Federal Reserve Chairman Jerome Powell on Friday laid the groundwork for future interest rate cuts, but he declined to provide specific timing or magnitude.
“The time has come for policy adjustments,” the central banker said in a long-awaited keynote address at the Fed’s annual retreat in Jackson Hole, Wyoming. “The way forward is clear and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”
Watch live: Fed Chairman Powell speaks at Jackson Hole meeting
While the market awaits the direction of monetary policy, Powell focused on reviewing the causes of inflation that led to 13 consecutive sharp interest rate hikes from March 2022 to July 2023.
However, he did note the progress on inflation and said the Fed can now turn its focus to the other side of its dual mandate, which is ensuring the economy remains at full employment.
“Inflation has fallen sharply. The labor market is no longer overheated and conditions are looser than before the pandemic,” Powell said. “Supply constraints have normalized. The balance of risks across our two missions has also changed.”
He vowed “we will do everything we can” to ensure that the labor market is strong and inflation continues to make progress.
As Powell began speaking, stocks rose and Treasury yields fell sharply.
Economist Paul McCulley, former managing director of Pimco, on CNBC’s “Squawk on the Street.”
See progress toward goals
The speech came as inflation continues to fall toward the Fed’s 2% target, but has not yet reached it. Fed recently favored measures of inflation It showed the rate at 2.5%, down from 3.2% a year ago and well below the peak of more than 7% in June 2022.
Meanwhile, the unemployment rate has slowly but steadily climbed, recently reaching 4.3%, a tried-and-true indicator that would otherwise trigger a recession. However, Powell attributed the rise in unemployment to more people entering the labor market and a slowdown in hiring, rather than an increase in layoffs or a general deterioration in the labor market.
“Our goal is to restore price stability while maintaining a strong labor market and avoiding the sharp rise in unemployment that characterized early deflationary periods when inflation expectations were less stable,” he said. “While the task is not yet accomplished, We have made great progress towards this goal.”
Markets expect the Fed to begin cutting interest rates in September, but Powell did not mention when he thought it would begin easing policy. The minutes of the July Open Market Committee meeting released on Wednesday stated that “the vast majority” of officials believed that a rate cut in September would be appropriate as long as there were no unexpected data.
In addition to assessing the current situation, Powell spent considerable time in his speech assessing what caused the surge in inflation, which hit its highest level in more than 40 years, as well as the Fed’s policy response and why price pressures have eased without a recession. .
“A good ship changes in an instant”
When inflation first started rising in early 2021, he and his colleagues, along with many Wall Street economists, believed it was “transitory” and caused by COVID-19-related factors that would wane.
Powell quipped, “The good ship Transition is a crowded ship, with most mainstream analysts and advanced economy central bankers on board. I think I saw some of my former shipmates today.”
When it became apparent that inflation was spreading from goods to services, the Fed pivoted and began raising interest rates, ultimately raising its benchmark overnight rate by 5.25 percentage points, which had been sitting around zero after an emergency rate cut early in the pandemic.
Powell said rising inflation is “a global phenomenon” and the result of “rapid growth in demand for goods, strained supply chains, tight labor markets and sharp increases in commodity prices.”
He attributed confidence in the Fed and good expectations that inflation will eventually ease to the fact that the economy has avoided a sharp downturn in a rate-raising cycle.
“The FOMC has met our responsibilities without hesitation, and our actions are a strong demonstration of our commitment to restoring price stability,” he said. “An important takeaway from recent experience is that anchoring Inflation expectations, coupled with strong central bank action, can promote deflation without the need for easing.”
Powell added that there was still “a lot to learn” from the experience.
“This is my assessment of the incident. Your mileage may vary,” he said.
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