Fed Chair Jerome Powell signals "time has come" for interest rate cuts
Federal Reserve Chair Jerome Powell said "the time has come" for the central bank to adjust its monetary policy, signaling that rate cuts could soon lower borrowing costs for American consumers and businesses.
Powell, who spoke at an annual conference of central bankers in Jackson Hole, Wyoming, didn't disclose specifics about when a rate cut could arrive, or its size, although economists have penciled in a reduction at the Fed's September 18 meeting. The federal funds rate now stands in a range of 5.25% to 5.5%, its highest level in 23 years.
In conveying that the Fed is likely to start cutting its benchmark rate, Powell cited some weakening in the labor market, as well as progress in battling high inflation. A slowdown in hiring and an uptick in the unemployment rate last month heightened concerns the Fed could mistake in the other direction, keeping rates too high for too long, throttling growth and plunging the economy into recession.
"We do not seek or welcome further cooling in labor market conditions," Powell said in his speech.
"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," he said.
Powell also signaled the Federal Reserve is increasingly confident that inflation will continue to cool, eventually reaching the bank's goal of a 2% annual rate, even with a reduction in borrowing costs. In previous speeches, Powell had raised concerns that rate cuts could spur inflation to flare up, erasing the gains the Fed had made in taming the hottest price increases in four decades.
"With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2% inflation while maintaining a strong labor market," Powell said.
Wall Street surged after Powell's comments, with the Dow Jones Industrial Average jumping 378 points, or 0.9%, to 41,091. The S&P 500 gained 1.1% and the tech-heavy Nasdaq composite rose 1.5%.
"Powell has rung the bell for the start of the cutting cycle," said Seema Shah, chief global strategist at Principal Asset Management, in an email. "The Federal Reserve now has strong confidence about inflation's path forward — it is time to shift to the other side of the dual mandate, and labor market risks now have their full attention."
How big of a rate cut?
One question left unanswered by Powell's speech was the potential size of a September rate cut. At the moment, about 3 in 4 economists polled by financial services firm FactSet are forecasting a reduction of 0.25 percentage points.
But if the August jobs data comes in weaker than expected, that could increase the chances of a bigger cut of 0.5 percentage points, experts noted. The August jobs report will be released on September 6.
"We continue to expect a cautious [0.25 percentage point] rate cut, but Powell underscored a view we have held that the Fed has room to ramp up the pace of rate cuts if the labor market deteriorates unexpectedly," Kathy Bostjancic, chief economist for Nationwide, noted in an email, referring to basis points.
She added that she expects additional rate cuts before year-end, bringing the total reductions to 0.75 percentage points, adding, "but we see the possibility of more rate reduction if employment growth slows abruptly."
How will this impact mortgage rates?
Already, mortgage rates have dropped to their lowest levels in 15 months, ahead of expectations that the Federal Reserve will cut its benchmark interest rate next month for the first time in four years.
But a rate cut of 0.25 to 0.5 percentage points will likely only make small changes in borrowing costs for consumers, noted Ted Rossman, senior industry analyst at Bankrate, in an email. Even so, mortgage rates could continue to decline, especially if inflation continues to fall and the job market shows some weakness, experts have noted.
"From a consumer perspective, it's important to note that lower interest rates will be a gradual process," he said. "The trip down is likely to be much slower than the series of interest rate hikes which quickly pushed the federal funds rate higher by 5.25 percentage points in 2022 and 2023."
Even though mortgage rates are already declining, there hasn't yet been a meaningful change in credit card or auto loan rates, he added.
– With reporting by the Associated Press.