Powell hints at possible interest rate cuts: 'It's time for policy adjustment'

• Jerome Powell, the Fed Chair, set the stage for potential interest rate reductions on Friday, but he refrained from giving specific details on when and how much.
• In his keynote address at the Fed's annual retreat in Jackson Hole, Wyoming, the central bank leader stated that it is necessary for policy to be adjusted.
• Powell spent a significant portion of his speech examining the causes of the inflation increase.

Jerome Powell, the Federal Reserve Chair, set the stage for potential interest rate reductions on Friday, but he did not specify the exact timing or magnitude.

"In his keynote address at the Fed's annual retreat in Jackson Hole, Wyoming, the central bank leader stated that it is time for policy adjustment. He explained that 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."

Powell focused on analyzing the causes of inflation that led to 13 rate hikes from March 2022 to July 2023, while markets awaited guidance on monetary policy direction.

He remarked on the advancement of inflation and stated that the Fed can now concentrate on the other aspect of its dual mandate, which is to maintain full employment.

""The labor market has cooled down, and supply constraints have normalized. As a result, the balance of risks to our mandates has shifted," Powell stated."

Despite the inflation rate consistently drifting back to the Fed's 2% target, a gauge the Fed prefers to measure inflation most recently showed the rate at 2.5%, down from 3.2% a year ago and well off its peak above 7% in June 2022.

Despite a recent increase in the unemployment rate to 4.3%, Powell believes that the rise is due to more people entering the workforce and slower hiring, rather than layoffs or a deteriorating labor market.

"Our goal has been to maintain a strong labor market while restoring price stability, preventing the sharp increases in unemployment that were seen in earlier disinflationary periods when inflation expectations were less well anchored," he stated. "Although we have not yet achieved our objective, we have made significant progress towards it."

The Fed is expected to start cutting in September, according to market expectations, though Powell did not mention a specific date for policy easing to begin. The minutes from the July open market committee meeting, released on Wednesday, indicated that a majority of officials believe a September cut will be appropriate, provided there are no data surprises.

Powell evaluated the factors that led to the surge in inflation, the Fed's policy response, and why price pressures have eased without a recession in his speech.

In early 2021, when inflation started to increase, he and his colleagues, along with many Wall Street economists, considered it "transitory" and attributed it to Covid-related factors that would eventually subside.

"Powell joked that the crowded ship Transitory was filled with mainstream analysts and advanced-economy central bankers."

The Fed raised its benchmark overnight rate by 5.25 percentage points after realizing that inflation was affecting not only goods but also services.

According to Powell, the increase in inflation is a global issue caused by the increase in demand for goods, strained supply chains, tight labor markets, and sharp rise in commodity prices.

He believed that the Fed's confidence and well-anchored expectations that inflation would eventually decrease would prevent a severe recession during the rate-hike period.

"Our commitment to restoring price stability was demonstrated through our unwavering actions, which forcefully showed our dedication to fulfilling our responsibilities."

Powell stated that "much can still be learned" from the experience.

"My evaluation of events may differ from yours," he stated.