(Photo : Fed Reserve)
US Federal Reserve chief Powell

• Federal Reserve Chair Jerome Powell signals imminent interest rate cuts.
• The shift in policy aims to defend against job loss and achieve a 2% inflation target.
• Analysts expect the first rate cut at the Fed's September policy meeting.
• The market predicts a larger-than-usual initial cut, marking a significant shift in the central bank's policy stance.

In a significant policy shift, Federal Reserve Chair Jerome Powell has signaled an imminent start to interest rate cuts. This announcement was made during a highly anticipated speech at the Kansas City Fed's annual economic conference in Jackson Hole, Wyoming. Powell's statement, The time has come for policy to adjust, underscores the urgency of the situation. The direction, timing, and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.

This pivot from a battle against inflation to a readiness to defend against job loss is a significant shift in the Fed's stance. Powell expressed concerns over a cooling job market and confidence that inflation is within reach of the U.S. central bank's 2% target. Inflation, which had risen to about 7% during the COVID-19 pandemic, is now on a sustainable path back to 2%, according to Powell.

He also noted that the downside risks to employment have increased, with a slowdown in the labor market being unmistakable. Despite the rise in the unemployment rate to 4.3% being driven by slower hiring rather than layoffs, Powell signaled the Fed would not tolerate further erosion.

Market Expectations and Reactions

Analysts and financial markets had already widely expected the Fed to deliver its first rate cut at its Sept. 17-18 policy meeting. This view was cemented after a readout of the central bank's July meeting said a vast majority of policymakers agreed the policy easing likely would begin next month. Most analysts have forecast the Fed will kick off its policy easing with a quarter-percentage-point rate reduction, the central bank's usual increment.

However, Powell's new emphasis on protecting the job market raises the chance of a bigger cut, especially if the U.S. government's jobs report for August, due to be released on Sept. 6, shows further deterioration in what many policymakers have called a still-healthy job market. With its policy rate currently in the 5.25%-5.50% range, the Fed has ample room to reduce borrowing costs to cushion the economy, Powell said.

After his remarks, traders moved to price in a better than one-in-three chance that the Fed will start its easing cycle with a half-percentage-point rate cut, and are fully confident of at least one super-sized cut before the end of this year. Chair Powell's speech made it clear that there are likely a series of rate cuts on the way, and some could be of the 50-basis-point variety, wrote Omair Sharif, the president of Inflation Insights.

Historical Precedence and Future Projections

This policy shift by the Federal Reserve is reminiscent of similar moves in the past. For instance, in the run-up to the 1976 U.S. presidential election, then-Fed chief Arthur Burns embarked on a short easing cycle just four weeks ahead of the election. This historical precedent underscores the Fed's role in managing economic stability amidst political transitions, even as it aims to make decisions independent of political cycles.

For his part, Powell on Friday came as close as he is likely to in declaring victory over the outbreak of inflation that rattled the economy at the start of the pandemic. The fast rise in prices led the Fed to increase its benchmark policy rate from the near-zero level to the current range, which is the highest in a quarter of a century. It has been held there for more than a year even as the economy defied frequent predictions of recession, inflation fell, and economic growth continued - the makings of a textbook soft landing, with the endgame of rate cuts now set to begin.

While the task is not complete, we have made a good deal of progress toward restoring price stability, Powell said in his speech. The Fed defines price stability as 2% inflation, as measured by the personal consumption expenditures price index. The index is currently running at an annual rate of 2.5%. With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2% inflation while maintaining a strong labor market, he said.

In conclusion, the Federal Reserve, under the leadership of Jerome Powell, is set to embark on a series of interest rate cuts to support the labor market and achieve price stability. This move, which comes amidst a consequential U.S. presidential election, marks a significant shift in the central bank's policy stance. The timing and magnitude of these cuts will depend on incoming data and the evolving economic outlook. However, the market is confident that the easing cycle will begin next month, with a high probability of a larger-than-usual initial cut. This policy shift underscores the Fed's commitment to maintaining economic stability and its readiness to adapt to changing economic conditions.