“The time has come” for the US Federal Reserve to cut interest rates, its chairman declared, hailing progress in the battle to bring down inflation from its highest level in a generation.
With price growth now on a “sustainable” path back to normal levels, Jerome Powell signaled that the central bank was ready to start reducing rates from next month.
The US labor market – which rapidly recovered from the damage inflicted during the early months of the Covid-19 crisis, adding millions of jobs – now faces greater “downside risks”, he acknowledged. Unemployment ticked up last month.
But Powell expressed confidence that there was “good reason” to believe inflation could retreat further without damaging the world’s largest economy – if the Fed now acts.
“The time has come for policy to adjust,” Powell told an annual symposium for central bankers at Jackson Hole in Wyoming on Friday. “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.”
Two years ago, when inflation was soaring during the pandemic, policymakers at the Fed scrambled to cool the US economy by raising rates to a two-decade high. Now price growth is falling back – it rose at an annual rate of 2.9% in July, having faded from a peak of 9.1% in June 2022 – they are preparing to cut rates, but have yet to do so.
Officials hope to guide the US to a so-called “soft landing”, whereby inflation is normalized, and recession avoided. The Fed’s target of inflation is 2%.
The central bank’s next rate-setting meeting is due to take place in September, when it is widely expected to cut rates for the first time since Covid-19 took hold four years ago.
In contrast to Powell’s comments, the governor of the Bank of England, Andrew Bailey, warned the UK economy still faced risks from high inflation that may require interest rates to remain higher for longer.
“It is too early to declare victory,” he told the Jackson Hole summit on Friday. “We need to be cautious because the job is not completed – we are not yet back to target on a sustained basis.”
The UK central bank cut interest rates for the first time since the Covid pandemic earlier this month, with a quarter-point reduction in borrowing costs to 5%. The European Central Bank also cut interest rates in June, but has since held its main policy rates unchanged.
UK inflation rose above the Bank’s 2% target in July, hitting 2.2%. The Bank has warned UK inflation could peak at about 2.75%, before falling back below target within two years’ time.