By Howard Schneider
JACKSON HOLE, Wyoming (Reuters) – Federal Reserve Chairman Jerome Powell said on Friday that the U.S. central bank will not shy away from pivoting to interest rate cuts in the final weeks of the presidential election campaign and protect the current labor market. top priority.
“The time has come for policy to adjust,” Powell said in a speech at the Kansas City Fed’s annual Jackson Hole conference in a strong signal the central bank will begin cutting rates in mid-September, about seven weeks before the November 5 election. .
His statement – essentially a declaration that the Fed’s fight with inflation is over and that maintaining jobs is now at the top of the to-do list – came the morning after Vice President Kamala Harris accepted the Democratic nomination for president, a development that has upset a contest that has been leaning towards former President Donald Trump, the Republican candidate.
The comments led to the first rate cut at the Fed’s September 17-18 meeting, a move that Trump, who has been highly critical of Powell despite having nominated him for the Fed’s top job, and some Republican lawmakers have warned will be seen as a partisan effort to juice the economy ahead of vote.
Powell and fellow policymakers, including other Trump appointees such as Fed Governor Christopher Waller, have been pushing for the past four weeks toward a consensus rate cut at next month’s meeting, citing economic data that adds to declining inflation as a risk. . to the labor market has increased.
This wouldn’t be the first time the Fed has started a cycle of rate cuts in an election year, and election policy in previous years has coincided with wins and losses for incumbents and challengers. But the rate cut on September 18 will be – in about seven weeks – the second closest policy turn before a presidential election since at least 1976.
At the time, Fed chief Arthur Burns began a short easing cycle that began just four weeks before an election featuring a race between Republican President Gerald Ford (NYSE: ) and Democratic challenger Jimmy Carter. Ford lost.
‘Do everything we can’
Congress has charged the Fed to maintain the highest level of employment consistent with stable inflation, and with the unemployment rate has risen nearly a percentage point – from 3.4% to 4.3% – over the past year, Powell said the Fed has seen enough.
“We do not seek or accept further cooling in labor market conditions,” Powell said in a speech at a lodge in Wyoming’s Grand Teton National Park, answering a question that has so far remained open: How much more job weakness the Fed will allow or feel. is it needed to wring the last bit of inflation from the economy? The answer is no, with the inflation measure the Fed uses to target 2% currently at 2.5% and looking much lower.
With price pressures easing and many hiring measures starting to weaken, Powell said the central bank would now “do everything we can to support a strong labor market,” comments some analysts said opened the door to an initial cut of half a point. percentage as opposed to the more traditional quarter-percentage-point addition.
This is a significant change from Powell’s comments as inflation rises in 2021 and 2022. The Fed began to raise the benchmark policy rate in March 2022 to the highest level in a quarter of a century, and at the Jackson Hole forum two. last year, he warned that workers and their families would feel the “pain” of rising unemployment and higher credit costs.
Credit is always getting more expensive. The average interest rate on a 30-year fixed-rate home loan rose from less than 3% in the summer of 2021, before rate hikes began, to nearly 8% last October after the Fed’s policy rate reached a plateau of 5.25%-5.50% in July 2023.
But labor market pain never materialized. The unemployment rate, which has averaged 5.7% since the late 1940s, remained below 4% from February 2022 – the eve of the Fed’s rate hike – until last May. Wages continue to rise.
Even the current 4.3% rate is about what the central bank feels is consistent with the Fed’s long-term 2% inflation target.
But it is higher than what Powell inherited when he became Fed chief in 2018, a situation he said he wanted to restore when the COVID-19 pandemic threw more than 20 million people out of work in the spring of 2020 and pushed the unemployment rate to record highs. as 14.8%.
A significant rise in the current unemployment rate could undermine Powell’s legacy as Fed chief who changed monetary policy to give more weight to the central bank’s employment mandate in the belief that low unemployment and stable inflation can coexist.
He said he remains optimistic.
“With appropriate policy withdrawals, there is good reason to think that the economy will return to 2% inflation while maintaining a strong labor market,” Powell said. With the Fed’s benchmark rate affecting the economy, and possibly higher than the “neutral rate” that does not hinder or stimulate economic growth – and even further from the near-zero “liftoff” rate in 2022 – “our current rate. policy rate gives a lot space to respond,” he said.
