Fed Chair Powell Indicates that Rate Cuts Will Begin Soon

Photo of Federal Reserve Chair Jerome Powell from federalreserve.gov

Federal Reserve chairs often take the opportunity of the Kansas City Fed’s annual monetary policy symposium held in Jackson Hole, Wyoming to provide a summary of their views on monetary policy and on the state of the economy. In speeches, Fed chairs are careful not to preempt decisions of the Federal Open Market Committee (FOMC) by stating that policy changes will occur that the committee hasn’t yet agreed to. In his speech at Jackson Hole on Friday (August 23), Powell came about as close as Fed chairs ever do to announcing a policy change in a speech.

In the speech, Powell indicated that: “The time has come for policy to adjust. 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.” The statement is effectively an announcement that the FOMC will reduce its target for the federal funds rate at its next meeting on September 17-18. By referring to “the timing and pace of rate cuts,” Powell was indicating that the FOMC was likely to eventually reduce its target for the federal funds rate well below its current 5.25 percent to 5.50 percent, although the reductions will be spread out over a number of meetings.

The minutes of the FOMC’s last meeting on July 30-31 were released on August 21. The minutes stated that: “The vast majority [of committee members] observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting.” The apparent consensus at the July meeting that the target for the federal funds rate should be reduced at the September meeting was likely the key reason why Powell was so forthright in his speech.

In his speech, Powell summarized his views on the reasons that inflation accelerated in 2021 and why it has slowly declined since reaching a peak in the summer of 2022:

“[The analysis of events that Powell supports] attributes much of the increase in inflation to an extraordinary collision between overheated and temporarily distorted demand and constrained supply. While researchers differ in their approaches and, to some extent, in their conclusions, a consensus seems to be emerging, which I see as attributing most of the rise in inflation to this collision. All told, the healing from pandemic distortions, our efforts to moderate aggregate demand, and the anchoring of expectations have worked together to put inflation on what increasingly appears to be a sustainable path to our 2 percent objective.”

As he has over the past three years, Powell emphasized the importance of expectations having remained “anchored,” meaning that households and firms continued to expect that the annual inflation rate would return to 2 percent, even when the current inflation rose far above that rate. We discuss how expectations of inflation affect the current inflation rate in Macroeconomics, Chapter 17 (Economics, Chapter 27).