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Federal Reserve Chair Jerome Powell on Friday indicated that the central bank would soon begin cutting interest rates.
Speaking at an annual gathering in Jackson Hole, Wyoming, Powell said the “time has come” for the Fed to adjust its interest rate policy. The announcement comes after a years-long effort to fight inflation with highly elevated interest rates.
At previous meetings, Powell emphasized that the Fed needed to be confident that inflation had begun moving sustainably downward to its target rate of 2% before instituting rate cuts. On Friday, Powell appeared to indicate that the Fed had achieved that objective, stating, “My confidence has grown that inflation is on a sustainable path down to 2%.”
While price increases have slowed significantly from a peak of more than 9%, inflation remains nearly a percentage point higher than the Fed’s target rate of 2%.
In recent months, the labor market has slowed alongside cooling inflation. This trend was highlighted last month by a weaker-than-expected jobs report that raised concerns among some economists that the U.S. may be headed toward a recession.
The Fed is guided by a dual mandate to keep inflation under control and maximize employment. In theory, low interest rates help stimulate economic activity and boost employment, while high interest rates slow economic performance and ease inflation.
Recent economic developments have shifted the Fed’s focus away from controlling inflation and toward ensuring a healthy labor market, Powell noted. The unemployment rate has ticked up this year from 3.7% to 4.3%. “A cooldown in the labor market is unmistakable,” Powell said.
According to the CME FedWatch Tool, a measure of market sentiment, the chances of an interest rate cut at the Fed’s next meeting in September are all but certain. Market observers are divided over whether the Fed will impose its typical cut of a quarter of a percentage point or opt for a larger half-point cut. The tool indicates a roughly 60% chance of a quarter-point cut and a 40% chance of a half-point cut.
“Powell has rung the bell for the start of the cutting cycle,” Seema Shah, chief global strategist at investment firm Principal Asset Management, told ABC News in a statement. “Make no mistake, if the labor market shows signs of further cooling, the Fed will cut with conviction.”
Wall Street rallied in early trading on Friday following Powell’s remarks. Each of the major stock indexes climbed more than half a percentage point on the news.