JACKSON HOLE, Wyoming - The US Federal Reserve is ready to start cutting interest rates, chairman Jerome Powell said on Friday, affirming expectations that officials will begin lowering borrowing costs next month.
“The time has come for policy to adjust,” Powell said in the text of a speech at the annual economic conference held by the Kansas City Fed 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.”
Mr Powell also acknowledged recent progress on inflation, which is once more moderating after stalling earlier in the year: “My confidence has grown that inflation is on a sustainable path back to 2%,” he said, referring to the central bank’s inflation target.
US Treasury yields fell and the S&P 500 index of US stocks rose in early-morning trade while the dollar declined in response to his comments.
Swaps traders held steady in their pricing for the total rate cuts they foresee through the end of 2024, at 98 basis points. Odds also remained steady for a cut of 25 basis points at the next Fed meeting on Sept 17 and 18.
While Mr Powell’s remarks provided some clarity for financial markets in the near term, they offered few clues as to how the Fed might proceed after its September gathering.
Still, the speech confirmed the Fed is at a key turning point in its two-year battle against inflation. For most of that time, the US labour market proved surprisingly sturdy, giving officials room to focus doggedly on lowering inflation towards their 2% target.
The Fed has held its benchmark rate in a range of 5.25% to 5.50% — its highest level in more than two decades — for the last year in support of that goal, propping up borrowing costs across the US economy.
Yet just as inflation has neared its target, cracks have appeared on the employment front, prompting several Fed officials to worry that high rates now pose a threat to the economy’s continued strength. Warning signals included a disappointing July jobs report that rattled financial markets.
“We do not seek or welcome further cooling in labour market conditions,” Mr Powell said, adding that the slowdown in the labour market was “unmistakable”.
After being late to raise rates in response to an inflation surge during the Covid-19 pandemic, Mr Powell’s remarks underscore how Fed officials are hoping to avoid another policy error now that price growth is easing.
Their success or failure will determine whether there is a so-called soft landing, the rare feat of smothering a burst of inflation without tipping the economy into recession.
“Our objective has been to restore price stability while maintaining a strong labour market, avoiding the sharp increases in unemployment that characterised earlier disinflationary episodes when inflation expectations were less well anchored,” Mr Powell said.
“While the task is not complete, we have made a good deal of progress toward that outcome.”