By Michael Salemme —

In a consequential speech at the Jackson Hole conference last Friday, the Chairman of the Federal Reserve, Jerome Powell, gave one of the most explicit signals that a rate cut was coming soon — very likely at the scheduled September meeting of the Federal Reserve. His comments led to significant increases in the stock market, with the S&P 500, NASDAQ, and DOW JONES all notching gains of over 1% that Friday as the market reacted to what was seen as proof that the Fed’s “higher for longer” strategy of keeping rates restrictive would not continue for much longer. 

Powell’s speech came at a time the Fed has seen increased pressure from the market and politicians to ensure that its dual mandate of stabilizing prices and promoting employment is correctly balanced. Given that the jobs market has increasingly shown signs of cooling, and because the U.S. inflation rate has reached its lowest level since March 2021 (2.9%), the Fed is under pressure to end its restrictive market policy and lower interest rates. These separate pressures on the Fed have put the goal of achieving a soft landing, in which a recession is avoided while prices are stabilized, at the forefront of economic discussion. Reaching the goal of a soft landing has both never been closer while also still being precarious. Chair Powell stated that “while the task is not complete, we have made a good deal of progress toward that outcome.” His speech indicated the Feds’ optimistic outlook in achieving his goal of a soft landing even as the BLS revision of job numbers showed that the number of jobs in the economy was actually more than 800,000 lower than previously reported. However, while the jobs numbers are certainly cooler than they were one or two years ago, the overall economy and consumer confidence still show signs of strength, with the last retail sales numbers coming in at a 1% increase far above the expected 0.3%, showing that the consumer continues to be willing to spend even as some parts of the economy have Slowed relative to the final two quarters of 2023. All this means that Powell’s decision to cut interest rates could come right in time for the soft landing to be achieved. However, the next jobs report will be an important barometer for whether Powell’s cuts are too late, too soon, or just at the right moment.   

The Chair’s decision to signal an upcoming rate cut was made most evident when Powell said, “The time has come for policy to adjust.” This decision to firmly signal a rate cut has created increased discussion about the size of a possible cut during the Fed’s September meeting. There are two significant camps, one calling for a 25-basis point reduction in interest rates and another calling for 50 basis points of reduction in interest rates. One of Powell’s most indicative statements about his view of how far cuts should go came when he said that a strong jobs market could be protected, with Powell saying “an appropriate dialing back of policy restraint,” which comes as the last four months of unemployment data have shown a growth in the unemployment rate, the highest it’s been since October 2021. For Powell, the decision to cut comes with many headwinds. First, he wants to avoid the same policy failure that came with the Fed’s early reluctance to increase interest rates and the optics of a rate cut in the midst of a presidential election. However, for Jerome Powell, the decision to reduce interest rates seems to be one he is comfortable making, as it has become clear that such a cut is the only way to effectively uphold and balance the Fed’s dual mandate of maximizing employment and ensuring stable prices. The coming period of reduced Fed restrictiveness will likely be just as fraught as a period of rate hikes. However, the Fed seems to still have some confidence that it may be able to steer the United States economy into the long-hoped-for soft landing.