The chairman of the US Federal Reserve (Fed) Jerome Powell said Friday that “the time has come” for the central bank to cut interest rates as labor market risks intensify and inflation moves toward the Fed’s 2 percent target. However, he did not specify when and by how much interest rates would be cut.

The Fed chief, speaking at an annual conference of central bankers in Jackson Hole, Wyoming, stressed that “Inflation has come down significantly. The labor market is no longer overheated and conditions are now less ‘tight’ than they were before the pandemic.” “Supply constraints have smoothed out. The current unemployment rate of 4.3% is about the level that Fed officials believe is consistent with stable inflation over the long term.

Jerome Powell’s speech comes as inflation is steadily returning to the Fed’s 2 percent target, though not quite there yet. At the same time, the unemployment rate is rising slowly but steadily, most recently at 4.3%. However, Powell attributed the rise in unemployment to the inflow new potential in the labor market and a slower rate of hiring, rather than an increase in layoffs or a general worsening of it.

The Fed chairman attributed the fact that the US economy avoided recession to the Fed’s confidence and well-established expectations that inflation would eventually subside.
The rise in inflation, he noted, was “a global phenomenon”, a result of “rapid growth in demand for goods, disruptions to supply chains, tight labor markets and sharp increases in commodity prices”.

Markets expect the Fed to start cutting interest rates in September, although Powell “opened his papers”. Minutes of the Federal Open Market Committee’s (FOMC) July meeting, released on Wednesday, said the “overwhelming majority” of officials see a rate cut in September as appropriate, provided there are no reversals from the data.

In July, the Federal Reserve kept its key interest rate unchanged, as widely expected, but hinted that inflation is moving closer to its target level, a perception that could “open the door” to future rate cuts.

Staying at the highest level of the last 23 years, the range for the federal funds rate is 5.25% to 5.5%.