‘Time has come’ for rate cuts: Fed chair Powell

US Federal Reserve chairman Jerome Powell today told a central bank symposium that the "time has come" for the Fed to begin lowering borrowing costs, just weeks before the next Fed policy meeting in mid-September.

"The time has come for policy to adjust," he told an audience of central bankers and economists at the annual symposium at Jackson Hole, Wyoming. "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."

Powell's remarks today are the clearest signal that the Fed is ready to begin lowering borrowing costs, a move that would help spur economic activity as the economy has shown signs of slowing. The move would also come a little over two months before the presidential election in the US.

After the 31 July Fed policy meeting that kept the rate unchanged, Powell said that if economic data continued to come in as expected, a rate cut "could be on the table" for the September meeting.

After Powell's remarks today, the CME's FedWatch tool was signaling 65.5pc odds of a quarter point rate cut at the next Fed meeting and 34.5pc probability of a 50 basis point cut. That compares with 76pc for a quarter point cut and 24pc for a half point cut Thursday.

"With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2pc inflation while maintaining a strong labor market," he said today in the text of his speech. "The upside risks to inflation have diminished. And the downside risks to employment have increased."

The Fed — which has a dual mandate of pursuing maximum employment and price stability — has been battling to bring down inflation for the last two years after it peaked at 9.1pc in June 2022. In the sharpest course of rate hikes in four decades, the Fed pushed up its target rate by more than five percentage points to a range of 5.25-5.5pc from early 2022 through July 2023.

The Fed has maintained the target rate at that level since then, which has pushed the consumer price index to 2.9pc in the year through July, its lowest in three years. While inflation has slowed markedly, the economy has largely proven resilient.

Still, the labor market has shown signs of weakening recently, especially as a much weaker-than-expected employment report for July caused a brief meltdown on financial markets several weeks ago. This prompted some economists to warn that the Fed had been too slow in adjusting its policy as recession fears had mounted.

"We will do everything we can to support a strong labor market as we make further progress toward price stability," Powell said. "The current level of our policy rate gives us ample room to respond to any risks we may face."

Powell noted that the labor market "has cooled considerably from its formerly overheated state," pointing out that unemployment had risen by nearly one percentage point to 4.3pc in July from early 2023, "still low by historical standards… Even so, the cooling in labor market conditions is unmistakable."

By Bob Willis