Powell may use Jackson Hole speech to hint at how fast and how far the Fed could cut rates

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WASHINGTON (AP) — Federal Reserve officials say they’re increasingly confident they’ve nearly tamed inflation. Now, the health of the labor market is starting to worry them.

With inflation slowing toward its 2% target, hiring slowing and unemployment rising, the Federal Reserve is poised to cut its benchmark interest rate next month from a 23-year high. But how quickly it cuts rates after that will largely determine whether employers continue to hire. A Fed rate cut would ultimately lead to lower rates on auto loans, mortgages and other forms of consumer borrowing.

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Federal Reserve Chairman Jerome Powell is likely to offer some hints about how the bank views the economy and what its next steps might be in a high-profile speech on Friday in Jackson Hole, Wyoming, at the Fed’s annual conference of central bankers. It’s a platform that Powell and his predecessors have often used to signal changes in their thinking or approach.

Powell is likely to signal that the Fed has become more confident that inflation is heading back toward its 2% target, which it has long said would be necessary before it starts cutting interest rates.

Economists generally agree that the Fed is close to overcoming high inflation, which has brought financial pain to millions of households for three years as the economy recovers from the pandemic-induced recession. But few economists believe Powell or any other Fed official is ready to declare “mission accomplished.”

“I don’t think the Fed is afraid of inflation,” said Tom Porcelli, chief U.S. economist at PGIM Fixed Income. “At this point, it’s right for the Fed to focus more on employment than inflation. Its policy is designed to counter inflation that could be much higher than this.”

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But the pace of rate cuts in the coming months will depend on what economic data shows. After the government reported this month that hiring in July was much lower than expected and the unemployment rate hit a three-year high of 4.3%, stocks fell for two days on concerns that the United States could slide into recession. Some economists have begun to predict a half-percentage-point rate cut in September and perhaps another in November.

But healthier economic reports last week, including another drop in inflation and strong gains in retail sales, have largely allayed those concerns. Wall Street traders now expect the Fed to cut rates three times by quarter-points in September, November and December, though December will be a toss-up between a quarter-point and a half-point cut. Mortgage rates have already started to fall in anticipation of the rate cut.

Some officials have said a half-percentage-point rate cut by the Fed in September could become more likely if there are signs of a further slowdown in hiring. The next jobs report is due on Sept. 6, after Jackson Hole but before the Fed’s next meeting in mid-September.

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“The evidence of accelerating weakness in labor markets may warrant faster action, either in terms of the rate increases or the speed with which we try to get back” to interest rates that no longer constrain the economy, Atlanta Fed President Raphael Boucek said in an interview with The Associated Press on Monday.

Even if employment remains strong, the Fed is poised to cut interest rates this year given the steady progress on inflation, economists say. Last week, the government said consumer prices rose just 2.9% in July from a year earlier, the smallest increase in more than three years.

Boucek noted that the economy has changed from what it was just a few months ago, when he was suggesting that a rate cut might not be necessary until the last three months of the year.

“I have more confidence that we are likely to reach our inflation target. We have seen labor markets weaken significantly compared to where they were last year. We may need to change our policy stance sooner than I had previously thought,” he said.

Both Boucek and Austin Goolsbee, president of the Federal Reserve Bank of Chicago, say that inflation-adjusted interest rates—which many businesses and investors pay most attention to—rise as inflation falls even as inflation slows. When the Fed first set its benchmark rate at its current 5.3%, inflation—excluding volatile energy and food costs—was 4.7%. Now it’s just 3.2%.

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“Our policies are becoming more stringent with each passing moment in these kinds of situations,” Boucek said. “We have to be concerned” that interest rates are so high that they could slow the economy.

However, Boucek said the labor market and economy appear mostly healthy for now, and he still expects a “soft landing,” with inflation falling to the Fed’s 2% target without triggering a recession.

With the economic outlook unclear and the Fed so focused on what future data shows, there may not be much Powell can say on Friday about the central bank’s next steps.

Given the Fed’s focus on how economic data comes in, “it will be difficult for Powell to pre-commit to a particular path at Jackson Hole,” Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said in a research note.

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