Powell admits it - rate cuts are coming

Looks like Federal Reserve Chair Jerome Powell has finally seen the light and will adjust policy to match US economic reality.

JUST IN: Federal Reserve Chair Jerome Powell on Friday indicated that the central bank would soon begin cutting interest rates. https://t.co/ukeBHHkRh4 pic.twitter.com/FyuLJwd73I

— ABC News (@ABC) August 23, 2024

Under Powell, the Fed raised its benchmark rate to the highest level in 23 years to subdue inflation that two years ago was running at the hottest pace in more than four decades. Inflation has come down steadily, and investors now expect the Fed to start cutting rates at its next meeting in September — an expectation that essentially got Powell's endorsement Friday.

“My confidence has grown that inflation is on a sustainable path back to 2%,” Powell said in his keynote speech at the Fed’s annual economic conference in Jackson Hole.

He noted that inflation, according to the Fed's preferred gauge, had fallen to [a 12-month rate of] 2.5% last from a peak of 7.1% two years ago. Measured by the better known consumer price index, inflation has dropped from a peak 9.1% in mid-2022 to 2.9% last month. Both are edging closer to the Fed's 2% target.

Powell sounded confident that the Fed would achieve a so-called soft landing — containing inflation without causing a recession. "There is good reason to think that the economy will get back to 2% inflation while maintaining a strong labor market,'' he said.

I still think a goal of 2% inflation is arbitrary and off-base, given that (as I've mentioned before) the US economy grew plenty of jobs and output with inflation of 3-4% throughout the 1980s and 1990s. But regardless, inflation has cooled off after the profiteering and shortages price spikes of 2021 and 2022, and PCE inflation has been pretty consistently below 3% for a year now, other than when business got one last chance to re-set prices at the start of this year.

We still have to wait until September 17 to get those lower rates on credit cards and other Fed-connected items, and that's still a few months too late. And the real question is whether the rate cut will be a catch-up of 50 basis points, or only 25 points, which allows for more cuts as we move toward 2025.

But it is nice for the Fed to acknowledge that we are in a spot where caring about recession is at least worth worrying about as much as price levels, which is a bias I have in general (it's more important to have jobs, wages and growth), and it'll be fun to watch Trump's head snap off when the Fed does that overdue cut in 3 weeks.