With inflation declining and the job market starting to slow, Federal Reserve Chair Jerome Powell has signaled that the central bank may begin reducing its historically high interest rates as early as September.

Powell did not specify how much the Fed’s key rate would be cut, but most analysts anticipate a reduction of a quarter point.

“The time has come for policy adjustments,” Powell stated on Friday during the Fed’s annual symposium in Jackson Hole, Wyoming. “The direction is clear, and the timing and speed of rate cuts will depend on incoming data, the changing outlook, and the balance of risks involved.”

He further explained, “Although we have not completed our task, we have made significant progress toward that goal. I am increasingly confident that inflation is moving back to our target of 2 percent,” which is the Fed’s objective for inflation.

This change in messaging is notable. For several months, the Fed maintained that it would not lower rates—currently at a 23-year high of 5.25% to 5.5%—until they were certain that inflation was consistently trending toward 2%. The Fed’s preferred measure of inflation was 2.5% in June, a decrease from a peak of 5.6% in mid-2022.

At the same time, the once-booming labor market that experienced unprecedented job growth and wage increases is beginning to cool.

“The risks of rising inflation have lessened,” said Powell. “Conversely, the risks to employment have increased.”

“It’s unlikely that the job market will pressure inflation upward anytime soon,” he elaborated. “We do not seek or welcome a further slowdown in job market conditions.”

A disappointing jobs report from earlier this month indicated weak job growth in July, prompting a drop in the stock market and leading many economists to predict the Fed might cut rates by a half percentage point. However, recent strong economic data has eased those concerns and led to a market rebound.

Reducing Fed rates would lower borrowing costs for mortgages, credit cards, and other loans for consumers and businesses, likely boosting the stock market as well. However, it would also decrease yields on bank savings accounts, which have recently been providing healthy returns.

Powell’s statements were anticipated following recent reports showing a continued decline in inflation last month alongside a weakening job market. His comments during this occasion were more definitive than those made at a news conference earlier this month after the Fed decided to maintain rates. At that time, he mentioned that inflation was noticeably easing and that rate cuts could occur in September, “if the data supports that.”

Since then, reports have shown that the consumer price index dropped to 2.9% in July, the lowest it has been in three years, while U.S. employers added only 114,000 jobs, falling short of the expected 175,000, and the unemployment rate rose from 4.1% to 4.3%, the highest level since October 2021.

The disappointing figures led to a downturn in the stock market due to fears of a recession, coupled with criticism that the Fed should have cut rates at its early August meeting or even sooner. Many economists have since suggested that the central bank might reduce rates by half a percentage point next month instead of the usual quarter point.

The Fed raises rates to limit borrowing and economic activity to control inflation. Conversely, it lowers rates to stimulate the economy, enhance job growth, and potentially avoid or recover from a recession.

However, recent robust economic indicators have alleviated concerns, leading to a stock market recovery that has compensated for prior losses. Retail sales surpassed expectations in July, and initial jobless claims—a reliable measure of layoffs—have declined in recent weeks after a spike last month.

Still, analysts believe that a weak jobs report for August could keep the possibility of a half-percentage point cut on the table, particularly if inflation continues to drop this month.

On a broader scale, the job market is clearly slowing down as companies reduce hiring and investments in response to the Fed’s substantial rate increases. Employers added a still robust average of 170,000 jobs over the last three months, though this is a decrease from 227,000 from January to April.

By the end of the year, futures markets project that the Fed will lower its key short-term interest rate three times by a total of up to one percentage point.

From March 2022 to July 2023, the Fed raised its key rate from close to zero to a 23-year peak of 5.25% to 5.5% to combat an inflation surge not seen in 40 years.

Has the U.S. Achieved a Soft Landing?

Powell also shared his thoughts on why he believes the Fed has seemingly managed to achieve a “soft landing,” where rate hikes successfully reduce inflation without triggering a recession.

The pandemic initiated the inflation spike as workers in factories, ports, and warehouses faced disruptions due to COVID-19. During this time, Americans, utilizing stimulus checks, procured large quantities of furniture, electronics, and other products while remaining at home. Inflation increased further due to Russia’s invasion of Ukraine, which pushed energy and commodity prices higher.

However, as the health crisis began to resolve, those pandemic-related disruptions started to diminish. The labor shortages that had caused wage hikes gradually eased. And In March 2022, the number of job openings reached an unprecedented high of 12 million. This abundance of vacancies allowed the labor market to adjust naturally as job openings decreased without a notable increase in the unemployment rate.

According to Powell, the Federal Reserve (Fed) played a crucial part in this process. Its increases in interest rates were effective in keeping inflation expectations stable, despite significant price hikes. This stability is vital because if people think inflation will keep growing, consumers will continuously demand higher wages, leading companies to further increase prices and create a cycle of ongoing inflation.

Powell emphasized that a key lesson from recent experiences is that stable inflation expectations, supported by strong actions from the central bank, can help reduce inflation (disinflation) without requiring a substantial rise in unemployment.

He stated, “The Fed did not hesitate to fulfill our duties, and our actions clearly showed our dedication to restoring price stability.”