In an important speech at the Federal Reserve’s yearly gathering in Jackson Hole, Chair Jerome Powell signaled that the central bank is likely to decrease interest rates in light of changing economic situations. Although he didn’t provide specific timing or the amount of potential reductions, Powell’s comments set the stage for future adjustments to monetary policy.
“It’s time for policy adjustments,” Powell remarked during his highly anticipated keynote address. He stressed that while the direction for rate changes is evident, the exact timing and extent will depend on upcoming data, the shifting economic landscape, and the assessment of related risks.
Powell’s speech also reviewed the path that led to the Fed’s earlier aggressive rate increases. He discussed the inflationary challenges that required 11 rate hikes from March 2022 to July 2023. However, he pointed out significant improvements in controlling inflation and highlighted the Fed’s renewed commitment to maintaining full employment.
“Inflation has decreased notably. The labor market is no longer excessively hot, and conditions are now less stringent than they were before the pandemic,” Powell observed. “Supply issues have become more manageable, and the risks regarding our two objectives have shifted.”
The Fed Chair reinforced that the central bank will keep working to uphold a strong labor market while continuing to address inflation. His remarks resulted in favorable market responses, with stocks rising and Treasury yields dropping significantly. Traders now believe there’s a 100% chance of at least a quarter-point rate cut in the upcoming September meeting, and the odds of a half-point cut have risen to around one in three, based on CME Group’s FedWatch tool.
“This was essentially a farewell from Chair Powell, signifying that the mission focused on inflation over the past two years has succeeded,” noted economist Paul McCulley, a former managing director at Pimco, in his comments on CNBC’s “Squawk on the Street.”
The address comes as inflation rates are moving closer to the Fed’s 2% target. Recent data showed inflation at 2.5%, down from 3.2% one year ago and significantly lower than the peak of over 7% recorded in June 2022. As the Fed balances its dual mandate of controlling inflation and supporting employment, Powell’s remarks indicate that a meaningful shift in policy focus may be on the verge of occurring.
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