Powell on Fed Policy Moves: The Time Has Come

8/23/2024

Richard Clarida

In his annual Jackson Hole speech, Fed Chair Powell assessed the post-pandemic U.S. economy and suggested rate cuts are coming soon.

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Federal Reserve Chair Jerome Powell in his remarks Friday morning at the Jackson Hole Symposium signaled that interest rate cuts are coming. Specifically, he stated that “the time has come for policy to adjust.” The minutes of the Fed’s July meeting, released two days prior, offered a similar hint at policy easing soon to come. The base case is likely a 25-basis-point (bp) cut in September.

Powell’s speech offered a familiar rationale for commencing rate cuts with U.S. inflation still running at “2-point-something” percent, somewhat above the Fed’s 2% target. Namely, he indicated that the Fed is confident that sufficient progress on disinflation has been achieved and is expected to continue. Thus, with the U.S. labor market having returned to better balance, the Fed with its dual mandate (stable prices and maximum employment) does “not seek or welcome further cooling in labor market conditions.” In other words, the Powell Fed is aiming to stick that historically rare “soft landing” in which high interest rates reduce inflation but don’t cause a recession that triggers a steep rise in unemployment.

Powell devoted much of his speech to a concise and balanced review of the causes of the post-pandemic surge in global inflation, which peaked in 2022, and its subsequent slowing. Perhaps the speech is intended to be read (at least by future economic historians) as the third installment – along with his Jackson Hole remarks in 2021 and 2022 – of Powell’s real-time oral history of the conduction of monetary policy in this unusual and volatile era.

Signals, not specifics

Absent from Powell’s speech was any specific discussion of the destination for the federal funds rate at the end of this easing cycle or the pace of rate cuts along the way. Instead, the remarks indicated – drawing on oft-used language from Fed statements – that “the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

That said, we believe the “time has come” language makes clear that the Fed will cut rates by at least 25 bps at its September meeting, and that it will signal via its “dot plot” projections that at least two more cuts of 25 bps are expected at the remaining two meetings this year in November and December. Although the Fed likes to say it is “data- and not data-point-dependent,” the August employment report released on 6 September will likely be significant in the “25 versus 50” discussion at the next meeting.

The details are yet to come into focus, but for the Fed, the direction of travel seems clear.