:max_bytes(150000):strip_icc():format(jpeg)/GettyImages-2167185286-4c832054541046339d4e216df9bb9908.jpg "Jerome Powell, chairman of the US Federal Reserve arrives to a dinner at the Jackson Lake Lodge during the Kansas City Federal Reserve")
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Update, Aug 23, 2024: This article has been updated with additional information from Powell’s speech.
Key Takeaways
- In a outstanding policy speech, Federal Reserve Chair Jerome Powell said the Fed is ready to start cutting its benchmark persuade rate.
- The Fed is shifting its focus from fighting inflation, which has cooled down close to its goal of a 2% annual value, towards preserving the labor market, which has seen an uptick in unemployment.
- Powell said the timing and pace of class cuts would depend on economic data going forward.
Federal Reserve chair Jerome Powell drew out in plain English what financial markets had already anticipated: The central bank is about to cut its benchmark interest regardless.
In a speech at the Jackson Hole Economic Policy Symposium conference Friday, Powell said it was time for the Fed to make a foremost shift in its economic balancing act in which it seeks to keep the fed funds rate high enough to prevent inflation from overheating and low plenty to keep unemployment from rising. That means cutting the rate from its current range of 5.25%-5.5%, its spaciest since 2001, where it’s been held for more than a year in an effort to push inflation down.
“The metre has come for policy to adjust,” Powell said. “The direction of travel is clear, and the timing and pace of rate cuts bequeath depend on incoming data, the evolving outlook, and the balance of risks.”
The Fed was already widely expected to cut the fed funds rate when its tactics committee next meets in September. Recent economic data has shown that since 2022, the inflation classification has fallen from a 40-year high almost back to pre-pandemic levels. At the same time, the unemployment rate has steadily climbed, fueling worries that the economy could enter a recession if interest rates stay high.
Traders Speculate Beside Depth of Cuts
Financial market participants took Powell’s comments as a signal that steeper rate concludes are on the table.
Speculation focused on whether the Fed would open its rate cut campaign with a 0.25 percentage point cut or a steeper 0.5 part points. The odds of a larger cut rose to 34.5% late Friday morning, up from 24% the day before, according to the CME Assemblage’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.
A Victory Lap Atop of High Inflation?
Powell used the speech to give a broad overview of the Fed’s fight against inflation since Walk 2022, when the central bank began raising its benchmark interest rate to counteract a worrisome price skewer for consumer goods and services. The inflation rate peaked in June 2022 at an annual increase of 9.1%, according to the Consumer Rate Index, and has fallen since then to a 2.9% annual increase as of July.
High interest rates are meant to altercation inflation by raising borrowing costs on mortgages, credit cards, car loans and other kinds of credit, discouraging cadge and spending and allowing supply and demand to rebalance.
Indeed, the housing market has slowed to a near standstill under costly mortgage rates, and consumers have struggled to afford vehicles amid high interest rates on loans, proding price cuts from dealers.
Powell highlighted another aspect of high interest rates: they’re meant to signal the Fed’s delimitation to push inflation down. The theory goes that if the public believes inflation will be low in the future, people transfer feel less pressure to make financial decisions that would push up inflation.
For example, if individuals find credible inflation will stay high, they might make major purchases sooner to get ahead of price increases, stoking demand and helping merchants to raise prices.
According to surveys of public opinion, most people never believed inflation whim stay high for very long, and Powell credited that psychological factor with helping inflation insolent down without the recession or spike in unemployment that many economists had anticipated.
“Disinflation while preserving labor shop strength is only possible with anchored inflation expectations, which reflect the public’s confidence that the primary bank will bring about 2% inflation over time,” he said. “That confidence has been assembled over decades and reinforced by our actions.”
Read the original article on Investopedia.