Federal Reserve Chairman Jerome Powell on Friday paved the way for future interest rate cuts, though he declined to offer specific indications on timing or extent.
“The time has come to adjust policy,” the central bank chief said in his long-awaited keynote address at the bank’s annual retreat in Jackson Hole, Wyoming. “The direction is clear, and the timing and pace of rate cuts will depend on incoming data, evolving expectations, and the balance of risks.”
WATCH LIVE: Fed Chair Jerome Powell Speaks from Jackson Hole Conference
As markets wait to see where monetary policy is headed, Powell has focused heavily on looking back at what caused the inflation that led to an aggressive series of 13 interest rate hikes from March 2022 to July 2023.
But he pointed to progress on inflation and said the Fed could now shift its focus equally to the other side of its dual mandate, making sure the economy stays around full employment.
“Inflation has fallen significantly. The labor market is no longer overheating, and conditions are less tight than they were before the pandemic. Supply constraints have returned to normal. The balance of risks to our state has shifted,” Powell said.
He pledged that “we will do everything we can” to make sure the labor market is strong and that progress on inflation continues.
Stocks rose as Powell began speaking while Treasury yields fell sharply.
“This was a send-off for Fed Chairman Powell, who said the mission, which has been focused on inflation for the past two years, has been a success,” economist Paul McCauley, former managing director of Pimco, said on CNBC’s “Squawk on the Street.”
Sees progress towards goals
The speech comes as inflation has been steadily falling toward the Fed’s 2% target, though it has yet to reach it. A gauge the Fed favors for measuring inflation recently showed the rate at 2.5%, down from 3.2% a year ago and well off its peak above 7% in June 2022.
At the same time, the unemployment rate has been rising slowly but steadily, recently hitting 4.3% and in a region that would have been a test case for recession. However, Powell attributed the rise in unemployment to more people entering the labor market and a slowdown in hiring, not to a rise in layoffs or a general deterioration in the labor market.
“Our goal was to restore price stability while maintaining a strong labor market, and avoid the sharp increases in unemployment that characterized previous periods of deflation when inflation expectations were less stable. While the job is not yet complete, we have made significant progress toward achieving this outcome,” he said.
Markets are expecting the Fed to begin cutting interest rates in September, though Powell has not said when the easing would begin. Minutes from the July FOMC meeting, released Wednesday, indicated that a “substantial majority” of officials believe a September rate cut would be appropriate as long as there are no surprises in the data.
In addition to assessing the current situation, Powell devoted significant time in his speech to assessing what led to the rise in inflation — which has reached its highest level in more than 40 years — as well as the Fed's policy response and why price pressures have eased without a recession.
'The Good Ship Passing'
When inflation first started rising in early 2021, he and his colleagues — as well as many Wall Street economists — dismissed it as “transitory” and caused by Covid-19-related factors that would slow.
“The good ship Transitory was crowded, with most of the traditional analysts and central bankers from advanced economies on board,” Powell said, to laughter. “And I think I see some of the former shipmates there today.”
And when it became clear that inflation was spreading from goods to services, the Fed began raising interest rates, eventually adding 5.25 percentage points to the benchmark overnight rate, which had been around zero after emergency cuts in the early days of the pandemic.
Powell said rising inflation was a “global phenomenon,” the result of “rapid increases in demand for goods, strained supply chains, tight labor markets, and sharp increases in commodity prices.”
He attributed confidence in the Federal Reserve and strong expectations that inflation will eventually decline to the economy avoiding a sharp slowdown during the rate hike cycle.
“The FOMC has not hesitated to carry out its responsibilities, and our actions have strongly demonstrated our commitment to restoring price stability,” he said. “One of the most important lessons of recent experience is that anchored inflation expectations, supported by strong central bank action, can facilitate lower inflation rates without requiring complacency.”
There is still “much to learn” from this experience, Powell added.
“This is my assessment of events. Your assessment of events may differ,” he said.
