Federal Reserve officials are increasingly confident that they have nearly controlled inflation, shifting their concern to the health of the job market. With inflation cooling towards the Fed’s 2% target, signs of slowing hiring, and a rising unemployment rate, the Fed is poised to cut its benchmark interest rate soon.
However, the pace of future rate cuts will largely depend on the labor market’s performance. A lower benchmark rate could reduce borrowing costs for consumers, such as auto loans and mortgages.
Chair Jerome Powell is expected to address the Fed’s outlook in a high-profile speech at the annual Jackson Hole conference. Powell may signal that the Fed is more assured that inflation is under control, bringing the possibility of rate cuts closer.
Although many economists believe the Fed is nearing success in controlling inflation, they caution that it is still too early to declare complete victory. The Fed is now likely to focus more on labor market conditions than on inflation.
The speed of future rate cuts will depend on upcoming economic data, particularly labor market indicators. A recent report showing lower-than-expected hiring and a three-year high in the unemployment rate raised fears of a potential recession, leading to speculation about significant rate cuts.
However, subsequent positive economic reports, including declining inflation and strong retail sales, have calmed those fears. Wall Street now anticipates several small rate cuts through the end of the year, though the exact pace remains uncertain.
Fed officials, including Raphael Bostic and Austan Goolsbee, acknowledge that a further slowdown in hiring could accelerate rate cuts. Bostic noted that the economy has changed significantly, with inflation falling and the labor market weakening compared to last year.
As inflation decreases, real interest rates have effectively risen, tightening economic conditions even without further rate increases. This shift may prompt the Fed to adjust its policy stance sooner than previously expected.
Despite these concerns, Bostic remains optimistic that the economy can achieve a “soft landing,” where inflation reaches the Fed’s 2% target without triggering a recession.
However, with the economic outlook still uncertain and future decisions heavily dependent on incoming data, Powell may be cautious in committing to a specific policy trajectory in his upcoming speech. The Fed’s next steps will likely be guided by how the job market and inflation data evolve in the coming months.
