Powell sends strongest-ever signal of rate cuts, gold surges nearly $20

On Friday, August 23, Federal Reserve Chairman Jerome Powell laid the groundwork for future interest rate cuts, but he declined to offer specifics on the timing and magnitude of any reductions. Spot gold rose sharply, and the dollar fell.

Powell: It's Time for Rate Cuts

"It is time to adjust policy," the central bank chief said in his highly anticipated keynote address at the Federal Reserve's annual retreat in Jackson Hole, Wyoming. "The direction forward is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks."

As markets await the direction of monetary policy, Powell also focused on reviewing the causes of inflation, leading to 13 aggressive interest rate hikes from March 2022 to July 2023.

However, he did note progress on inflation and said the Fed can now turn its attention to the other side of its dual mandate: ensuring the economy maintains full employment.

Powell said: "Inflation has come down substantially. The labor market is no longer overheating, and conditions are less tight now than they were before the pandemic. Supply constraints have normalized. The balance of risks to our two mandates has shifted."

This speech comes as inflation is steadily falling toward the Fed's 2% target, though it hasn't reached it yet. The Fed's measure of inflation recently showed it at 2.5%, down from 3.2% a year ago and far below the peak of over 7% in June 2022.

Meanwhile, the unemployment rate has been slowly but steadily rising, recently hitting 4.3%, a level that would normally trigger time-tested recession indicators. However, Powell attributed the rise in unemployment to more people entering the workforce and a slowdown in hiring, rather than increased layoffs or a general deterioration in the labor market.

He said: "Our goal is to restore price stability while maintaining a strong labor market and avoiding a sharp rise in unemployment, which has been a feature of deflationary periods when inflation expectations were less stable in the past. While the job is not yet done, we have made significant progress toward that goal."

Markets expect the Fed to begin cutting rates in September, but Powell did not mention when he thinks that will begin. Minutes from the July Federal Open Market Committee meeting released on Wednesday indicated that "most" officials considered a September rate cut appropriate, provided there were no surprises in the data.

In addition to assessing the current situation, Powell devoted a considerable portion of his speech to assessing the causes of the surge in inflation (to its highest level in more than 40 years), the Fed's policy response, and why price pressures have eased without a recession.

When inflation first began to rise in early 2021, he and his colleagues—along with many Wall Street economists—considered it "transitory," caused by COVID-19-related factors that would abate.

Powell quipped: "The good ship 'transitory' was crowded, carrying most mainstream analysts and central bankers in advanced economies."

When inflation clearly spread from goods to services, the Fed shifted course and began raising rates, eventually raising its benchmark overnight rate by 5.25 percentage points from near zero where it had been after emergency rate cuts at the start of the pandemic.

Powell said the rise in inflation was "a global phenomenon" resulting from "rapid growth in goods demand, strained supply chains, a tight labor market, and a sharp rise in commodity prices."

He attributed this to confidence in the Fed and good expectations that inflation would eventually ease, leading the economy to avoid a sharp downturn during the rate-hiking cycle.

"The FOMC acted fearlessly in fulfilling its mandate, and our actions powerfully signaled our determination to restore price stability," he said. "A key lesson from recent experience is that well-anchored inflation expectations, coupled with forceful action by the central bank, can facilitate disinflation without the need for a loosening of monetary policy."

Powell added that there is "much more we can learn" from this experience.

"That's my assessment of events. Your assessment may differ," he said.

Spot Gold rose nearly $20 in the short term.

Institutional Commentary

Wall Street Journal: Powell Sends Strongest Signal Yet of Rate Cuts

Federal Reserve Chairman Jerome Powell sent his strongest signal yet of interest rate cuts, saying he intends to act to prevent further weakening in the U.S. labor market. "We are not seeking nor do we welcome further cooling in labor market conditions. It is time to adjust policy," Powell said Friday. A rate cut is widely expected at the September meeting. Powell's comments Friday essentially marked the end of the Fed's historic fight against inflation, two years after he stood on the same stage and said he was willing to accept a recession as the cost of bringing down inflation. Powell's tone was far less ambiguous than it was at a press conference following the last meeting. At that time, Powell said the Fed needed more data before it could be confident in the decline in inflation. Friday's speech indicated he now has that data.