Fed chief signals in Jackson Hole that weak August jobs data would punch ticket to half-point rate cut

By Greg Robb

Chair Jerome Powell strikes dramatic rate-cut tone cuts while keeping all options on Fed's table

JACKSON HOLE, Wyo. - Federal Reserve Chair Jerome Powell on Friday announced that "the time has come" for lower interest rates and stressed that the central bank was prepared to slash rates aggressively if the economy were to weaken quickly.

The unusually blunt talk from the mild-mannered Fed chief was designed to bolster confidence in the economy, said Torsten Sløk, chief economist at Apollo Global Management, in an interview after the speech.

But Powell kept the central bank's options open, offering no information about when and by how much the Fed would move after September.

"Saying 'the time has come' does make it sound relatively dramatic, but the data will determine the speed at which interest rates are going to come down," Sløk said.

"Is this a 90-degree turn, or a 25-degree turn?" Sløk wondered, observing that the answer was not clear.

Sløk is in a camp that believes the Fed isn't late to easing and that a September rate cut could prove to be an insurance move.

'If the labor market continues to show signs of strength, then they will go 25 basis points. If the labor market, of course, shown signs of weakness, then the [Fed] is definitely open now to going 50 basis points.'Torsten Sløk, Apollo Global Management

"The economy is actually in better shape than what many people believe," the Apollo economist said. Layoffs remain low, and business leaders report that consumers are still spending at a healthy pace, he said.

MarketWatch live coverage from Jackson Hole: Powell concedes he captained 'the good ship Transitory'

The market has priced in 100 basis points of easing this year, which are not needed, Sløk said. He said he doesn't foresee the market displaying disappointment that the Fed isn't cutting rates quickly, as long as corporate earnings continue to be strong.

In his speech early Friday, Powell said the U.S. economy continues to grow at a solid pace. That was an attempt to offer reassurance against recession concerns, said Krishna Guha, vice chairman of Evercore ISI.

Powell stressed in his speech that inflation had come down so much over the past 18 months that the central bank now has the ability to respond to any weakness in the labor market, Sløk said. This could also serve to bolster investor and consumer confidence that a worst-case scenario can be avoided.

"The employment report, of course, for August becomes extremely important in this context," Sløk said.

"If the labor market continues to show signs of strength, then they will go 25 basis points. If the labor market, of course, shown signs of weakness, then the [Fed] is definitely open now to going 50 basis points," he said.

If the job market weakens suddenly, Powell stressed that the Fed would react swiftly.

'[T]he odds of a 50 [basis point] cut have increased.'Omair Sharif, Inflation Insights

Economists are divided over whether the Fed "is behind the curve," meaning it's tardily entering this rate-cut stage of the policy cycle.

Omair Sharif, the president of Inflation Insights, said he thought Powell had opened the door to a series of rate cuts, "and some could be of the 50 [basis points] variety."

"I have been in the 25 [basis point] cut camp for September, but given what I felt was a more concerned tone about the labor-market outlook than the chair has expressed in recent memory, the odds of a 50 [point] cut have increased," Sharif said in a note to clients.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said Powell's speech was "better late than never, but late was avoidable."

"It would have been much better for the economy if the Fed had put rather less weight on a few disappointing inflation prints and had eased in June. March would have been even better, but policy makers have been so determined not to be caught out by unexpected inflation again that they have waited until the risk has become vanishingly small. To put it another way, they have waited far too long," Shepherdson said, in a research note.

He said Powell's statement that the Fed did not seek or welcome further cooling in the labor market "is likely to haunt him over the next few months."

'It would have been much better for the economy if the Fed had put rather less weight on a few disappointing inflation prints and had eased in June.'Ian Shepherdson, Pantheon Macroeconomics

Guha said major questions remain, including whether Powell might be slowed down by his colleagues. "But the speech commits the Fed to a forward-looking risk-management approach that derisks the macro outlook some and is risk-positive, in our view," Guha said.

Read on: U.S. economy grows again in August, S&P finds, and should ease near-term recession fears

-Greg Robb

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08-23-24 1325ET

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