Federal Reserve Chair Jerome Powell said the “time has come” for the Fed to adjust its policy direction with respect to interest rates in light of recent data on inflationary pressure, employment, and other factors.
Although Fed officials left the federal funds rate unchanged, in the 5.25-5.50 percent range, during the July 30-31 meeting of the Federal Open Market Committee (FOMC), many experts believe a rate cut could be on the way in September and more could follow.
With pandemic-related economic disruptions mostly in the review mirror, Powell highlighted key data indicating the long-awaited time for rate reductions appears to be all but upon us, speaking at an economic symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyo.
“Overall, the economy continues to grow at a solid pace,” he said. “But the inflation and labor market data show an evolving situation. The upside risks to inflation have diminished. And the downside risks to employment have increased. As we highlighted in our last FOMC statement, we are attentive to the risks to both sides of our dual mandate.
“The time has come for policy to adjust. 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 credited the Fed’s restrictive monetary policy approach with helping to move inflation closer to the agency’s long-held 2 percent target rate, making the prospect of impending rate reductions more realistic than it has been in more than a year.
“Pandemic-related distortions to supply and demand, as well as severe shocks to energy and commodity markets, were important drivers of high inflation, and their reversal has been a key part of the story of its decline,” he said. “Our restrictive monetary policy contributed to a moderation in aggregate demand, which combined with improvements in aggregate supply to reduce inflationary pressures while allowing growth to continue at a healthy pace.”
Minutes released from the July FOMC meeting indicated “several” policymakers said progress in lowering inflation coupled with a rise in unemployment “had provided a plausible case” for a quarter-percentage-point cut in July.
The minutes also indicated opposition to a rate cut has waned as concerns that such a move could restart inflation have subsided.
“An important takeaway from recent experience is that anchored inflation expectations, reinforced by vigorous central bank actions, can facilitate disinflation without the need for slack,” Powell added.
The labor market, a key focus of the Fed, has shown signs of cooling. The unemployment rate, which began to rise over a year ago, now stands at 4.3 percent, nearly a full percentage point higher than in early 2023.
Powell pointed out most of that increase has come over the past six months.
“So far, rising unemployment has not been the result of elevated layoffs, as is typically the case in an economic downturn,” he said. “Rather, the increase mainly 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.”
Despite the cooling labor market, Powell assured that the Fed does not seek further weakening.
“We do not seek or welcome further cooling in labor market conditions,” he said. “However, the evolving economic landscape has led to a reassessment of the risks associated with the Federal Reserve’s policy stance.”