Federal Reserve Chairman Jerome Powell and his central bank colleagues face a very different dilemma than the one they faced a year ago when they met on Friday in Jackson Hole, Wyoming, at the central bank’s annual economic symposium.
The main question last August was how long interest rates needed to remain at 20-year highs to tame inflation.
This year, with inflation showing new signs of subsiding and the job market slowing, the question is not whether the central bank will cut interest rates in September, but how much.
Investors will be listening for the answer on Friday at 10 a.m. ET when Chairman Powell speaks, where he will have a chance to hint at the future direction of monetary policy.
Federal Reserve Chairman Jay Powell (right), European Central Bank President Christine Lagarde (left), and Bank of Japan Governor Kazuo Ueda (center) at Jackson Lake Lodge last year. (Natalie Bering/Getty Images) (Natalie Bering via Getty Images)
At a press conference following the Fed’s last meeting on July 31, he said a 25 basis point rate cut was possible next month, but played down the idea of a bigger cut, such as 50 basis points.
According to minutes of the meeting released on Wednesday, “several” Fed policymakers argued that there was a “plausible basis” to cut interest rates by 25 basis points at the July meeting or that “such a decision could have been supported.”
A “majority” of those at the meeting agreed that a rate cut in September was “likely” if price and employment data improved.
Read more: Fed forecast for 2024: Experts discuss the possibility of a rate cut
Since the July meeting, there have been further signs of subsiding inflation and a softening job market, leading some to argue that this is already happening.
In fact, revised figures released by the Labor Department on Wednesday showed the U.S. economy had 818,000 fewer jobs in March 2024 than originally reported, suggesting the labor market may have been cooling for much longer than initially thought.
Why the Federal Reserve Meets in Jackson Hole
The tradition of gathering in Jackson Hole began more than 40 years ago in 1982, when officials from the Federal Reserve Bank of Kansas City chose the location for their get-together.
That year, the Kansas City Fed thought the best way to encourage then-chairman Paul Volcker to accept the invitation was to hold the event in late August at a good spot for fly-fishing, as Volcker’s love of the sport was widely known.
Decades later, central bankers, academics, policymakers and journalists from around the world still gather in the same place to discuss economics and monetary policy. The event takes place at Jackson Lake Lodge in Grand Teton National Park.
Paul Volcker smokes a cigar with his hands on his hips during a meeting in Washington in 1982. He was chairman of the Federal Reserve at the time. (Bettmann via Getty Images)
Traditionally, the Fed chairman has used his Jackson Hole speech to deliver key long-term policy messages.
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In a 2010 speech, former Fed Chairman Ben Bernanke argued that the Fed could stimulate the economy through bond purchases, a tool also known as quantitative easing (QE).
Chairman Powell’s 2018 “Guided by the Stars” speech, perhaps his most memorable as chairman, outlined his thinking about a natural real interest rate that neither spurs nor slows growth.
In a shorter-than-usual speech, Powell vowed to do what’s necessary to bring inflation back to the central bank’s 2% target in 2022, sending markets tumbling after warning that higher interest rates could bring pain and higher unemployment.
Read more: How the Federal Reserve’s interest rate decision will affect your bank accounts, CDs, loans and credit cards
“We will continue our efforts until we are confident the job is done,” he said at the time.
Last August, Chairman Powell pledged to curb inflation somehow and reaffirmed that the Fed was “prepared to raise interest rates further.”
“Inflation has come down from its peak, which is a welcome development, but it is still too high,” he said last year.
“I don’t think he knows yet.”
The chairman’s tone is likely to change significantly this Friday following the release of more encouraging inflation data that underpins the Fed’s progress.
Some Fed watchers are hoping not from Powell with a specific prediction for September, but rather a reminder that the Fed will be paying close attention to employment going forward as the job market weakens.
“He wants to be very transparent, but frankly I don’t think we know yet,” said Wilmer Stith, fixed-income portfolio manager at Wilmington Trust Inc. “They’re probably going to be even more focused on making sure the unemployment rate doesn’t fall any further.”
The Fed has a dual mandate to maintain price stability and maximum employment. The latter has become more important as unemployment rises, increasing pressure on the Fed to act. In July, the U.S. unemployment rate rose to 4.3%, the highest level since October 2021.
Luke Tilley, chief economist at Wilmington Trust, expects Powell to discuss the natural interest rate, the rate at which monetary policy neither stimulates nor restricts economic growth.
This measure, also known as the “neutral” interest rate, helps understand how restrictive central banks really are.
“The debate about what is neutral and what is restrictive will give the Fed an opportunity to say, ‘We’re going to lower rates, but we want to be clear that we’re just taking the brakes off a little bit, we’re not going to accelerate,'” Tilley said.
Esther George, a former president of the Kansas City Federal Reserve Bank and former host of the Jackson Hole conference, said she expects Powell to do something similar to what he did in his 2018 “STARS” speech.
“I’m hoping that he’ll take this topic and step back and get some perspective,” George said. “The question I’m going to ask in this speech is, what do you think the last four years have taught us about inflation trends, about the labor market?”
But George acknowledged that people will be looking to the speech for clues about what the Fed will do in September.
Federal Reserve Chairman Jerome Powell (right) and then-Kansas City Fed President Esther George (left), with New York Fed President John Williams (centre) at Jackson Hole in 2018. (Reuters/Ann Safir) (Reuters/Reuters)
He said market expectations “appear to be more aggressive than the outlook suggests, with the economy growing above potential.”
“I think they will continue on a gradual path, but I think they will continue to keep a close eye on inflation developments as they begin the rate-cutting process.”
Fed watchers may have to wait beyond this week for further confirmation of what’s to come in September, most notably the August jobs report due to be released on September 6th.
Any surprises in the report could change the Fed’s calculations: A weaker-than-expected July jobs report sparked the worst stock market sell-off this year and has some Fed watchers predicting a 50-basis-point rate cut.
But traders have trimmed those bets over the past week as new reports on the economy’s resilience have eased concerns that a major slowdown in the U.S. economy is on the horizon.
Until a few weeks ago, the chances that the Fed will cut interest rates by 25 basis points rather than 50 basis points at its Sept. 17-18 meeting were around 74 percent.
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