Bloomberg News
Federal Reserve Chair Jerome Powell said
During his much-anticipated Friday morning speech at the Federal Reserve Bank of Kansas City’s Jackson Hole Economic Symposium, Powell said he is confident that inflation is on course to hit the Fed’s long-term target of 2%. He also noted that there has been an “unmistakable” cooling in the labor market.
He stopped short of committing to interest rates at next month’s Federal Open Market Committee meeting, but said the shift toward easier monetary policy was imminent.
“The time has come for policy to adjust,” Powell said. “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.”
Financial markets have been anticipating lower rates for months, with some hoping for a cut at the FOMC’s last meeting three weeks ago. Instead, the committee opted to maintain their target range between 5.25% and 5.5%, while sending a strong signal that a loosening of monetary policy was on the horizon. At the time Powell said “the economy is moving closer to the point at which it will be appropriate to reduce our policy rate.”
Two days after that meeting, the Bureau of Labor Statistics released its July jobs report, showing a bigger than expected decline in overall. Earlier this week, that number was revised down further by more than 800,000 jobs. During his speech, Powell said a looser labor market was critical to the disinflation of the past year, but noted that a higher unemployment rate is not necessary for the Fed to hit its inflation target.
“It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon,” Powell said. “We do not seek or welcome further cooling in labor market conditions.”
Powell said the fact that the Fed was able to rein in inflation without causing mass layoffs was “a welcome and historically unusual result.” He attributed this to the peculiar conditions of the pandemic and post-pandemic eras, which included a deep but short recessions in 2020, global supply chain disruption, a large number of employees leaving the workforce and substantial government stimulus.
The trajectory outlined by Powell stands in stark contrast to his remarks at last year’s Jackson Hole conference,
Interest rate traders broadly expect the FOMC to drop interest rates next month, according to CME Group’s FedWatch tool, with more than 70% of market participants betting on a 25 basis point cut and the remaining 28.5% anticipating a half-point cut.
Longer-term yields, including those from 10-year Treasury securities, have been falling for months on the back of an improving inflation outlook and job market softening.
During his speech, Powell also addressed the various developments that contributed to the overall inflation picture and the Fed’s response.
He noted that initial spikes in inflation were concentrated on goods acutely impacted by supply chain constraints, such as motor vehicles. Because of this, he said, the FOMC considered the pricing uptick a short term shock that history counseled them to “look through.”
“The good ship Transitory was a crowded one, with most mainstream analysts and advanced-economy central bankers on board,” Powell said. “The common expectation was that supply conditions would improve reasonably quickly, that the rapid recovery in demand would run its course, and that demand would rotate back from goods to services, bringing inflation down.”
Ultimately, that price growth spread to other goods and services, which spurred the Fed to act aggressively to combat inflation before it became entrenched. Powell said the central bank has learned much from the past three years, but noted that final word on the matter will not be written for years to come.
“It is, of course, too soon to make definitive assessments,” he said. “This period will be analyzed and debated long after we are gone.”
