Federal Reserve: May cut interest rates in September

On August 22, according to a CNBC/Bloomberg/WSJ report, Federal Reserve Chairman Jerome Powell on Friday offered a modest hint about possible future interest rate cuts, noting that high uncertainty makes the work of monetary policymakers difficult. The central bank president delivered a highly anticipated speech at the Fed's annual meeting in Jackson Hole, Wyoming. In his prepared remarks, he mentioned "sweeping changes" to tax, trade, and immigration policies. As a result, "the balance of risks appears to be shifting" between the Fed's goals of maximum employment and price stability. While he noted that the labor market remains strong and the economy is showing resilience, he said downside risks are rising. At the same time, he said tariffs are creating the risk of rising inflation again—a situation the Fed needs to avoid: stagflation.

Powell said that with the Fed's benchmark interest rate a full percentage point lower than when he delivered his keynote speech a year ago and unemployment still low, "we can prudently consider changing the stance of policy."

He added: "Nevertheless, with policy in restrictive territory, the underlying outlook and the evolving balance of risks may require us to adjust the stance of policy."

This was the only time in his speech that he came close to endorsing a rate cut, and Wall Street generally believes a rate cut will occur when the Fed's Open Market Committee next meets on September 16-17. However, the comments were enough to send stocks soaring and Treasury yields plunging. Following Powell's speech, the Dow Jones Industrial Average rose more than 600 points, while the yield on the policy-sensitive two-year Treasury note fell 0.08 percentage points to around 3.71%. Adding to market expectations, US President Donald Trump publicly and harshly criticized Powell and his colleagues, demanding a significant rate cut from the Federal Reserve. The Fed has held its benchmark lending rate in a range of 4.25% to 4.5% since December. Policymakers continue to cite the uncertain impact of tariffs on inflation as a reason for caution, arguing that current economic conditions and a slightly tighter policy stance provide time for further decision-making. The importance of the Fed's independence While Powell did not specifically address the White House's call for lower interest rates, he did point out the importance of the Fed's independence. "Federal Open Market Committee members will make these decisions entirely based on their assessment of the data and its impact on the economic outlook and the balance of risks. We will never deviate from that approach," he said. The speech comes amid ongoing negotiations between the White House and its global trading partners, a dynamic that often leaves the final outcome difficult to predict. Recent indicators suggest that consumer prices are gradually rising, but wholesale costs are increasing at a faster pace. The Trump administration argues that tariffs will not lead to lasting inflation, necessitating a rate cut. In his speech, Powell took the position that a range of outcomes are possible, and that a "reasonable baseline scenario" is that the impact of tariffs will be "transient—a one-time change in the price level" that might not justify maintaining high interest rates. However, he said nothing is certain at this point. "It will take time for increased tariffs to work their way through supply chains and distribution networks," Powell said. "In addition, the ongoing evolution of tariff rates could prolong the adjustment process." In addition to summarizing the current situation and potential outcomes, the speech also addressed the Fed's five-year review of its policy framework. This review features some notable changes from the Fed's last review in 2020. Back then, during the COVID-19 pandemic, the Fed shifted to "flexible average inflation targeting," effectively allowing inflation to rise above the Fed's 2% target after a prolonged period below 2%. This allowed policymakers to be patient if a slight increase in inflation signaled a fuller recovery in the labor market.

However, soon after the strategy was adopted, inflation began to climb, eventually reaching its highest level in 40 years, and policymakers mostly viewed the rise as "transitory" and not requiring interest rate hikes. Powell noted the devastating impact of inflation and the lessons learned from it.

"The idea of ​​intentionally and mildly overshooting inflation has proven irrelevant. As I publicly acknowledged in 2021, the inflation that emerged a few months after we announced the changes to the 2020 consensus statement was neither intentional nor mild," Powell said. "The past five years have been a painful reminder of the hardships that high inflation brings, especially for those least able to afford the higher costs of necessities of life." In addition, in this review, the Federal Reserve reiterated its commitment to its 2% inflation target. This has been criticized by all sides, with some arguing that interest rates are too high and could lead to a devaluation of the dollar, while others believe that the Fed needs to adopt a flexible policy.

Powell said: "We believe that our commitment to this goal is a key factor in helping to keep longer-term inflation expectations anchored."

The following is a summary of key points from Federal Reserve Chairman Powell's speech at the Kansas City Fed Economic Symposium:

1. At the Fed's September 16-17 meeting, Powell left room for a rate cut, saying: "The baseline outlook and the evolving balance of risks may require us to adjust our policy stance."

2. The Fed chairman also said, "The stability of the unemployment rate and other labor market indicators allows us to proceed cautiously as we consider changing our policy stance."