U.S. Federal Reserve Chair Jerome Powell said the time is now to allow the Fed to reduce its main policy rate, while confirming expectations that the Fed will begin cutting borrowing costs in the coming month and stating his intent to stop any another cooling of the labour market, according to Bloomberg.
“The time has come for policy to adjust,” Powell declared on in the text of an address at the annual Kansas City Federal Reserve gathering held in Jackson Hole, Wyoming.
“The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks,” Powell said.
It was noted that the Fed chief also praised the recent improvement in inflation, which has been slowing in recent months, after having stalled during the previous year. “My confidence has grown that inflation is on a sustainable path back to 2%,” said the president in reference to central bank’s goal of lowering inflation.
Treasury yields fell, and they also saw the S&P 500 index of US stocks climbed while the dollar fell.
The swaps market remained steady in their prices for the overall rate cuts they expect to see through 2024’s end with a price of the 98-basis point mark. The odds also remained stable for a cut of quarter-points in September.
OIL CLIMBS ON THE INDICATION OF RATE CUT BY JEROME POWELL
U.S. light crude oil prices increased by over two percent per barrel on Friday following remarks by Federal Reserve Chair Jerome Powell that suggested they might reduce interest rates.
Brent crude futures climbed 1.80, or 2.33 percent, to $79.02 a barrel while U.S. West Texas Intermediate (WTI) crude futures saw their value surge 1.82 or 2.49 percent higher, closing up at $74.83.
“The Federal Reserve’s pivot is real and is having an effect across the board,” stated Phil Flynn, senior analyst with Price Futures Group. It has had an effect on all commodities.
AMBIGUITY
Although the comments provided some clarity to the finance markets over the short future, they did not provide any indications of what the Fed could proceed following its September meeting.
However, the speech proved that the Fed is at the brink of a crucial event in its two-year fight against inflation.
For the majority of the time the labor market was quite robust, giving the officials ample opportunity to work on reducing inflation to the central bank’s target of 2.
The Fed has maintained its benchmark rate at an area of 5.25%-5.5 percent — its highest rate in more than 20 years — over the last year to help in pursuit of this goal, thereby boosting up borrowing costs throughout the entire economy.
But just as inflation been gaining momentum there are cracks appearing on the employment front, leading some Fed officials to fear that the current high rate of inflation could be an imminent threat to the strength of the economy.
The warning signals came from an unsatisfactory July employment report that shook financial markets.
“We do not seek or welcome further cooling in labor market conditions.” Powell added, stating the slowing in the labour marketplace was “unmistakable.”
POLICY SUM UP
After a delay in raising rates due to an increase in inflation triggered by the Covid-19 pandemic, Powell’s comments illustrate the ways Fed officials hope to avoid a repeat policy blunder since price increases are decreasing.
Their performance or failure will determine the likelihood of the so-called soft landing, the remarkable feat of smothering an surge of inflation without tumbling an economy in recession.
“Our objective has been to restore price stability while maintaining a strong labor market, avoiding the sharp increases in unemployment that characterized earlier disinflationary episodes when inflation expectations were less well anchored,” Powell stated. “While the task is not complete, we have made a good deal of progress toward that outcome.”
In their last meeting in July in July, they were “vast majority” of Fed officials agreed that it would be appropriate to reduce rates for September if economic reports continued to be consistent like they had hoped.
While inflation is still higher than the Fed’s target however, it has seen a significant decline from the recent high of 7.1 percentage in 2022.
The central bank’s favorite inflation measure is the personal price index for consumption, was up 2.5 percent in June compared to the previous year.
WHAT’S NEXT
Powell’s remarks are likely to be welcomed by Americans who are struggling with high interest rates on automobiles, mortgages and credit cards and other loans.
The market is widely expecting cuts of a quarter point next week’s Federal Open Market Committee next will meet on Sept. 17-18.
There are still questions about the direction of the Fed’s future and Powell did not provide any additional information.
Investors are considering whether another job report that is negative could force the Fed to reduce rates by a greater than usual 50 basis point in September.
Another issue to consider is how policymakers will determine the speed and magnitude of rate cuts in the following months.
Powell stated that policymakers “will do everything we can to support a strong labor market as we make further progress toward price stability.”
