Fed Chairman says ‘time has come’ to lower interest rates

Fed Chair Jay Powell’s speech at the Jackson Hole symposium acknowledged that it was time to cut interest rates from their two-decade high.

“The time has come for policy to adjust,” Powell said. “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.”

The Fed has in the past attracted criticism for responding too slowly to surging inflation and an overheated US labour market. This has, it has been argued, exacerbated the country’s inflation, and impaired macroeconomic performance more generally.

The Federal Open Market Committee (FOMC) has been tightening monetary policy since early 2022, making borrowing less attractive by increasing interest rates, affecting personal loans, mortgages, and credit card repayments.

But with Powell’s recent comments at Jackson Hole, and news that many members of the FOMC favoured cuts if inflation data continued to show improvement, the Dow Jones Industrial Average rallied by 400 points.

Some economists have been surprised by how well the economy has withstood tight monetary policy, although inevitably there have been casualties, notably the housing sector, which has slowed considerably under the weight of mortgage rates that topped seven per cent until a recent easing.

Commenting on Powell’s speech and the effects of a tightened monetary policy since early 2022, London Business School’s Professor Richard Portes said: “Monetary policy is perhaps not as powerful as we perhaps thought”.

One explanation for a variable picture of the US economy, reports Tim Smart of US News & World Report, is that there have been two economies: “one in which people with assets – those who own stocks or refinanced their mortgages at rates near three per cent at the beginning of the pandemic – have not felt the sting of higher rates, and one in which those who are of more modest means have struggled to gain traction or stay afloat”.