U.S. Federal Reserve Chairman Jerome Powell on Friday gave a clear endorsement of easing monetary policy, saying he does not want the labor market to remain tight and expressing confidence that inflation is close to the central bank’s 2% target.
“Upside risks to inflation have diminished. Downside risks to employment have increased,” Powell said in his speech at the Fed’s annual economic conference in Jackson Hole, Wyoming.
“It is time to adjust policy. The direction is clear, and the timing and pace of rate cuts will depend on incoming data, changes in expectations and the balance of risks,” he continued.
Referring to the two goals that Congress has tasked the Fed with achieving, Powell said his “confidence has increased that inflation is on a sustainable path back to 2%,” after it rose to about 7% during the coronavirus pandemic, while the unemployment rate has increased.
It is noteworthy that the US Federal Reserve kept the interest rate in the range of 5.25% to 5.5% at its last meeting in June.
Powell added that the unemployment rate rose by about one percentage point over the past year largely due to the increase in the labor force and the slowdown in hiring, not to an increase in layoffs.
The unemployment rate is currently 4.3%, roughly at the level that Fed officials feel is consistent with stable inflation over the long term.
“We do not want or welcome further tightening of labor market conditions,” Powell said. “We will do everything we can to support a strong labor market while making further progress toward price stability. As policy tightening is appropriately eased, there is good reason to believe that the economy will return to 2 percent inflation while maintaining a strong labor market.”
Traders continued to bet on a quarter-point rate cut at the Federal Reserve’s Sept. 17-18 meeting on Friday, but after Powell’s comments, about one in three traders are betting on a half-point cut in inflation.
“While the job is not done yet, we have made a great deal of progress” toward restoring price stability, Powell continued.
The Federal Reserve says price stability occurs when the inflation rate, as measured by the U.S. personal consumption expenditures price index, is 2%, and the index has been running at an annual rate of 2.5%.
Powell made the remarks at the Jackson Lake Resort in Grand Teton National Park in Wyoming before a large crowd of central bankers and economists.
This gathering has become a global platform for officials to formulate their ideas regarding monetary policy and the economy.
