Federal Reserve Chair Jerome Powell said Friday that the "time has come" for the United States to start cutting interest rates, adding that his "confidence has grown" that the battle against inflation is on track.
"The time has come for policy to adjust," he said in a keynote speech at the Jackson Hole Economic Symposium in the western U.S. state of Wyoming, in unusually direct remarks about the likely path of monetary policy.
"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," he added.
U.S. stocks rose on Powell's remarks, with all three major indices on Wall Street up sharply at around 10 a.m. local time in Washington.
The annual economic symposium in Wyoming gives Powell a global platform to share the Fed's thinking with financial markets. He had said a few weeks ago that policymakers could cut rates "as soon as" September if the labor market remained solid and inflation continued to ease.
The Fed's benchmark lending rate currently sits at a 23-year high of between 5.25 and 5.50%, cooling demand in the world's largest economy ahead of November's presidential elections, in which inflation and the cost of living have taken a central role.
Powell said the Fed's restrictive monetary policy had "helped restore balance between aggregate supply and demand, easing inflationary pressures and ensuring that inflation expectations remained well anchored."
"My confidence has grown that inflation is on a sustainable path back to 2%," he added, referring to the Fed's long-term inflation target.
- 'Soft landing' in sight -
After holding its key lending rate at a two-decade high for more than a year, Powell's remarks suggest the U.S. central bank is now all but certain to start cutting rates in September as inflation continues to ease.
The Fed has a dual mandate from Congress to tackle both inflation and unemployment and has been signaling in recent months that the risks to the two sides of its mandate are now coming into better balance.
Powell said Friday that the U.S. labor market "has cooled considerably from its formerly overheated state," with the unemployment rate up sharply from last year, though at 4.3%, it remains low by historical standards.
"The cooling in labor market conditions is unmistakable," he added.
While inflation has fallen and the labor market has cooled, economic growth has remained positive, raising confidence that the Fed could pull off a so-called soft landing -- where it hits its inflation target without bringing about a recession or a substantial rise in unemployment.
- Pace of cuts -
Earlier this week, the minutes of the Fed's July rate decision spelled out the likely direction of travel: Most members of the bank's rate-setting committee said it would likely be "appropriate" to cut rates in September if the data continued to come in as expected.
"Inflation gives them the reason to start to cut rates," Nationwide Mutual Chief Economist Kathy Bostjancic told AFP ahead of Powell's speech, adding that the upcoming labor market data would likely dictate how aggressively they did so.
Many analysts expect the Fed to move ahead with a more cautious quarter-percentage-point rate cut in September but see a larger half-point cut as a possibility -- depending on upcoming data.
Futures traders put the chances of a smaller cut in September around 70% and the probability of a bigger cut at approximately 30%, according to data from CME Group.
The decision to cut by 25 or 50 basis points "will depend on how the data come in over the next month or so, and importantly, what the next jobs report looks like," Deutsche Bank Chief U.S. Economist Matthew Luzzetti told AFP ahead of Powell's speech.
A weaker jobs report would likely raise the chances of a larger half-point cut, he added.
Both Bostjancic and Luzzetti see three quarter-point cuts in the remaining three rate decisions this year as the most likely scenario -- higher than the median expectation of Fed policymakers back in June.
This would cut the Fed's benchmark lending rate by a total of 75 basis points, lowering it to between 4.50 and 4.75%.
But the financial markets think the Fed could go even further.
Futures traders currently assign a probability of more than 65% that the Fed will cut interest rates by at least a full percentage point by the end of the year.
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