WASHINGTON — Federal Reserve Chair Jerome Powell all but proclaimed victory in the fight against inflation and signaled that interest rate cuts are coming in a much-anticipated speech Friday in Jackson Hole, Wyoming.
Under Powell, the Fed raised its benchmark rate to the highest level in 23 years to subdue inflation that two years ago was running at the hottest pace in more than four decades. Inflation has come down steadily, and investors now expect the Fed to start cutting rates at its next meeting in September — an expectation that essentially got Powell’s endorsement Friday.
“My confidence has grown that inflation is on a sustainable path back to 2%,” Powell said in his keynote speech at the Fed’s annual economic conference in Jackson Hole.
He noted that inflation, according to the Fed’s preferred gauge, had fallen to 2.5% last from a peak of 7.1% two years ago. Measured by the better known consumer price index, inflation has dropped from a peak 9.1% in mid-2022 to 2.9% last month. Both are edging closer to the Fed’s 2% target.
Powell sounded confident that the Fed would achieve a so-called soft landing — containing inflation without causing a recession. “There is good reason to think that the economy will get back to 2% inflation while maintaining a strong labor market,” he said.
Higher rates contributed to progress against inflation, as did the easing of supply chain bottlenecks and worker shortages that caused shipping delays and higher prices as the economy bounded back with unexpected strength from COVID-19 lockdowns.
Powell suggested Friday that rate cuts are all but inevitable. “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,” he said.
Last year, the Fed had predicted that it would trim rates three times this year. But the cuts kept getting pushed back as the progress against inflation faltered early in 2024. Since then, the steady drop in inflation has resumed, giving the Fed more confidence that victory was in sight.
Powell acknowledged that he and his Fed colleagues misjudged the inflationary threat when it emerged in early 2021. At the time, they expected the flareup of higher prices to be short-lived — the temporary consequence of pandemic-related supply chain disruptions. The pressure, they thought, would fade “fairly quickly without the need for a monetary policy response — in short, that the inflation would be transitory.”
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