Get ready for rate cuts
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Fed chief Jerome Powell in Jackson Hole, Wyoming. Photo: Natalie Behring/Bloomberg via Getty Images
Two years ago at the annual symposium in Jackson Hole, Fed chief Jerome Powell offered a blunt, succinct declaration that the Fed was ready to tolerate economic pain in order to fight inflation. He wasn't quite as blunt, nor as succinct, in remarks Friday, but the message was similarly hard to miss.
The big picture: The Fed is ready to cut rates — aggressively, if necessary — to prevent further worsening in the job market. The era of elevated interest rates is near its end, and the predominant economic risk is no longer inflation.
- It sets up a rate cut at a policy meeting that concludes Sept 18, with the size of that cut — either the usual quarter-point adjustment or a super-sized half-point reduction — dependent on data between now and then, particularly the August jobs report due out Sept. 6.
State of play: The headline takeaway from Powell's speech was his comment that the "time has come for policy to adjust," with the pace of that adjustment dependent on incoming data.
- But arguably more significant: "We do not seek or welcome further cooling in labor market conditions."
Between the lines: That's the most explicit acknowledgment yet that the softening in the labor market the Fed once sought to bring inflation down has now gone far enough.
- It implies that more weak jobs numbers like those seen in July would be met with aggressive Fed action.
- The direction the Fed is heading is now crystal clear, but the pace and extent of rate cuts remain uncertain.
- Assuming growth holds up, a handful of quarter-point cuts over the next year would do the trick of adjusting the policy stance to current economic realities. But Powell implicitly acknowledged that the Fed has break-the-glass options if activity really starts to falter.
What they're saying: "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 said.
- "The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions," he said.
- That is to say, with its target interest rate north of 5%, the Fed has a lot of room to cut rates if it were to become necessary, in contrast to much of the 2010s when rates were rarely much above zero.
