Fed's Powell, in policy shift, says 'time has come' to cut rates

By Howard Schneider and Ann Saphir

JACKSON HOLE, Wyoming (Reuters) -Federal Reserve Chair Jerome Powell on Friday endorsed an imminent start to interest rate cuts, saying further cooling in the job market would be unwelcome and expressing confidence that inflation is within reach of the U.S. central bank's 2% target.

"The time has come for policy to adjust," Powell said in a highly anticipated speech to the Kansas City Fed's annual economic conference in Jackson Hole, Wyoming. "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 emphatic pivot from a battle against inflation to a readiness to defend against job loss opens a new chapter for the central bank just as a consequential U.S. presidential election nears.

Powell said his "confidence has grown that inflation is on a sustainable path back to 2%," after rising to about 7% during the COVID-19 pandemic, and the upside risks have diminished.

Meanwhile, he said, a slowdown in the labor market is "unmistakable" and "the downside risks to employment have increased."

And while slower hiring, rather than a more concerning rise in layoffs, has so far driven the rapid rise in the unemployment rate to 4.3%, Powell signaled the Fed would not countenance further erosion.

"We do not seek or welcome further cooling in labor market conditions," he said. "We will do everything we can to support a strong labor market as we make further progress toward price stability."

Analysts and financial markets had already widely expected the Fed to deliver its first rate cut at its Sept. 17-18 policy meeting, a view that was cemented after a readout of the central bank's July meeting said a "vast majority" of policymakers agreed the policy easing likely would begin next month.

Most analysts have forecast the Fed will kick off its policy easing with a quarter-percentage-point rate reduction, the central bank's usual increment.

Powell's new emphasis on protecting the job market raises the chance of a bigger cut, especially if the U.S. government's jobs report for August, due to be released on Sept. 6, shows further deterioration in what many policymakers have called a still-healthy job market.

With its policy rate currently in the 5.25%-5.50% range, the Fed has "ample room" to reduce borrowing costs to cushion the economy, Powell said.

After his remarks, traders moved to price in a better than one-in-three chance that the Fed will start its easing cycle with a half-percentage-point rate cut, and are fully confident of at least one super-sized cut before the end of this year.

"Chair Powell's speech made it clear that there are likely a series of rate cuts on the way, and some could be of the 50-basis-point variety," wrote Omair Sharif, the president of Inflation Insights. "While some Fed officials may want to go in 25-basis-point increments, the Chair retained optionality ... i.e., 'we'll go 50 basis points if we feel like it is needed.'"

Markets are betting the Fed's policy rate will be in the 3.00%-3.25% range by the end of 2025, more than 2 percentage points below where it is now.

The impact of Powell's remarks is rippling to other central banks as well.

U.S. stocks jumped after the release of Powell's remarks, with the benchmark S&P 500 index gaining about 1% and nearing a record high. U.S. Treasury yields dropped and the dollar weakened against a basket of currencies.

'SOFT LANDING'

Chicago Fed Bank President Austan Goolsbee has for months signaled his support for a rate cut, and on Friday did so again, saying policy is currently too tight, especially with the labor market flashing warning lights.

Other policymakers, including Atlanta Fed President Raphael Bostic, who has previously been more hesitant on rate cuts, also joined in to back the coming policy easing.

For his part, Powell on Friday came as close as he is likely to in declaring victory over the outbreak of inflation that rattled the economy at the start of the pandemic.

The fast rise in prices led the Fed to increase its benchmark policy rate from the near-zero level to the current range, which is the highest in a quarter of a century. It has been held there for more than a year even as the economy defied frequent predictions of recession, inflation fell, and economic growth continued - the makings of a textbook "soft landing," with the endgame of rate cuts now set to begin.

"While the task is not complete, we have made a good deal of progress" toward restoring price stability, Powell said in his speech. The Fed defines price stability as 2% inflation, as measured by the personal consumption expenditures price index. The index is currently running at an annual rate of 2.5%.

"With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2% inflation while maintaining a strong labor market," he said.

Powell spoke at the Jackson Lake Lodge in Wyoming's Grand Teton National Park to a gathering of central bankers and economists that has become a global platform for officials to shape views of monetary policy and the economy.

Fed officials will provide updated economic projections at their meeting next month, including more details on how they expect the benchmark policy rate to evolve from here.

(Reporting by Howard Schneider; Additional reporting by Ann Saphir, Michael S. Derby, Lindsay Dunsmuir and Carolina Mandl; Editing by Dan Burns and Paul Simao)