At the Federal Reserve's annual retreat in Jackson Hole, Wyo., Chairman Jerome Powell uttered the four words markets had been waiting for since last spring.
"The time has come," Powell said, for the Fed to begin reducing interest rates.
“The time has come for policy to adjust,” he 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 Federal Reserve was poised to cut rates in June when a sudden burst of inflation in May stayed its hand. Another inflation increase in June forced a reevaluation of the Fed's plans to cut rates by up to 125 basis points (one and a quarter percent) by the end of the year.
With the inflation rate in July coming in under 3% for the first time since 2022, the central bank seems ready to start cutting.
“The only question remaining for the Sept. 18 meeting is: By how much will the Fed be cutting?” said Joseph LaVorgna, chief economist at SMBC Nikko Securities.
Indeed, some eager beavers are calling for a rate cut of half or even a full percentage point. That's not likely unless the jobs report shows higher-than-expected unemployment.
“The outcome of the August employment report,” which will be reported Sept. 6, LaVorgna said, “is obviously critical.” If that report shows a second straight month of weak hiring, the Fed may cut its key rate by a more aggressive half-point.
The interest rate-sensitive industries like housing and auto loans could use a shot in the arm.
In the short run, impending rate cuts could boost voters’ views on the economy’s health, which could benefit Vice President Kamala Harris. That’s because lower borrowing costs will provide relief for the housing market and boost share prices, with corporate debt costs set to decrease.
But the Fed only has one interest rate meeting scheduled between now and the election — next month — meaning that most of the fallout will come after the voting.
Even so, any move to reduce rates could draw a political backlash, with former President Donald Trump warning that it could amount to election interference that could help Harris.
Few voters pay attention to interest rates, and most voters think of their own personal financial situation rather than the macroeconomy. But in a close election, perceptions matter. If the perception is that the macroeconomy is improving, it can only help Harris.
“We will do everything we can,” Powell said, “to support a strong labor market as we make further progress toward price stability.” This is a signal that Powell may be willing to risk higher inflation to keep unemployment numbers down. That could lead to unexpected bumps in inflation, which could derail the Fed's plans for rate cuts.
Indeed, Powell's optimism seems misplaced, according to some economists.
“I see a strong consumer,” said Michael Strain, director of economic policy studies at the conservative American Enterprise Institut. Strain calls the rate cuts "premature."
“I see an economy that’s likely growing above potential," he said. "I see a labor market where the unemployment rate could be falling this month, and it’s not clear to me why that combination of data would suggest that a data-dependent Fed would begin its cutting cycle in September.”
Anyone who said the Fed is immune to politics doesn't know what they're talking about.
A rate cut in mid-September, coming less than two months before the presidential election, could bring some unwelcome political heat on the Fed, which seeks to avoid becoming entangled in election-year politics. Former President Donald Trump has argued that the Fed shouldn’t cut rates so close to an election. But Powell has repeatedly underscored that the central bank would make its rate decisions based purely on economic data, without regard to the political calendar.
And if you believe that, I've got a bridge over the Chicago River I'd like to sell you.
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