Federal Reserve policymakers on Friday signaled their intention to begin a series of interest rate cuts at the central bank's upcoming meeting in two weeks.
They cited a cooling in the labor market as a key factor influencing this decision, suggesting that without a policy shift, the slowdown could escalate into a more severe economic downturn.
Their remarks were widely interpreted as endorsing a quarter-percentage-point reduction in the Fed's policy rate. Additionally, policymakers left the door open for further and potentially more significant rate cuts if the job market continues to weaken.
The Fed has maintained its benchmark borrowing rate in the current 5.25%-5.50% range since July 2023. This follows an aggressive rate-hiking campaign initiated 18 months earlier in response to surging inflation.
Inflation, as measured by the Fed's preferred metric, has significantly decreased from its mid-2022 peak of around 7%. The unemployment rate, which stood at 3.5% when the Fed paused rate hikes, has risen to 4.2%, and monthly job growth has slowed.
U.S. central bankers have shifted their monetary policy focus from solely addressing inflation to supporting job growth.
"It's now appropriate to reduce the restrictiveness of our policy stance by lowering the target range for the federal funds rate," stated New York Fed President John Williams.
Fed Governor Christopher Waller went further, indicating his support for consecutive rate cuts or even larger reductions if warranted by the data. "I was a strong advocate for front-loading rate hikes during the 2022 inflation surge, and I will be an advocate for front-loading rate cuts if appropriate," Waller said.
Chicago Fed President Austan Goolsbee, who has long signaled the need for lower rates, emphasized the importance of data-driven policy adjustments. "I don't think the next meeting alone is the most crucial factor," Goolsbee said. "It's essential for the Fed to understand the overall trend of the data over the coming policy meetings."
Analysts interpreted the policymakers' messages as clear signals. "Fed leadership views a 25-basis-point cut as the baseline for the September meeting but remains open to 50-basis-point cuts at subsequent meetings if the labor market continues to deteriorate," stated Goldman Sachs economists.
Two weeks ago, Fed Chair Jerome Powell sparked speculation about the size of a September rate cut by stating that "the time has come" to ease policy. Waller echoed Powell's sentiment, adding that "a series of reductions is likely to be appropriate."
No Economic Collapse
Data released earlier on Friday revealed that monthly job gains averaged 116,000 in the June-August period, falling short of the estimated job growth needed to keep pace with an expanding population.
Waller noted that the latest employment report, along with other recent data, "reinforces the view of continued moderation in the labor market." While the data indicates softening, he emphasized that the economy is not headed toward a recession. Nevertheless, "the current batch of data now requires action, not patience."
All three policymakers acknowledged progress in curbing inflation, with Waller stating that it is now on the "right path" to reach the Fed's 2% target. Underlying inflation, as measured by the core personal consumption expenditures price index, is averaging 2.6% on an annualized six-month basis and 1.7% on an annualized three-month basis.
Traders of futures tied to the Fed's policy rate are currently pricing in a 75% chance of a 25-basis-point rate cut at the upcoming meeting. They anticipate a policy rate of 4.25%-4.50% by the end of the year, implying a larger rate cut at one of the central bank's final two meetings.
"It's clear that the employment market is slowing down, and the Fed needs to start taking action," said Eugenio Aleman, chief economist at Raymond James. "However, the sky is not falling, the economy is not on the brink of collapse, and a 50-basis-point cut could send an incorrect signal to the market that the economy is in dire straits. The Fed wants to avoid that."
