Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole symposium in Wyoming this morning addressed several key points regarding the U.S. economic outlook and monetary policy:
• Interest rate cuts: Powell signaled that the Federal Reserve is likely to begin cutting interest rates in September. He emphasized that the timing and scale of these cuts would depend on incoming economic data and the evolving economic outlook. “The direction of travel is clear” for the Fed in monetary policy, said Powell, as the Fed angles to pivot toward rate cuts.
• Inflation and labor market: Powell expressed confidence that inflation is approaching the Fed’s 2% target, noting significant progress in reducing inflation from its peak levels. “With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2% inflation while maintaining a strong labor market,” Powell said. He highlighted that while the labor market is no longer overheated, the Fed remains cautious about potential declines in employment and is committed to supporting a robust labor market. “We do not seek or welcome further cooling in labor market conditions,” Powell said, adding the Fed will do “everything we can” to support a strong labor market, a hint the central bank will be aggressive in cutting rates to support economic stability.
• Economic progress since the pandemic: Powell reviewed the economic developments since the onset of the Covid-19 pandemic, acknowledging the challenges faced and the progress made in stabilizing inflation while maintaining employment levels. He underscored the importance of learning from the pandemic’s economic impacts to refine future monetary policy strategies.
• Future monetary policy: Powell reiterated the Fed’s commitment to a data-dependent approach, indicating that any policy adjustments would be guided by economic indicators such as inflation and employment trends. He also mentioned the Fed’s ongoing efforts to achieve a “soft landing” for the economy, aiming to reduce inflation without triggering a recession.
Financial markets responded positively to Powell’s speech: The S&P 500 rose to a more than 1% gain within five minutes after the release of the transcript, and yields for 2-year and 10-year Treasury notes fell about five basis points apiece (lower yields mean more valuable bonds).