Federal Reserve Chairman Jerome Powell said that the time has come for the Fed to cut interest rates, confirming market expectations that the central bank will begin cutting rates next month. Powell also emphasized that he will prevent further cooling of the labor market.

"The time for adjusting policies has come," Powell said at the Jackson Hole Symposium on Friday. "The future direction is clear, and the timing and pace of rate cuts will depend on the upcoming data releases, evolving outlook, and risk balance."

The Federal Reserve Chairman also acknowledged recent progress in inflation. He said, "Our confidence in inflation sustainably returning to the 2% target has strengthened."

The yield on U.S. Treasuries fell in response, the S&P 500 index rose, and the U.S. dollar declined.

Interest rate swap traders' estimates of rates remained largely unchanged, with an expected total rate cut of about 102 basis points by the end of 2024. Bets on a 25 basis points cut in September remained mostly unchanged, while the probability of a 50 basis points cut slightly rose to 24%.

While Powell's remarks cleared some of the fog in the financial markets in the short term, they provided almost no clues on how the Fed may act after the September meeting.

However, Powell's speech at least confirms that the Fed's two-year battle with inflation is approaching a key turning point. For most of these two years, the labor market unexpectedly remained strong, giving officials enough room to lower the inflation rate and push it towards the central bank's 2% target. However, just as inflation was gradually approaching the target, cracks appeared on the employment side, with several Fed officials concerned that high interest rates pose a threat to the economy's continued strength.

Powell added, "We are not seeking nor do we want to see further cooling of the labor market. The slowdown in employment is clear and unequivocal."

Powell added that he believes the Federal Reserve has enough ammunition to deal with the rapid deterioration of the labor market.

He said, "Our current policy interest rate level gives us enough room to address any risks that may arise, including the risk of further weakening of the labor market."

Policy shift

Derek Tang, economist at LH Meyer/Monetary Policy Analytics, commented on Powell's speech, saying, "One thing that can be certain is that the Fed's focus is no longer on inflation issues, and I believe they are working to prevent the economy from falling into recession."

Powell's speech highlights the Fed officials' desire to avoid policy mistakes in the face of slowing inflation. Their success or failure will determine whether the US can achieve a so-called soft landing.

"Our goal has always been to restore price stability while maintaining a strong labor market and avoiding a sharp rise in unemployment," Powell said. "Although the task is not yet complete, we have made significant progress towards this outcome."

Minutes released this week from the last meeting in July showed that the "vast majority" of Fed officials believed that if economic data continued to meet expectations, a rate cut in September may be appropriate.

The path ahead

The market still has doubts about the interest rate prospects of the Federal Reserve, but Powell did not provide more clues.

Investors are weighing whether if the next non-farm payroll data still performs poorly, it will force the Federal Reserve to cut interest rates by 50 basis points in September. Another key issue is how policymakers will determine the speed and extent of rate cuts in the coming months.

Powell stated, "As we make further progress on price stability, policymakers will make every effort to support a strong labor market".

Goldman Sachs' chief economist Jan Hatzius said, "Powell wants to keep his options open. My interpretation is that he believes interest rate decisions will depend on economic data. If he made judgments in advance, he might become passive when the data arrives."

Before the September rate meeting, the Fed will also receive a jobs report and two inflation reports.

"It may not be necessary to cut rates by 50 basis points at the moment," former St. Louis Fed President Jim Bullard said on Friday. "I think this will trigger market expectations for a very rapid decline in interest rates. They may not need to do so."