference, indicating that the Fed would likely start cutting rates in mid-September, roughly seven weeks before the November 5 election.

His comments essentially signaled the end of the Fed’s battle with inflation, placing safeguarding employment at the forefront. This announcement came after Vice President Kamala Harris accepted the Democratic nomination for president, altering a race that appeared to favor former President Donald Trump, the Republican candidate.

Powell’s remarks set the stage for a potential rate cut at the Fed’s September 17-18 meeting, an action that Trump and some Republican lawmakers have suggested could be seen as a partisan effort to boost the economy before voting.

In recent weeks, Powell and other policymakers, including those appointed by Trump, such as Fed Governor Christopher Waller, have moved toward consensus on a rate cut at next month’s meeting, as economic data indicates decreasing inflation and increasing risks to the labor market.

This wouldn’t be the first instance of the Fed initiating a rate-cutting cycle in an election year. Historically, policy changes have occurred closely before elections, with varying outcomes for incumbents and challengers. A rate cut on September 18 would mark one of the closest such actions before a presidential vote since at least 1976.

Congress has tasked the Fed with balancing employment with stable inflation. Powell noted that the unemployment rate had risen nearly a percentage point, from 3.4% to 4.3%, over the past year, leading the Fed to conclude it had enough data to act. “We do not seek or welcome further cooling in labor market conditions,” Powell remarked, indicating the Fed’s unwillingness to tolerate more job weakness.

With inflation currently at 2.5%, Powell asserted that the central bank would now “do everything we can to support a strong labor market,” leaving open the possibility for a half-percentage-point cut instead of the more common quarter-point reductions.

This marks a notable shift from Powell’s comments during the inflation surges of 2021 and 2022 when the Fed began raising its benchmark policy rate to the highest level in 25 years. The average interest rate on a 30-year fixed-rate mortgage jumped from under 3% to nearly 8% after the Fed’s policy rate peaked at 5.25%-5.50%.

Despite the rise in interest rates, the anticipated labor market pain did not manifest as anticipated. The unemployment rate remained below 4% from February 2022 until May of this year. Even the current 4.3% level aligns with the Fed’s long-term inflation target.

Powell, who hopes to maintain a legacy focused on low unemployment and stable inflation, expressed optimism. He stated, “With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2% inflation while maintaining a strong labor market.” He believes the current policy rate allows ample room for the Fed to respond effectively to economic conditions.