Powell: “Time has come” for first US interest rate cut

The president of the Federal Reserve (Fed, American central bank), Jerome Powellopened the door this Friday to a first interest rate cut at the organization’s next meeting in September, news long awaited by the markets.

“The time has come for a policy adjustment“monetary,” he said Powell during his traditional speech at the meeting of central bankers in Jackson Hole (Wyoming). “The direction is clear,” he added.

The president of the US central bank assured that his “Confidence increased that inflation is on a lasting path returning to 2%”, which is the objective of the institution.

Until now, Powell The Fed had not given any indication of a date for a rate cut, a measure long awaited by the market because it lowers the cost of money and stimulates the flow of funds in the economy.

The Fed had raised interest rates to combat inflation. High rates make credit more expensive and discourage consumption and investment, thereby lowering price pressures.

But in the first half of the year, inflation again gave some scares. Now Powell has been direct.

“The time has come to make adjustments to monetary policy.”

Jerome Powell

“The direction to follow is clear, and the timing and pace of rate cuts will depend on emerging data, evolving outlooks and the balance of risks.”, between maintaining full employment and controlling inflation, the two regulatory mandates that the Fed has, he pointed out in the framework of the symposium on economic policy of Jackson Hole.

The Fed chairman’s speech was the most eagerly awaited part of the exclusive economic meeting, as he was expected to give clues about the future rate decision that members of the Federal Open Market Committee (FOMC) of the Fed will make at their meeting on September 17 and 18.

In the very particular language of central bankers, Powell’s message indicates that the monetary policy committee of the Fed (FOMC) will act on rates at its next meeting on September 17 and 18, the last before the US presidential election on November 5.

Although Powell has been more forceful than on other occasions in saying that it is time to lower rates, he did not resolve in his speech one of the big questions: how much the rate cut will be and how many reductions there will be before the end of the year.

On Wednesday it was learned in the “minutes” – excerpts from the last FOMC meeting of the Fed– that “The vast majority (of the members of that body) emphasize that, if the data continue on the expected path, it would probably be appropriate to relax the (monetary) policy during the next meeting.”

Wall Street was clearly reacting to the upside, with its main indicators firmly above 1% gain at 14:30 GMT.

Shifting balances

“There is a good chance that the recent data has strengthened the “doves” (as the FOMC members are known, who are more concerned about the evolution of the labor market and in favor of lower rates, editor’s note) and calmed the “hawks” (more focused on inflation and more orthodox, editor’s note).” within the Fedsummarized in an analysis note the chief economist of Pantheon Macroeconomics, Ian Shepherdson.

In particular, Wednesday’s revision of the US job creation figure for the fiscal year ending in March showed that the labor market is in a weakening phase.

Preliminary data for the last fiscal year indicate that the US economy created 818,000 fewer jobs than previously reported.

This correction represents a 30% decrease compared to the initial data of 2.9 million jobs created in March.

These figures suggest that “The economy continues to grow but at a more moderate pace“, EY economist Gregory Daco told AFP.

“We will do everything in our power to sustain a strong labor market.”

Jerome Powell

Employment, back on the radar

Until now, the data showed a progressive weakening of job creation, but the new information, and a rise in unemployment to 4.3%, underline the risk of this becoming a problem.

“We will do everything we can to support a strong labor market as we move toward price stability. With appropriate easing of policy moderation, there is good reason to think that the economy will return to 2% inflation while maintaining a strong labor market.“Powell said from Jackson Holea sign that employment is back on the Federal Reserve’s radar.

Powell also said that although the labor market “has cooled considerably from its previous overheated state” and the unemployment rate has risen in the last half year to 4.3%, it is “still low by historical standards” and “It has not been the result of an increase in layoffs, as usually happens in an economic recession””.

All analysts expect a rate cut in September, most by 25 basis points, although 40% expect a reduction of even half a percentage point. Powell did not give details on the magnitude of the change.

With information from AFP and EFE