Powell announces start of Federal Reserve rate cuts

Jerome Powell told Jackson Hole that "the time has come" for the US central bank to cut interest rates. The growing weakness in the labour market leaves no room for further uncertainty on the part of the Federal Reserve chairman, while inflation after more than a year of historically high rates seems to be heading towards the 2 per cent target. The end of the tightening and a reversal with a rate cut is now in the cards: Powell's words, in fact, announce a loosening starting from the next meeting in September.

"Upside risks to inflation have diminished. And downside risks to employment have increased," Powell said in a much-anticipated speech at the Kansas City Fed's annual economic conference in Jackson Hole, Wyoming. "The time has come for policy to adjust. The direction of travel is clear and the timing and rhythm of rate cuts will depend on incoming data, the evolving outlook and the balance of risks."

Referring to the two targets the Fed is mandated by Congress to meet, Powell said his "confidence has grown that inflation is on a sustainable path back to 2 per cent" after rising to about 7 per cent during the Covid pandemic, while unemployment is on the rise. Powell also said that the nearly one percentage point jump in the unemployment rate over the past year was largely due to a rise in labour supply and a slowdown in hiring, not an increase in layoffs. And he also emphatically stressed that the Fed is determined to prevent any further rise in unemployment: its earlier talk of labour market 'pain' as necessary to control inflation is now a thing of the past.

The current unemployment rate of 4.3 per cent is roughly at the level Fed officials believe is consistent with long-term stable inflation. "We do not seek nor welcome a further cooling of labour market conditions ," Powell said. "We will do all we can to support a strong labour market as we make further progress towards price stability. With appropriate tightening, there is good reason to think the economy will return to 2 per cent inflation while maintaining a strong labour market."

Powell's comments are as close as one could expect to a victory statement on inflation that has shaken the economy since the beginning of the pandemic. The rapid rise in prices led the Fed to raise the benchmark rate from near zero to the current range of 5.25%-5.50%, the highest level in a quarter century.