Quick Hit:

Federal Reserve Chair Jerome Powell announced that "the time has come" for the central bank to begin cutting its key interest rate from its 23-year high. While Powell did not specify when the cuts would start, the Fed is widely expected to announce a modest reduction during its mid-September meeting despite Trump arguing the Fed should avoid rate cuts so close to an election.

Key Details:

• Speaking at the Fed's annual economic conference in Jackson Hole, Wyoming, Powell hinted at the possibility of multiple rate cuts but provided few specifics, stating, "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."

• Inflation has significantly decreased from its peak of 7.1% two years ago, with the Fed's preferred measure showing a drop to 2.5% last month, close to the central bank's 2% target. Powell expressed confidence that inflation is now "on a sustainable path back to 2%," despite prices continuing to rise.

• Powell highlighted the Fed's commitment to maintaining economic growth and a strong labor market, even as recent hiring has slowed. He noted that the Fed will "do everything we can to support a strong labor market as we make further progress toward price stability."

Diving Deeper:

Federal Reserve Chair Jerome Powell has signaled that the central bank is prepared to start reducing its key interest rate, which is currently at a 23-year high. In his keynote speech at the Fed's annual economic conference in Jackson Hole, Wyoming, Powell remarked that "the time has come for policy to adjust," suggesting that while the specifics of the rate cuts remain uncertain, the Fed is likely to announce a modest quarter-point cut during its meeting in mid-September.

Powell's mention of multiple rate cuts hinted at the possibility of a series of reductions, which many economists have anticipated. He underscored that the timing and size of these cuts would be determined by incoming economic data and the overall outlook.

The Fed Chair pointed out that inflation, which had reached its highest level in four decades, is now largely under control. The Fed's preferred inflation measure recently fell to 2.5%, down from a peak of 7.1% two years ago, and is now nearing the central bank's 2% target. Powell expressed growing confidence that inflation is on a sustainable path back to this target.

In his speech, Powell also addressed the importance of sustaining economic growth and supporting a strong labor market, even as hiring has slowed. He stated that by cutting rates, "there is good reason to think that the economy will get back to 2% inflation while maintaining a strong labor market."

The anticipated rate cuts come as the U.S. economy faces a mixed outlook. While inflation has decreased and retail sales have shown robust gains, recent reports of slower hiring and a rise in the unemployment rate have raised concerns about a potential recession. Wall Street traders now expect the Fed to implement a series of rate cuts, starting with a quarter-point reduction in September, followed by additional cuts in November and December.

However, Powell's announcement has also sparked political debate, particularly with the upcoming presidential election. Former President Donald Trump has argued that the Fed should avoid cutting rates so close to the election, but Powell has consistently emphasized that the central bank's decisions are based solely on economic data, not political considerations. Powell's speech highlighted the Fed's success in reducing high inflation without triggering a recession, a feat attributed to the resolution of pandemic-related supply chain disruptions and a cooling of wage growth.