Fed Policymakers Indicate Readiness to Begin Cutting Interest Rates, According to Reuters

By Ann Saphir, Lindsay Dunsmuir, and Michael S. Derby

Federal Reserve officials indicated on Friday that they are poised to initiate a series of interest rate cuts during the upcoming central bank meeting in two weeks. This decision comes in light of a cooling labor market that may worsen if no policy adjustments are made.

Their statements were largely interpreted as a signal for a quarter-percentage-point reduction in the Fed’s policy rate, with the possibility of further or larger cuts if job market conditions continue to weaken.

Since July 2023, the Fed has maintained its benchmark borrowing rate within the 5.25%-5.50% range after implementing a series of aggressive rate hikes over the previous 18 months to counteract rising inflation.

The Fed’s preferred inflation measure has decreased significantly from a mid-2022 peak of around 7%. The unemployment rate, which was 3.5% when the Fed halted rate increases, has since climbed to 4.2%, accompanied by a slowdown in monthly job growth.

Central bank officials have shifted their monetary policy focus from solely addressing inflation to now prioritizing support for employment.

"It is now appropriate to dial down the degree of restrictiveness in the stance of policy by reducing the target range for the federal funds rate," stated New York Fed President John Williams during a Council on Foreign Relations event.

Fed Governor Christopher Waller expanded on this, expressing support for consecutive cuts or larger reductions if warranted by economic data. "I was a strong proponent of front-loading rate hikes when inflation surged in 2022, and I will advocate for front-loading rate cuts if necessary," Waller noted.

Chicago Fed President Austan Goolsbee, who has consistently suggested the need for lower rates, affirmed his intention to adjust policy based on incoming data. "I don’t think what happens at the next meeting is the most important aspect," Goolsbee remarked in an interview, emphasizing the need for the Fed to monitor data trends over the following months.

Analysts interpreted the Fed’s messaging clearly. According to economists at Goldman Sachs, Fed leadership appears to regard a 25-basis-point cut as the baseline for the upcoming meeting, while remaining open to 50-basis-point cuts in subsequent meetings if the labor market continues to decline.

Previously, Fed Chair Jerome Powell sparked speculation on the potential for a September rate cut when he stated that "the time has come" to ease policy. Waller echoed this sentiment, suggesting that a series of reductions may be justified.

Employment data released earlier on Friday revealed that average monthly job gains from June to August stood at 116,000, falling short of what many economists deem necessary for a growing population. Waller indicated that this report, along with other recent data, suggests a continued moderation in the labor market, although he stated that the economy does not appear to be on a path toward recession. However, he added, "the current data no longer requires patience; it requires action."

All three policymakers noted advancements in lowering inflation, with Waller remarking that inflation is now on the "right path" toward the Fed’s 2% target. The underlying inflation rate, based on the core personal consumption expenditures price index, is averaging 2.6% on an annualized six-month basis and 1.7% on an annualized three-month basis.

Traders looking at futures tied to the Fed’s policy rate are currently predicting a 75% likelihood that the central bank will initiate a 25-basis-point rate cut. They anticipate a policy rate of 4.25%-4.50% by year’s end, indicating the possibility of a larger reduction in one of the last two meetings of the year.

"It is clear that the employment market is slowing down, and the Fed has to start moving," stated Eugenio Aleman, chief economist at Raymond James. However, he cautioned, "the sky is not falling, and a 50-basis-point cut would send the wrong message to the market," implying that such an action could misinterpret the economy’s overall health. "They don’t want to do that."