After multiple years of Federal Reserve interest rate hikes, Chair Jerome Powell has indicated an interest rate drop is on the horizon, saying “the time has come for policy to adjust.”
This change reflects the Federal Reserve’s recognition that the worst of the pandemic-related economic distortions are now largely behind us, according to Powell, speaking at an economic symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming
“Four and a half years after COVID-19’s arrival, the worst of the pandemic-related economic distortions are fading,” Powell stated. “Inflation has declined significantly. The labor market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic.”
“The time has come for policy to adjust,” he later added. “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 emphasized the progress made in bringing inflation closer to the Federal Reserve’s 2 percent target.
“Our restrictive monetary policy helped restore balance between aggregate supply and demand, easing inflationary pressures and ensuring that inflation expectations remained well anchored,” he said. “Inflation is now much closer to our objective, with prices having risen 2.5 percent over the past 12 months. After a pause earlier this year, progress toward our 2 percent objective has resumed. My confidence has grown that inflation is on a sustainable path back to 2 percent.”
The labor market, a key focus of the Federal Reserve, has also 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 Federal Reserve 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.”
The recent ebbs and flows of inflation were also touched on by Powell, attributing its rise and subsequent fall to a complex interplay of factors.
“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.”
A September rate cut was hinted at during the Federal Open Market Committee’s July 30-31 meeting, in which officials left the benchmark interest rate unchanged at the 5.25-5.50 percent range.
Minutes released from that 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, especially stemming from worry of that action restarting inflation, was dwindling.