At an annual meeting of global central bankers in Jackson Hole, Wyoming, on Friday, Federal Reserve Chairman Jerome Powell sent his strongest signal yet that the monetary authority is ready to begin cutting its benchmark federal funds rate, which has been at a 20-year high since July 2023.
“It is time to adjust policy,” Powell said. “The direction is clear and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the allocation of risks.”
While most economists have predicted a rate cut at the Fed’s September meeting, Powell has so far addressed the issue mostly with gentle hints and cautious language. Friday’s comments, however, were widely interpreted as confirmation and US financial markets reacted positively to the Fed chair’s latest announcement.
If the Fed makes a downward revision next month, it would be the first cut in more than four years and the beginning of a shift away from one of the central bank’s most aggressive strategies to contain inflationary pressures fueled by the unprecedented economic impact of the global health crisis caused by Covid-19.
The Fed’s overnight interest rate on intrabank loans has been at 5.25 to 5.5 percent since last summer, the highest in 23 years after the monetary authority raised it 11 times in a row to cool the U.S. economy, which was running at full speed as it recovered from the pandemic.
Inflation and unemployment in focus
While inflation in the U.S. has fallen to 2.5% according to the Fed’s preferred measure, it peaked above 7% in 2022 and rose again earlier this year before turning downward again in the second quarter of 2024. But even as inflation shows signs of reliably moving back toward the Fed’s 2% target, an unexpectedly fast-declining labor market is a driving factor behind the decision to cut interest rates in September.
“Overall, the economy continues to grow solidly, but inflation and labor market data show an evolving situation,” Powell said. “Upside risks to inflation have declined and downside risks to employment have increased.”
According to the latest Labor Department data released earlier this month, U.S. businesses added 114,000 nonfarm jobs in July, falling far short of the 175,000 many economists expected and well below the average of 217,000 new jobs per month last year. The annual unemployment rate hit 4.3% in July, its highest since October 2021 and up from 4.1% in June. According to the Labor Department’s employment summary for July, the number of unemployed rose by 352,000 last month, to 7.2 million. The new data reflects a sharp increase in U.S. unemployment compared to 12 months ago, when the unemployment rate was 3.5% and the number of unemployed was 5.9 million.
USA has created fewer jobs than expected
In addition to the latest job growth data, the Labor Department announced earlier this week that it was revising its original estimate of how many jobs will be created in 2023 downward by 818,000 positions. As part of the revision, the total number of jobs created last year was adjusted to 2 million. Although data revisions are a regular part of the agency’s labor market analyses, the adjustment was larger than usual.
The Fed’s two-part policy mandate of supporting price stability and maximum employment has been heavily weighted toward inflation in recent years. But the recent labor market slowdown has – as Powell noted in his comments Friday – shifted the monetary authority’s focus to the employment side of its responsibilities.
“The unemployment rate began rising over a year ago and is now at 4.3%,” Powell said. “Still low by historical standards, but almost a full percentage point above the level seen in early 2023. Most of this increase has occurred in the past six months. So far, rising unemployment has not been the result of increased layoffs, as is typically the case in an economic downturn. Rather, the increase primarily reflects a substantial increase in the labor supply and a slowdown in the previously frenetic pace of hiring.”
“We do not seek or welcome a further slowdown in the labor market,” Powell said.
At the state level, Utah’s unemployment rate has also increased, but it remains well below the national average. The latest data from the Utah Department of Workforce Services shows that the state’s unemployment rate was 3.2% in July, two-tenths of a percent higher than in June.
Interest rate adjustments are the Fed’s main weapon against rising prices for consumer goods and services. The rate hikes increase the cost of debt for businesses and consumers, a move aimed at reducing spending and overall economic activity. This change in dynamics usually leads to lower inflation rates.
The next meeting of the US Federal Reserve, at which the Federal Open Market Committee will also vote on setting the interest rate, is scheduled for September 17 and 18.
