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But not everyone agreed with Powell’s interpretation of the economy. Michael Strain, director of economic policy studies at the conservative American Enterprise Institute, said inflation has not yet fallen to the Fed’s 2% target and could be stuck somewhere above that. Strain said that while the labor market has “sagged,” it has not been “weak,” making the September cut premature.
“Certainly, lower interest rates are possible in the future, but they may not be appropriate before 2025,” Strain said.
Major stock indexes rose during the speech on the prospect of a rate cut next month. By midday, the S&P 500, Nasdaq and Dow Jones Industrial Average were up at least 1%.
Powell shed light on his attempts to steer the Fed’s sometimes volatile course in comments Friday at an annual conference — filled with travel metaphors befitting an optimistic traveler. He revisited the central bank’s mistaken assumption that pandemic-era inflation would be temporary, joked that “the good ship that passes has been crowded,” and even went off-script to say he recognized “some of my former buddies here.” Referring to the Fed’s critics, he said that while he had made his assessment of the past few years clear, “your experience may differ.”
Ultimately, his speech was more upbeat than in years past, when the Fed was in the midst of its war on inflation. But he made clear that the two-pronged battle to control prices without sparking widespread layoffs will not be easy. It's not over yet.
“We will do everything we can to support a strong labor market while making further progress toward price stability,” Powell said. “With appropriate policy easing, there is good reason to believe that the economy will return to 2 percent inflation while maintaining a strong labor market.”
Indeed, the weakness in the labor market has become more apparent in recent days. On Wednesday (U.S. time), revised government data showed that employers added 818,000 fewer jobs between April 2023 and March than reported at the time. The period covered by the revisions covers The situation is now in the rearview mirror enough that it probably won't change policymakers' insistence that the labor market remains a pillar of economic strength.
But it got complicated Indeed, the Fed’s case for keeping interest rates high – as did the weaker-than-expected jobs report in July. That report also caused a wild day of trading in global markets, underscoring how important the Fed’s interest-rate decisions are.
For months, financial markets have been eager for a concrete timetable for rate cuts. Now that Powell has laid the groundwork for a September rate cut, attention will turn to the Fed’s subsequent meetings in November and December.
Officials rarely forecast that far in advance, preferring to leave options on the table. This year also brings the added challenge that the economy could look different depending on who wins the presidential election. As much as the Fed tries to avoid politics at all costs, the cuts expected in the next few months should ultimately give the economy some momentum heading into November, even as Democrats and Republicans try to sell voters on their plans to cut costs and create jobs. (The Fed holds its November meeting the week of the election.)
The coming cuts are likely to be most beneficial to Vice President Kamala Harris, who campaigned partly on a strong economy under President Joe Biden. However, Harris’s populist policy agenda could also stoke inflation by, for example, boosting demand for housing, even as her campaign emphasizes cutting everyday costs.
Meanwhile, economists widely expect Republican presidential candidate and former President Donald Trump’s proposals for mass deportations and higher tariffs to also push prices higher. Trump has also suggested that presidents should have more control over monetary policy, which has long been seen as the responsibility of the Federal Reserve, free from interference from elected officials. Just this week, Trump also attacked the Bureau of Labor Statistics for its massive job revisions, though the agency has also revised its estimates under his administration.
There is a clear risk of inflation worsening in 2025, said Adam Posen, president of the Peterson Institute for International Economics, “and that risk is likely to increase and increase if Trump wins.” If rates rise again, the Fed may have to reverse course again.
“This sets us up for a sudden, nasty shift in monetary policy—and that shift will be all the more disruptive and damaging precisely because the president and [Fed] “We've given up on talking about anything but direct forecasts,” Posen said.
Looking at the broader picture, the U.S. economy is in great shape. Inflation slowed in July to its lowest level since the spring of 2021, unemployment remains low, consumers haven’t cut back on spending. And the U.S. economy is resilient compared to its peers, many of which are sending their central bankers and economists to this conference in Grand Teton.
But Powell and his colleagues aren’t celebrating too much, knowing that the economy has outperformed their expectations time and again. Last year, Powell took the stage to say that there was still some ground to cover on inflation. And in 2022, he issued a brief, blunt warning that stabilizing the economy would cause “some pain” for Americans and possibly weaken the labor market.
At the time, it seemed almost certain that the Fed would have to cause a recession to beat inflation. But that pain never materialized, and there is still no economic slowdown on the horizon as the Fed prepares to cut interest rates.
Speaking to Bloomberg TV after Powell’s speech, Philadelphia Fed President Patrick Harker said he wasn’t hearing that people in his region were overly concerned about a quarter-point rate cut versus a half-point. Instead, businesses were looking for assurances that the Fed had a plan.
He summed up the advice he hears as: “Don’t just stop and start… start the process and keep moving forward.”
Washington Post
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