- Federal Reserve Chair Jerome Powell discussed what it would take for the central bank to cut interest rates at its next meeting in September.
- Economic data continuing on its recent trajectory would help give the Fed confidence that inflation is on its way to its goal, he said.
- The Fed has kept its key interest rate at a 23-year high since last July in an effort to quell inflation, which is running close to the Fed’s goal of a 2% annual rate.
- Powell emphasized the Fed is now thinking about lowering interest rates to protect the labor market from a drastic rise in unemployment.
Federal Reserve chair Jerome Powell said outright on Wednesday what financial markets had already guessed: If the economy continues on its current trajectory, lower interest rates are likely coming in September.
At a press conference following the Fed’s decision to hold its benchmark fed funds rate steady at a 23-year high to fight inflation, Powell said Fed policymakers had even discussed lowering the rate—which would have come as a surprise to financial markets—but had ultimately decided to wait.
“A reduction in our policy rate could be on the table as soon as the next meeting in September,” Powell said. “We’re getting closer to the point at which it will be appropriate to reduce our policy rate, but we’re not quite at that point yet.”
Powell said no decisions had been made about future cuts and that the Fed would react to whatever economic data comes out between Wednesday and Sept. 18, when the Fed’s policy committee is scheduled to meet again.
“If we were to see, for example, inflation moving down quickly or more or less in line with expectations, and growth remains reasonably strong and the labor market remains consistent with its current condition, then I would think that a rate cut could be on the table at the September meeting.”
Federal Reserve is Walking A Tightrope
Powell’s comments emphasized the tightrope the Fed is walking as it uses monetary policy to pursue the central bank’s dual mandate of keeping inflation under control while maintaining maximum employment.
A higher fed funds rate pushes interest up on all kinds of loans. That tends to slow the economy, stifling inflation while risking hurting the labor market. Lower interest rates do the opposite, stoking the economy and encouraging hiring while risking fueling inflation.
After a year of keeping the rate at a 23-year high to stifle the post-pandemic surge of inflation, the Fed is getting ready to pivot to prevent a surge of unemployment.
The inflation rate has fallen close to the Fed’s goal of 2% a year. Meanwhile, the unemployment rate has ticked up from the 50-year low it hit last year to 4.1%, close to its pre-pandemic level and low by historical standards.
Powell’s comments were more or less what financial markets had expected, Van Hesser, chief strategist at KBRA, said in an interview with Investopedia.
“The Fed did what the market really hoped it would do, and that is, acknowledge the attention given to both sides of its dual mandate, and we’re seeing that shift now from being inflation-focused to a better balance between stable prices and maximum employment,” Hesser said. “That acknowledgment suggests that we’re moving toward that September cut.”
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