Chair signals moves to bring rates lower are imminent
Interest rate cuts are on the way from the Federal Reserve, with Chair Jerome Powell saying on Friday that “the time has come” for rates to start moving lower amid cooling inflation and a slowing labor market.
Speaking in a keynote address at the Fed’s annual conference in Jackson Hole, Wyoming, Powell gave no indication of when the central bank would start trimming rates or by how much – but offered his strongest signal yet that a cut is imminent.
His comments arrived with markets already virtually certain a 25-basis-point cut to the Fed’s key rate will take place in September. “The direction of travel is clear,” Powell said, “and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
Inflation has ticked down significantly from the highs of mid-2022, with a further slowdown in the consumer price index (CPI) in July fueling conviction that price pressures are continuing to ease.
Overall annual inflation came in at 2.9% in July, its lowest year-over-year gain for over three years, while the Fed’s preferred gauge also slowed, to 2.5%.
Those developments were warmly welcomed by Powell in his comments at Jackson Hole. “My confidence has grown,” he said, “that inflation is on a sustainable path back to 2%.”
Speech by Chair Powell on the economic outlook at an economic policy symposium sponsored by @KansasCityFed: https://t.co/oBbmwVLBAz
— Federal Reserve (@federalreserve) August 23, 2024
Watch live: https://t.co/xOEbfu9h6K pic.twitter.com/WxwdMOn7jJ
After displaying surprising resilience through the opening quarter of the year, the US labor market has also sagged in recent months. The unemployment rate has risen to its highest level since the COVID-19 pandemic, 4.3%, although claims for unemployment benefits appear to be steadying rather than spiking.
In his comments on Friday, Powell said the Fed would “do everything we can to support a strong labor market as we make further progress toward price stability.”
Lowering rates, he added, would likely offer a way for the economy to return to the Fed’s 2% inflation target without further weakening the US’s jobs outlook.
What’s next for mortgage rates?
Mortgage Bankers Association (MBA) senior vice president and chief economist Mike Fratantoni welcomed Powell’s remarks, saying that a September cut would likely mark “the first in a series” and precipitate a significant reduction in the federal funds target during the coming 18 months.
The labor market’s cooldown, Frantoni said, “has given the Fed the confidence that inflation will not reaccelerate. There is certainly a risk that the unemployment rate could rise faster and further than the Fed would like, but Chair Powell indicated that they are watching and would react to such a further softening in the job market.”
While Powell’s comments appear to have given the green light to rate cuts, Fratantoni said market watchers shouldn’t expect significant movement in mortgage rates as a result – since investors had already priced in that likelihood.
Still, “the immediate reaction to the speech resulted in some reductions in longer-term Treasuries and secondary mortgage market yields,” he noted, “so mortgage rates may be somewhat lower in the near term.”
The MBA is currently expecting mortgage rates to continue dropping towards the 6% mark in the coming 12 months. The Fed is next scheduled to meet on interest rates on September 17-18.
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