Jerome Powell, the Federal Reserve Chair, was back at the Jackson Hole Symposium today, and he laid out the game plan for what’s coming next with interest rates, and the big news is that rate cuts are on the table.
Powell told us that the era of relentless rate hikes is ending. “The direction of travel is clear,” he said. But he also added, “the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
So, basically, it’s all still up in the air.
Powell’s speech is coming just weeks before the Fed’s next meeting on September 17-18, where they might finally announce the first rate cut since the pandemic started.
As we know, the Fed isn’t exactly thrilled about the idea of the job market cooling off any further. That July jobs report didn’t help the mood either.
Only 114,000 new jobs were added last month, and unemployment nudged up to 4.3%—the highest since October 2021.
And don’t forget, there’s data showing 818,000 fewer people were employed in the U.S. as of March, suggesting the job market isn’t as strong as some thought.
Now, let’s get into the meat of it. Powell took the opportunity to declare, more or less, victory in the battle against inflation.
He’s got some confidence that inflation is heading back to that magic 2% target the Fed has been chasing. “Inflation has declined significantly,” he said. The numbers back him up, too.
Inflation is down to 2.5% using the Fed’s favorite measure, and it’s at 2.9% based on the consumer price index. Powell isn’t popping champagne bottles yet, but he’s definitely more upbeat than he’s been in the past.
According to him, the “worst of the pandemic-related economic distortions are fading.” But it wasn’t all good news. Powell admitted they didn’t see this inflation mess coming back in 2021.
They thought it was just a blip, a temporary spike. They even used the word “transitory,” which has now become a bit of a joke in financial circles. He basically admitted it was a screw-up, saying that using “transitory” was something they came to regret.
It turned out inflation wasn’t just a passing phase, and the Fed had to scramble to catch up. This led to 11 rate hikes over 2022 and 2023. That’s a lot. But it seems like those hikes did the trick.
For now, anyway.
Powell didn’t just talk about inflation and rate cuts. He also opened up about the Fed’s learning curve during this whole pandemic ordeal. He confessed that even the experts got caught off guard. The pandemic economy wasn’t like anything we’ve seen before.
The Fed chair called for humility, saying there’s still a lot to learn from this period. He added that the Fed is ready to listen to new ideas and even criticism as they go into their five-year review process later this year.
“We need a spirit of inquiry focused on learning from past experiences,” he said. He also pointed out that supply constraints have eased up, which is helping the situation.
The labor market is less crazy than it was before the pandemic, but Powell isn’t popping the confetti just yet. There’s still some tension, some stress.
Powell wrapped things up by emphasizing the need for flexibility. He talked about applying lessons from the past but doing so in a way that fits the current challenges.
It’s a balancing act, and he knows it. He’s not about to let his guard down just because things are looking a bit better. “We have made a good deal of progress toward our objective,” he said, but the work isn’t over yet.
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