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In a pivotal address at the Federal Reserve’s annual retreat in Jackson Hole, Chair Jerome Powell indicated that the central bank is poised to adjust interest rates downward in response to evolving economic conditions. While he did not specify exact timing or the extent of potential cuts, Powell’s remarks laid the groundwork for future monetary policy adjustments.
“The time has come for policy to adjust,” Powell stated during his highly anticipated keynote speech. He emphasized that while the direction for rate adjustments is clear, the specifics regarding timing and magnitude will be contingent on forthcoming data, the evolving economic outlook, and the balance of associated risks.
Powell’s address also reflected on the journey that led to the Fed’s previous aggressive rate hikes. He reviewed the inflationary pressures that necessitated a series of 11 rate increases from March 2022 through July 2023. However, he noted significant progress in managing inflation and highlighted the central bank’s renewed focus on maintaining full employment.
“Inflation has declined significantly. The labor market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic,” Powell remarked. “Supply constraints have normalized, and the balance of risks to our two mandates has changed.”
The Fed Chair assured that the central bank will continue its efforts to sustain a robust labor market while making further progress on inflation. His speech led to positive market reactions, with stocks gaining and Treasury yields falling sharply. Traders now anticipate a 100% probability of at least a quarter percentage point rate cut in the upcoming September meeting, with the likelihood of a half-point reduction increasing to approximately one in three, according to CME Group’s FedWatch tool.
“This was a valedictory of essentially Chair Powell turning the page, saying the mission, which has been focused on inflation for the last two years, has been successful,” commented economist Paul McCulley, a former Pimco managing director, on CNBC’s “Squawk on the Street.”
The speech arrives as inflation rates continue to trend towards the Fed’s 2% target. Recent data showed inflation at 2.5%, down from 3.2% a year ago and significantly below the peak above 7% recorded in June 2022. As the Fed navigates its dual mandate of managing inflation and supporting employment, Powell’s comments suggest a significant shift in policy focus may be on the horizon.
