Analysis-Powell's Fed not shy about cuts in election year, ready to protect labor market By Reuters

Written by Howard Schneider

JACKSON HOLE, Wyoming (Reuters) – Federal Reserve Chairman Jerome Powell made it clear on Friday that the US central bank will not hesitate to cut interest rates in the final weeks of the presidential election campaign and that protecting the labor market is now its prerogative. the best.

“The time has come for policy to be adjusted,” Powell said in a speech at the Kansas City Fed's annual Jackson Hole conference in a strong signal that the central bank will begin cutting rates in mid-September, about seven weeks before the November 5 election. .

His comments — a declaration that the Fed's war on inflation was over and protecting jobs was at the top of the to-do list — came the morning after Vice President Kamala Harris accepted the Democratic presidential nomination, a development that disrupted the convention. a race that had been leaning against former President Donald Trump, the Republican candidate.

The comments raised the first rate of tapering at the Fed's meeting on September 17-18, a move Trump, who has been highly critical of Powell even though he chose him for the Fed's top job, and some Republican lawmakers have warned will be seen as an executive. the party's attempt to improve the economy before the vote.

Powell and other policymakers, including other Trump appointees, such as Fed Governor Christopher Waller, have continued for the past four weeks to move toward lowering the consensus rate at next month's meeting, citing economic data that continues to show inflation as risks. labor markets have expanded.

This wouldn't be the first time the Fed has embarked on a rate-cutting cycle in an election year, and last year's policy changes have been accompanied by both wins and losses for incumbents and challengers. But the rate cut on September 18 will be – in about seven weeks – the closest policy reversal to occur before a presidential vote since at least 1976.

Meanwhile, the Fed chief, Arthur Burns, began a short cycle of humiliation starting four weeks before the election that included a race between Republican President Gerald Ford (NYSE: ) and Democratic challenger Jimmy Carter. Ford is missing.

'DO EVERYTHING WE DO'

Congress has charged the Fed with maintaining a high level of employment consistent with stable inflation, and with the unemployment rate rising nearly a percentage point — from 3.4% to 4.3% — last year, Powell said the Fed has seen enough.

“We neither want nor accept further cooling of labor market conditions,” Powell said in a speech at Wyoming's Grand Teton National Park, answering a still-open question: How much job weakness the Fed can tolerate or demand. was needed to curb inflation in the economy? The answer is no, with the rate of inflation the Fed uses for its 2% target now at 2.5% and appears to be on a downward trajectory.

With price pressures easing and many hiring measures starting to weaken, Powell said the central bank will now “do everything it can to support a strong labor market,” a comment some analysts say has opened the door to a half-percentage-point cut. as opposed to the traditional quarter point increment.

It was a significant change of tone in Powell's comments as inflation picks up in 2021 and 2022. The Fed began raising the rate of its monetary policy in March 2022 to the highest rate in a quarter of a century, and at the second Jackson Hole conference. years ago he warned that workers and families would feel “pain” in the form of rising unemployment and higher debt costs.

Credit was definitely more expensive. The average interest rate on a 30-year mortgage has risen from less than 3% in the summer of 2021, before the rate hike began, to nearly 8% last October after the Fed's policy rate reached in its place by 5.25%. -5.50% range in July 2023.

But the pain in the labor market did not go unnoticed. The unemployment rate, which has been at 5.7% since the late 1940s, remained below 4% from February 2022 – the eve of the Fed's rate hike – until this past May. Wages continue to rise.

Even the current rate of 4.3% is about what the central bank feels is consistent with the Fed's 2% inflation target over time.

But it's higher than what Powell found when he became Fed chief in 2018, conditions he says he wants to restore when the COVID-19 pandemic put more than 20 million people out of work in the spring of 2020 and raised the unemployment rate. as 14.8%.

A significant increase from the current level of unemployment could weaken Powell's legacy as Fed chief who overhauled monetary policy to put more weight on the central bank's employment mandate in the belief that low unemployment rates and stable inflation could coexist.

He says he is always optimistic.

“With an appropriate dial back on policy restraint, there is good reason to think the economy will return to 2% inflation while maintaining a strong labor market,” Powell said. The Fed's observation rate puts the winds in the economy, and it is undoubtedly much higher than the “neutral rate” that does not prevent or stimulate economic growth – and even further from the level that will reach zero “liftoff” in 2022 – “the current level of our country. The policy level gives us an opportunity enough to respond,” he said.