Fed Chair Powell signals interest rate cuts in future
Jerome Powell, the chair of the Federal Reserve, set the stage for future interest rate reductions on Friday, but he did not specify the date or scope of the cuts. In his eagerly awaited keynote speech at the Federal Reserve’s annual retreat in Jackson Hole, Wyoming, the head of the central bank stated, “The time has come for policy to adjust.”.
While the markets were waiting for direction on monetary policy, the Fed chairman focused as much on examining the causes of the inflation that led to an aggressive series of 13 rate hikes from March 2022 through July 2023.
He acknowledged the progress made on reducing inflation and that the Fed can now equally focus on ensuring that the economy maintains a higher employment rate, the other half of its dual mandate.
“Conditions have improved since the pandemic and the labor market is no longer overheated”, according to him. “Supply limitations are now commonplace.
Furthermore, the relative risks to our two mandates have shifted. “.The inflation rate is steadily returning to the Federal Reserve’s 2 percent target, though it is still not there as of the time of the speech. The most recent reading of the Fed’s preferred inflation gauge was 2.5 percent, down from 3.2% a year earlier and significantly below the peak of 7% in June 2022.
Simultaneously, the unemployment rate has gradually increased, reaching a recent high of 4.3% in a region that would normally set off a tried-and-true recessionary indicator.
The Fed chief did, however, attribute the increase in unemployment to a slower hiring rate and an increase in people entering the workforce as opposed to an increase in layoffs or a general decline in the labor market.
He credited the economy’s ability to avoid a severe contraction during the hike cycle to investor confidence in the Fed and well-founded expectations that inflation would eventually decline.
“The FOMC firmly demonstrated our commitment to restoring price stability by carrying out our responsibilities without hesitation,” he said. “A key lesson from the past is that disinflation can occur without the need for slack when there are anchored inflation expectations and strong central bank actions.
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