Fed Chair Jerome Powell signals interest rate cut at Jackson Hole: 'Time has come', inflation risk has shifted

"The upside risks to inflation have diminished. And the downside risks to employment have increased," he said regarding the shift in the balance of risks to the Fed's dual mandate, which has understandably facilitated a shift towards a monetary policy easing.

In the run up to the event, the markets were keenly waiting to parse Powell's statement for any kind of signal about the timing, size and pace of interest-rate cuts.

The worst of the pandemic related economic distortions are fading. Powell said, adding: "Inflation has declined significantly. The labour market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic."

Ahead of the speech, Bloomberg reported citing futures markets data that the investors are pricing in a 25 basis points rate cut at the Fed’s September 17-18 policy meeting. Further, the markets anticipate almost one full percentage point of rate cuts by the end of the year 2024.

Cooling inflation gives US Fed room to consider easier monetary policy

Jerome Powell highlighted the progress made on inflation, indicating that the Federal Reserve can now focus equally on the other aspect of its dual mandate: ensuring the economy remains close to full employment.

His comments follow a consistent decline in the inflation rate, which is approaching the Fed’s 2 percent target, but hasn't quite reached it yet. The Fed's preferred inflation gauge recently showed a rate of 2.5 percent, down from 3.2 percent a year ago and significantly lower than its peak above 7% in June 2022.

"With a careful easing of policy restraint, there is good reason to believe that the economy can return to 2% inflation while maintaining a strong labour market," Powell said.

Softening labour market needs Fed's attention

At the same time, concerns have risen over a softening labour market, with investors worried about the economy slipping into recession. Recent data showed that the US job growth was weaker than previously estimated in the 12 months leading up to March, with the Bureau of Labor Statistics' preliminary 2024 review showing 818,000 fewer jobs than initially reported.

This raised concerns among investors about the stability of the US economy as interest rates remain at a 23-year high.

Global stocks cheered Jerome Powell's remarks, with both US indices and the world indices soaring to near all-time highs. In the US, the Dow Jones Industrial average rose 434 points, or 1.1 percent; the S&P 500 gained 1.3 percent, approaching all-time high; and the Nasdaq Composite added 1.8 percent.

The MSCI AC World Index rose as much as 1.1 percent, all set to close at an all-time high, surpassing its previous high of July 16.

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