Powell Confirms Federal Reserve Pivot To Rate Cuts At Jackson Hole

Federal Reserve chair Jerome Powell spelled out in plain English what financial markets had already anticipated: The central bank is about to cut its benchmark interest rate.

In a speech at the Jackson Hole Economic Policy Symposium conference Friday, Powell said it was time for the Fed to make a major 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 enough to keep unemployment from rising. That means cutting the rate from its current range of 5.25%-5.5%, its highest since 2001, where it’s been held for more than a year in an effort to push inflation down. 

“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.”

The Fed was already widely expected to cut the fed funds rate when its policy committee next meets in September. Recent economic data has shown that since 2022, the inflation rate has fallen from a 40-year high almost back to pre-pandemic levels. At the same time, the unemployment rate has steadily risen, fueling worries that the economy could enter a recession if interest rates stay high. 

Traders Speculate About Depth of Cuts

Financial market participants took Powell’s comments as a signal that steeper rate cuts 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 percentage points. The odds of a larger cut rose to 34.5% late Friday morning, up from 24% the day before, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.

A Victory Lap Over High Inflation?

Powell used the speech to give a broad overview of the Fed’s fight against inflation since March 2022, when the central bank began raising its benchmark interest rate to counteract a worrisome price spike for consumer goods and services. The inflation rate peaked in June 2022 at an annual increase of 9.1%, according to the Consumer Price Index, and has fallen since then to a 2.9% annual increase as of July.

High interest rates are meant to combat inflation by raising borrowing costs on mortgages, credit cards, car loans and other kinds of credit, discouraging borrowing and spending and allowing supply and demand to rebalance. 

Indeed, the housing market has slowed to a near standstill under high mortgage rates, and consumers have struggled to afford vehicles amid high interest rates on loans, prompting price cuts from dealers.

Powell highlighted another aspect of high interest rates: they’re meant to signal the Fed’s determination to push inflation down. The theory goes that if the public believes inflation will be low in the future, people will feel less pressure to make financial decisions that would push up inflation. 

For example, if individuals believe inflation will stay high, they might make major purchases sooner to get ahead of price increases, stoking demand and prompting merchants to raise prices.

According to surveys of public opinion, most people never believed inflation would stay high for very long, and Powell credited that psychological factor with helping inflation cool down without the recession or spike in unemployment that many economists had anticipated. 

“Disinflation while preserving labor market strength is only possible with anchored inflation expectations, which reflect the public’s confidence that the central bank will bring about 2% inflation over time,” he said. “That confidence has been built over decades and reinforced by our actions.”