Jerome Powell, the chair of the Federal Reserve, made it abundantly evident on Friday that safeguarding the labour market was now the central bank’s top priority and that it would not hesitate to switch to interest rate reductions in the closing weeks of a presidential election campaign.
In an address to the Kansas City Fed’s annual Jackson Hole conference, Powell stated, “The time has come for policy to adjust,” sending a clear message that the central bank will begin reducing rates in mid-September, or around seven weeks before the election on November 5.
The day after Vice President Kamala Harris accepted the Democratic nomination for president, a development that threw off the race that had been favouring former President Donald Trump, the Republican nominee, his remarks, which amounted to a declaration that the Fed’s battle with inflation was over and that protecting jobs was now its top priority, were made.
The comments set the stage for the Fed’s first rate decrease on September 17–18, a move that some Republican lawmakers and Trump, who harshly criticized Powell despite having chosen him for the top Fed position, have warned will be viewed as a politicized attempt to boost the economy before of the election.
In the last four weeks, Powell and other policymakers—including those Trump appointed, like Fed Governor Christopher Waller—have gradually moved toward a consensus rate cut at the meeting next month. They have cited economic data that increasingly shows inflation is declining as labour market risks rise.
The Fed has previously started a rate-cutting cycle during an election year, and in those cases, both incumbents and challengers have won and lost. This is not the first time this has happened. However, a rate reduction on September 18 would mark the second-closest policy shift to occur before a presidential election since at least 1976, at about seven weeks.
The Fed’s head at the time, Arthur Burns, started a brief cycle of rate hikes only four weeks before an election in which Republican President Gerald Ford and Democratic opponent Jimmy Carter were to square off. Ford was defeated.
Powell stated the Fed had had enough after the unemployment rate increased by over a percentage point in the last year, from 3.4% to 4.3%. Congress has mandated that the Fed maintain the highest level of employment consistent with stable inflation.
“We do not seek or welcome further cooling in labour market conditions,” Powell said in his speech at a lodge in Wyoming’s Grand Teton National Park, answering a question that until now remained open: How much more job weakness would the Fed tolerate or feel it required to wring the last bit of inflation from the economy? The answer is none, with the inflation measure the Fed uses for its 2% target now at 2.5% and seemingly on the way lower.
Powell said that the central bank would now “do everything we can to support a strong labour market,” which some analysts said opened the door to an initial cut of half a percentage point rather than the more customary quarter-percentage-point increments. Powell stated that price pressures were easing and that many hiring measures were beginning to weaken.
With inflation shooting up in 2021 and 2022, Powell’s remarks took on a very different tone. The Fed warned that workers and families would experience “pain” in the form of increased joblessness and higher borrowing costs at the Jackson Hole meeting two years ago. The Fed started hiking its benchmark policy rate in March 2022 to what would be the highest level in a quarter of a century.
Undoubtedly, credit grew more expensive. After the Fed’s policy rate hit a plateau in July 2023, the average interest rate on a 30-year fixed-rate house loan increased from less than 3% in the summer of 2021—before the rate hikes started—to nearly 8% in October of last year.
However, the agony of the labour market never really showed up. Before this past May, the unemployment rate, which has averaged 5.7% since the late 1940s, was below 4% in February 2022, the night before the Fed raised interest rates. Wages kept rising.
Even the present 4.3% rate is roughly in line with the central bank’s assessment of what will ultimately be consistent with the Fed’s 2% inflation target.
However, it surpasses the levels Powell took over upon taking over as Fed chairman in 2018. Powell had stated that he aimed to bring back those levels after the COVID-19 epidemic forced over 20 million people out of work in the spring of 2020 and raised the jobless rate to 14.8%.
Powell’s reputation as the head of the Fed who reoriented monetary policy to give the central bank’s employment mandate more weight in the idea that low unemployment rates and stable inflation could coexist might be weakened by a major increase in unemployment from the current level.
He claims he is still hopeful.
“With an appropriate dialling back of policy restraint, there is good reason to think that the economy will get back to 2% inflation while maintaining a strong labour market,” Powell said. With the Fed’s benchmark rate posing a headwind to the economy, and arguably far above the “neutral rate” that neither restrains nor stimulates economic growth – and even farther from the near-zero “liftoff” level in 2022 – “the current level of our policy rate gives us ample room to respond,” he said.
