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Jerome Powell Signals A Conclusion to the Prolonged Debate on Rate Cuts

Brendon Ahn

Bloomberg

Amidst global attention on Federal Reserve Chair Jerome Powell’s perhaps most widely scrutinized policy speech on Friday, Mr. Powell clearly articulated that the central bank would cut interest rates in September. 


“The time has come for policy to adjust,” Mr. Powell decisively said during the Kansas City Fed’s annual conference at Jackson Hole in Wyoming, which could be the herald of the conclusion amidst debates on cutting interest rates. 


While the magnitude and coverage of this policy remain unclear as Mr. Powell states, “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,” Mr. Powell has provided a clear direction of where the policies are heading: cutting interest rates.

Bloomberg

Mr. Powell mainly asserts 3 motives behind cutting interest rates: a decline in inflation, securing the labor market, and providing flexibility for the market's future growth. Mr. Powell highlights that inflation has significantly fallen, from 5.7% in 2021 and a historic 9.1% in 2022 to 2.5% in August as he posits, “Inflation is now much closer to our objective... My confidence has grown that inflation is on a sustainable path back to 2 percent.” Mr. Powell is confident that inflation has fallen significantly, contiguous to the Fed’s target of 2%, and with inflationary pressures soothing, there is less need for harsh economic measures.


In addition, Mr. Powell also accentuated that the risks of employment and the labor market have risen while inflationary pressures have diminished as he said, “The upside risks to inflation have diminished. And the downside risks to employment have increased.” The Fed aims to prevent such risks via lowering interest rates thereby lowering borrowing costs and increasing consumer spending. 


Albeit giving a clear answer momentarily on the debate regarding interest rate cuts, it also sets future questions regarding the duration of how far the Fed should implement this policy. Like the Fed being tentative and circumspect to lower interest rates for the past 4 years, debates regarding the magnitude and the duration of this policy will continue throughout its implementation. And the answer, as Mr. Powell stated, will depend on future data on inflation and the labor market.

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