Analysis: Powell’s Fed Not Hesitant About Election-Year Cuts, Prepared to Defend Job Market by Reuters

Federal Reserve Chair Jerome Powell emphasized on Friday that the U.S. central bank is prepared to shift to interest rate cuts as the presidential election campaign advances, prioritizing job market protection.

“The time has come for policy to adjust,” Powell stated during his address at the Kansas City Fed’s annual Jackson Hole conference, indicating that rate cuts could commence in mid-September, just seven weeks ahead of the November 5 election.

This announcement essentially signals the conclusion of the Fed’s battle with inflation, redirecting focus toward safeguarding employment. His comments followed Vice President Kamala Harris’s acceptance of the Democratic presidential nomination, a moment that has reshaped a race trending in favor of former President Donald Trump, the Republican challenger.

Powell’s remarks set the stage for a potential rate cut during the Federal Open Market Committee meeting on September 17-18. Trump, who has criticized Powell despite appointing him, along with some Republican lawmakers, expressed concern that such a move may be perceived as politically motivated to bolster the economy before the election.

Recently, Powell and other policymakers, including those appointed by Trump, have reached a consensus on the need for a rate cut next month, prompted by economic data indicating a decline in inflationary pressures and rising risks to the labor market.

This won’t be the first instance of the Fed initiating a rate-cutting cycle in an election year. Historically, such decisions have coincided with varying electoral outcomes. However, September 18’s anticipated cut would stand out, occurring just seven weeks prior to the election, making it one of the closest policy shifts to a presidential vote since at least 1976.

In that year, then-Fed Chairman Arthur Burns initiated a brief easing cycle just four weeks before the election between Republican President Gerald Ford and Democratic challenger Jimmy Carter, with Ford ultimately losing the election.

The Federal Reserve is tasked with achieving maximum employment while maintaining stable inflation. With the unemployment rate having climbed nearly a percentage point from 3.4% to 4.3% over the past year, Powell indicated the Fed has seen enough job market weakness.

“We do not seek or welcome further cooling in labor market conditions,” Powell stated, addressing the pivotal question of how much job market deterioration the Fed would tolerate in its efforts to contain inflation. The Fed’s preferred inflation measure is currently at 2.5%, suggesting it is on a downward trajectory.

Given the easing price pressures and the weakening of hiring indicators, Powell asserted that the Fed would now “do everything we can to support a strong labor market.” Analysts interpreted this as a potential sign for an initial cut of half a percentage point, rather than the more conventional quarter-point reductions.

This marks a notable shift from Powell’s earlier stance during the inflation surge of 2021 and 2022, wherein he initiated rate hikes beginning in March 2022. As a result, the benchmark policy rate reached its highest level in 25 years, with Powell previously warning of “pain” in the labor market due to higher unemployment and borrowing costs.

Although borrowing costs have indeed risen, with the average interest rate on a 30-year fixed mortgage climbing from below 3% in summer 2021 to nearly 8% last October, the anticipated labor market challenges did not fully materialize. Since February 2022, the unemployment rate had remained below 4% until May of this year, with wages continuing to rise.

The current unemployment rate of 4.3% aligns with what the Fed considers consistent with its long-term inflation target of 2%, though it is higher than rates Powell faced when he assumed the Fed leadership. He has expressed a desire to restore conditions following the pandemic’s impact, which saw unemployment spike to 14.8%.

A notable rise in the unemployment rate could tarnish Powell’s legacy as a Fed chair who emphasized employment in monetary policy, believing in the coexistence of low jobless rates and stable inflation.

Powell remains optimistic, stating, “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 highlighted that the current level of the Fed’s policy rate allows significant room for response to economic needs.