Federal Reserve Prepares to Cut Interest Rates as Inflation Cools

Federal Reserve Chairman Jerome Powell has indicated that he and his colleagues are preparing to lower interest rates in response to decreasing inflation and the rising unemployment rate.

Speaking at the annual conclave of global central bankers in Jackson Hole, Wyoming, Powell highlighted significant progress in reducing inflation, which previously reached a four-decade high in 2022. He acknowledged that the U.S. job market is also cooling, noting a recent uptick in the unemployment rate.

To prevent further weakening of the job market, Powell stated that the Federal Reserve must adjust its policies. He remarked, “The upside risks to inflation have diminished. And the downside risks to employment have increased. The time has come for policy to adjust.”

Following his comments, investors expressed optimism, leading to a rise in major stock indexes. The Dow Jones Industrial Average increased by more than 300 points, while the broader S&P 500 index gained approximately 1%.

The Federal Reserve has kept interest rates at their highest level in over two decades for more than a year as part of its strategy to combat inflation. This approach has made borrowing more expensive, affecting loans for cars, business financing, and credit card balances.

Powell cautioned that the timeline and magnitude of any interest rate cuts will depend on forthcoming economic developments. Currently, market expectations suggest a quarter percentage point cut may occur during the Federal Reserve’s meeting in mid-September. Additionally, a larger cut of half a percentage point is a possibility if the August jobs report, expected to be released shortly before the meeting, shows weaker-than-expected results.