The News
Federal Reserve Chair Jerome Powell gave investors the strongest indication yet that the central bank plans to begin trimming rates next month, saying “the time has come for policy to adjust.”
Speaking from the Kansas Fed’s Jackson Hole Economic Symposium in Wyoming on Friday, Powell said: “The timing and pace of rate cuts will depend on incoming data, evolving outlook, and the balance of risks.”
Stock indices rose on Powell’s comments. The Dow Jones Industrial Average gained 0.9% in intraday trading while the S&P 500 increased 1.1%, and the Nasdaq Composite climbed 1.7%.
The speech is Powell’s highest-stakes one so far this year. It follows the release of fresh data signaling a weaker jobs market than previously estimated, and it comes ahead of the Fed’s long-awaited rate-setting meeting on Sept. 17 and 18. Some economists have suggested the Fed has waited too long to begin cutting rates, which could cause the US to tip into a recession.
Investors and economists were looking to the Fed chief for any confirmation that September will bring the first rate cut since the pandemic, as well as clues about its size. Some banks have been pushing for a half-point cut, which they say could stimulate dealmaking on Wall Street. Most economists think that’s unlikely. They largely expect the Fed will start cutting rates in September, but 60% predict a small cut of a quarter of a percentage point.
Powell has previously said he loses sleep over the matter. “Go too soon, and you undermine progress on inflation,” he said at a July news conference. “Wait too long or don’t go fast enough, and you put at risk the recovery. And so we have to balance those two things … It’s a rough balance.”
SIGNALS
Job market concerns take center stage
During his speech, Powell worried about unwanted cooling in the labor market, following a hiring slowdown in July and new data that showed last year’s jobs market wasn’t as hot as previously expected. With inflation declining significantly in recent months, the labor market now has the central bank’s “full attention,” Principal Asset Management’s Seema Shah wrote in a note to investors after the speech. The August jobs report, which will be released on Sept. 6, will give the Fed further insight into labor market conditions and may even warrant a larger cut. “Make no mistake, if the labor market shows signs of further cooling, the Fed will cut with conviction,” Shah said.
Hope is on the horizon
The Fed chief spoke of ships and shipmates navigating choppy waters — “travel metaphors befitting a hopeful voyager,” The Washington Post wrote. As a whole, the speech “struck a more hopeful tone than in years past, when the Fed was in the thick of its inflation fight,” according to the Post. In 2022, Powell’s speech included comments that pain laid ahead on inflation, which spooked the market and caused the S&P 500 to drop 3.4% that day. Friday’s speech had the opposite effect, with stock indices rising on Powell’s comments. Still, he “made clear that the two-pronged battle to control prices without sparking widespread layoffs was not over,” the Post wrote.
The Fed’s timing thrusts it into the political spotlight
Powell’s strong indication for a rate cut comes in the lead-up to the November presidential election. While Fed officials have said their decisions are not political and instead rely on what’s happening in the economy, Republican candidate Donald Trump has suggested that a Fed decision to cut rates ahead of the election would be political, because the incumbent Democratic party would benefit, The New York Times reported. Trump said earlier this month that the president should have “some say” in how the Fed handles interest rates.