Fed chair says ‘time has come’ to cut interest rates amid signs of weakening job market

Financial markets rallied Friday after Fed Chairman Jerome Powell said that it’s time to start cutting interest rates. The question now is by how much, and how quickly fed policymakers will act. Powell said inflation is low enough and that the bigger threat to the economy is now a weakening jobs market. John Yang speaks with Rachel Siegel, who covers the Fed for The Washington Post, for more.
Amna Nawaz:
Financial markets rallied today after Fed Chairman Jerome Powell clearly said that it’s time to start cutting interest rates from the 5.3 percent level they have been for more than a year.
As John Yang tells us, the question now is by how much and how quickly Fed policymakers will act.
John Yang:
Amna, speaking at an annual conference in Jackson Hole, Wyoming, Powell said inflation is now low enough and that the bigger threat to the economy is a weakening jobs market.
Jerome Powell, Federal Reserve Chairman:
The time has come for policy to adjust. 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. It seems unlikely that the labor market will be a source of elevated inflationary pressures any time soon. We do not seek or welcome further cooling in labor market conditions.
John Yang:
Powell also addressed critics who say the Fed was slow to react to early signs of inflation.
Rachel Siegel covers the Fed for The Washington Post, and she is in Jackson Hole.
Rachel, you’re out there with a bunch of central bankers, economists from around the world, even some Fed policymakers. What are they saying about the — not only the state of the economy, as Powell described it, but also the interest rate policy pathway that he laid out?
Rachel Siegel, The Washington Post:
Well, there was a lot that was quite expected in what we heard from Chair Powell this morning.
Everyone came out here expecting that he would tee up the path for a rate cut in September. And, sure enough, he said the time has come. So that was one signal that was pretty much expected across the board.
What we didn’t hear from Chair Powell, though, and where the conversation has now shifted is how much they’re going to decide to cut by. That’s ultimately going to be determined by how worried they are about this slowing in the job market.
We heard Powell say that they’re not looking to see any more slowing nor do they want to cause any more slowing. That could trigger a more aggressive rate cut at their next meeting in September. It could tee up more rate cuts later on in the year. But those are questions that we didn’t get quite answered this morning.
John Yang:
What’s the analysis? I mean, we will get one more jobs report before the September meeting and you do have meetings in November and December. How aggressive do they think he’s going to move and will it continue or will there be a pause?
Rachel Siegel:
Even, though, they left the door open to many options, there are really a couple of feasible paths here.
If Central Bankers are really worried, if they’re starting to see this pile up of data suggesting that the labor market is not only slowing, but maybe even crumbling under the weight of higher rates with a rising unemployment rate or mass layoffs, they could decide to issue a half-point cut in September.
And not only would that be of a larger scale, but it would signal this deeper concern and taking that concern seriously that they need to act and act fast.
Or they could stick to a more typical quarter-point, which signals a little bit more of a calm approach, a gradual approach, and maybe tee up similar quarter-point cuts for the rest of the year.
You also hear some officials say that it doesn’t really matter exactly the scale of the cut at one meeting or another, but more that they set out on a path, that they have a plan and that they’re really resolute in making sure they see it through.
John Yang:
Talking about concerns about the job market, earlier this week, the Labor Department revised downward their report on the number of jobs created between March 2023 and March 2024, down about 818,000.
How significant was that in Powell’s thinking, do you think?
Rachel Siegel:
You know, we will often hear from policymakers that they never hedge a decision to one specific data point.
And I think this is actually a good example. So that release came out as I was on the plane to fly out here. And when that finally refreshed on my phone, I was quite surprised. But I will be talking to officials here who say that maybe they had a little bit more of a sense of that all along, that they have been trying to really look under the hood of the jobs data that we have seen over the last couple of months that has hinted at perhaps more slowing than these official top-line numbers would tell us.
And they also say that even those revisions don’t overhaul their sense. The job market has been a pillar of economic strength. What they don’t want to do is, they don’t want to ruin that. They don’t want to cause so much pressure on the economy that they undermine that kind of progress.
And I think that those revisions, along with the July jobs report that also came in below expectations, are all part of this puzzle that explains to Central Bankers that it’s time to take some pressure off.
John Yang:
Powell also seemed to acknowledge today that the Fed didn’t act quickly when the first signs of inflation turned up because he thought it was going to be temporary, transitory, as he calls it, and that other economists agreed with him, he said.
What do critics say about that?
Rachel Siegel:
Well, now you hear critics who say that the Fed is falling behind once again. They point to just a couple of years ago, when the Fed made this mistaken assessment that inflation would prove to be temporary. It was why they held off on raising rates for so long.
Now you hear those critics come back and say, the Fed is moving too slow once again, they’re keeping too much pressure on the economy and that we’re starting to see the consequences.
I think the point that Powell was trying to make this morning is that officials are coming at this with quite a bit of humility, having learned those lessons pretty recently. He even had a clever line about sort of looking out onto the room and seeing many people who had been on the good ship transitory with them, that he recognized some of his old shipmates.
These are a lot of people who are still finding their way to figure out a very uncertain economy that continues to surprise them.
John Yang:
The Fed, we know, cherishes its political independence, that they are insulated from political pressures.
But this rate cut is going to land just in the middle of the presidential campaign, just a couple of months before the election. Already, Donald Trump is talking about how this could benefit the Democrats, how the administration manipulated that jobs revision to benefit themselves.
Number one, what do you make of that? And, number two, how do you think Powell will handle that?
Rachel Siegel:
Well, we have heard from President Trump talking about this for days now. He falsely said that the Democrats had manipulated the data, that it was all part of this plan to juice the numbers right before Election Day.
That is false. We know that that is not true. But I do think it’s this reminder that, even though the Fed tries incredibly hard to stay out of politics, to keep their decisions from being influenced by the political calendar, they don’t operate in a vacuum. And they are steering an economy that is going to be influenced in many ways by whoever wins this election.
Powell has shown that he is quite steadfast in just cutting through all of that. It was a couple of years ago actually at this very conference in Jackson Hole when President Trump called Powell a traitor or an enemy to the people. These are things that Powell, unfortunately, is used to.
But we’re capping off a week of the Democratic National Convention. Candidates are crisscrossing the country trying to woo voters on their message for the economy. And right here in Jackson Hole, the Fed is really trying to ignore a lot of it.
John Yang:
Rachel Siegel of The Washington Post, thank you very much.
Rachel Siegel:
Thank you.