Powell could use his Jackson Hole speech to signal how quickly and how much the Fed might cut rates
WASHINGTON (AP) — Federal Reserve officials said they are increasingly confident in their ability to inflation almost under control. Now it is the health of the labor market This is starting to cause them concern.
With inflation slowing towards its 2% target, the pace of hiring is slowing and unemployment rate increasesThe Fed is set to cut its key interest rate next month to its lowest level in 23 years. How quickly it can cut rates after that will depend largely on how well employers can hire. A cut in the Fed’s key interest rate would eventually lead to lower rates on auto loans, mortgages and other forms of consumer credit.
Fed Chairman Jerome Powell is likely to give some indication of how the Fed views the economy and what next steps it might take in a highly publicized speech Friday at Jackson Hole, Wyomingat the Fed annual conference of central bankersIt’s a platform that Powell and his predecessors have often used to signal changes in their thinking or approach.
Powell will likely signal that the Fed is increasingly confident that inflation will return to the 2% target, which it says would be needed before rate cuts begin.
Economists generally agree that the Fed is close to defeating the high inflation that left millions of households in financial distress three years ago when the economy rebounded from the pandemic-induced recession. Yet few economists think Powell or any other Fed official is ready to declare “mission accomplished.”
“I don’t think the Fed needs to be concerned about inflation,” said Tom Porcelli, chief U.S. economist at PGIM Fixed Income. “At this point, it’s normal for the Fed to be more focused on employment than inflation. Its policy is calibrated for inflation to be well above that level.”
However, how quickly the Fed cuts rates in the coming months will depend on what economic data shows. After the government announced this month that Hiring in July was well below expectations and the unemployment rate reached 4.3%After hitting a three-year high, stock prices plunged for two days on fears of a recession in the United States. Some economists began speculating that the Fed would cut rates by half a percentage point in September and perhaps another similar cut in November.
But healthier economic reports were released last week, including a further decline in inflation and a sharp rise in retail saleshave largely dispelled those concerns. Wall Street traders now expect three quarter-point rate cuts from the Fed in September, November and December, although in December it is almost impossible to accurately determine between a quarter-point and a half-point cut. Mortgage rates have already started to fall in anticipation of a rate cut.
A half-point rate cut by the Fed in September would be more likely if there are signs of a renewed slowdown in hiring, officials said. The next jobs report will be released on Sept. 6, after the Jackson Hole conference but before the Fed’s next meeting in mid-September.
Raphael Bostic, president of the Fed’s Atlanta branch, said in an interview with The Associated Press on Monday that “evidence of accelerating weakness in labor markets could warrant more rapid action, either in terms of the increments of movement or the speed at which we try to get back” to a rate level that no longer restrains the economy.
Even if hiring remains strong, the Fed is likely to cut rates this year given continued progress on inflation, economists say. Last week, the government said consumer prices had risen only 2.9% in July Compared to last year, this is the smallest increase in more than three years.
Bostic noted that the economy has changed in just a few months, when he suggested a rate cut might not be necessary until the last three months of the year.
“I’m more confident about the likelihood that we’ll hit our inflation target,” he said. “And we’ve seen labor markets weaken significantly from where they were last year. We may need to change our monetary policy sooner than I previously thought.”
Bostic and Austan Goolsbee, president of the Chicago branch of the Fed, both argue that as inflation falls, inflation-adjusted interest rates (which are most valued by businesses and investors) are rising even though inflation has slowed. When the Fed first set its benchmark rate at 5.3%, inflation (excluding volatile energy and food costs) was 4.7%. Today, it is just 3.2%.
“Our policies are getting stricter and stricter every moment in these kinds of situations,” Bostic said. “We have to be concerned” that rates are so high they could cause an economic slowdown.
Bostic said, however, that for now the jobs market and the economy appear broadly healthy, and he still expects a “soft landing,” in which inflation returns to the Fed’s 2% target without a recession occurring.
With the economic outlook uncertain and the Fed focused heavily on what future data will show, Powell may not be able to say much Friday about the central bank’s next steps.
Given the Fed’s focus on how economic data arrives, “it will be difficult for Powell to commit in advance to any particular trajectory at Jackson Hole,” Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said in a research note.
