(Bloomberg) — Never miss an episode. Follow The Big Take daily podcast today. The time has finally come for a rate cut.
That was the takeaway of Fed Chair Jerome Powell’s remarks in Jackson Hole on Friday when he let the world know to expect a cut at the next Fed meeting in September.Bloomberg’s Mike McKee joins host Sarah Holder from Jackson Hole to discuss what that cut could look like — and what it would mean for the economy, the US election and the American consumer. Listen and follow The Big Take on Apple Podcasts, Spotify or wherever you get your podcasts Here is a lightly edited transcript of the conversation: Sarah Holder: On Friday morning, some of the most powerful people in the financial world crowded into a lodge in Jackson Hole, Wyoming to hear the latest announcement from Federal Reserve Chair Jerome Powell.
Bloomberg’s Mike McKee was in the room. Mike McKee: The Fed meeting takes place in an unadorned meeting room with deer antler lights hanging from the ceiling and just long flat tables with folding chairs we sit on. It isn’t glamorous at all, but it is a beautiful location, at least.
Holder: What’s the energy in the room like when everyone’s waiting for Powell to take the dais? McKee: You know, people in this business, in here, are pretty used to this sort of thing, so it’s not like you’re at a rock concert waiting for somebody to show up. But people are interested, very interested in what he has to say, particularly where they’re anticipating a rate cut announcement of some sort. Holder: A rate cut.
The Federal Reserve has been holding interest rates high — around 5.5% — for a year. But with unemployment creeping up and inflation coming down, pressure has been building for the Fed to cut interest rates.
And when Powell entered the room and took the podium, it sounded like he agreed. Jerome Powell: The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.
Holder: Usually, Powell’s speeches are a little cryptic. There’s not a lot of direct talk. But not this time.
McKee: Interest rates are coming down. That’s the bottom line. The Fed has decided that the battle against inflation is almost won.
They’re more confident now that they are bringing down inflation to their 2% target. And they’re starting to worry about rising unemployment. So the balance of risks, as they call it, has changed.
And it is time to cut interest rates. So everybody’s going to expect a rate cut at the September 18 meeting. Holder: Today on the show: Fed Chair Jerome Powell’s announcement from Jackson Hole.
Why the Fed is signaling that September is finally the time for a rate cut, what that rate cut could look like, and what it would mean for the US economy, the presidential election and beyond. I’m Sarah Holder, and this is The Big Take from Bloomberg News. Holder: Bloomberg’s Mike McKee talked to us from a mobile studio in the Tetons, as equipment was being broken down around him.
I asked Mike for a little background on the Jackson Hole conference. McKee: It’s an academic conference designed to present economic theories, papers on ideas for doing monetary policy to the policymakers. Holder: It’s officially called the Jackson Hole Economic Policy Symposium, and it’s put on by the Federal Reserve Bank of Kansas City.
McKee: It’s been going on for 47 years now, but it only really became as big a deal as it is now in 2010 when Ben Bernanke came out and announced here that they would start quantitative easing. And since that time, Bernanke and Janet Yellen, who followed him, and now Jay Powell have used this occasion to make announcements that could really change the direction of the economy. Holder: Like 2022, for example, when Jay Powell came out and told the financial world the fight against inflation would mean tough times in the year ahead.
Powell: While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. Holder: People like Mike who cover the Fed are used to reading between the lines. That’s because Fed chairs like Jay Powell are very careful with what they say in public.
A single word from their mouths can have a huge impact on the global economy. The mention of “some pain” a couple years ago was taken as a strong warning sign, and the markets took a dive. But Mike says Powell’s message this year had a much brighter tone.
McKee: This was 180 degrees different. The last two years, Powell had a very strict, severe message that the Fed was going to do what it takes. They were not going to waiver.
Inflation was going to go away, no matter what it took. This year, inflation has come way down, and it’s headed towards their target. So the Fed will never take a victory lap.
They’ll never say the words, “soft landing,” but they are feeling much better about where the economy is. And I think Powell felt more relaxed in talking to people. He said at one point, these are my views.
Powell: That is my assessment of events. McKee: Your mileage may vary. Powell: Your mileage may differ.
McKee: I’m not sure what he meant by that, but it did get a laugh in the room. Holder: Inscrutable dad jokes aside, Mike says the fact that Jay Powell’s throwing in a laugh line or two means that the Fed must be feeling pretty good about where the economy is headed. After two years of severity, high interest rates and historic levels of inflation, I asked Mike how the Fed landed on now as the moment to say it’s finally time to cut rates? McKee: They’ve been following the inflation numbers, of course, very closely.
Their official measure is the personal consumption expenditures index, which comes out as a part of the GDP numbers that tells them where they think inflation is in terms of their 2% target. But of course, everybody follows the consumer price index. It’s the most widely known price index.
And a lot of people— civilian people watch that, Americans watch that. So, they’re also very attuned to that and putting those two together, they get a sense of where inflation is going and they’ve also been watching the employment numbers, very closely. And for a long time, we had very, very high job creation and that worried them because if you’re looking for workers and you can’t find them, you’re going to have to pay more, which could lead to inflation.
And now what they’re saying is that’s come down. There’s not the wage pressure that there was. So we can start thinking about cutting rates because both sides of our measures have started to come down.
Holder: Of course, the Fed doesn’t make its decisions in an economic vacuum. The fact that we’re about 70 days out from a US presidential election is impossible to ignore. Powell has often talked about how important he feels it is for the Fed to remain independent.
Powell : It’s a very special American institution, and it’s one that works to serve all Americans. And absolutely critical to that is staying in our lane, sticking to our knitting, not running to reach out to the big hot political issues of the day. Holder: The central bank is meant to be apolitical.
Powell said he takes that duty so seriously that he’s led an increasingly private life to ward against any perception that politics is involved in the Fed’s decision-making. Powell spoke about this last month in an interview with Bloomberg host and Carlyle Co-Founder & Co-Chairman David Rubenstein. David Rubenstein: Now, when you want to go out, let’s say, have dinner at a restaurant, do you worry that people are listening to what you’re saying, they’re eavesdropping? Powell: So that is exactly what I worry about.
I have found that I get recognized now and people at the next table are always listening. So we don’t, we don’t really go to restaurants. Rubenstein: So what do you do? You just go in a private room or you don’t go to restaurants? Powell: If you go, if you’re in a restaurant, you need to be in a private room and by the way, if someone at your table were to be well served and start to speak loudly, everyone’s hearing that too.
So you gotta be— we just don’t do that for now. We go to— we eat at home a lot. We eat at friends’ houses.
Holder: So why would Jay Powell — someone who’s taken such great pains to keep The Fed out of the political spotlight — announce a rate cut so close to an election? I put that question to Mike. Holder: Do politics impact the way the Fed makes these decisions? Is there a perception that the Fed is going to cut rates for political reasons? McKee: Well, there might be among campaigns and average people who read comments about it. But Fed officials insist, and the historical record shows, that election years don’t change what they do.
They have raised rates and cut rates before in election years and shortly before election day. There’s no indication that they have ever been biased, and they take great offense at the idea that they would be. Their view is, we have one job, which is to keep inflation down and employment up.
That’s what Congress told us to do. And so we’re going to do that no matter what the outside situation is. Holder: Even though the Fed has no political agenda, its decisions do have a political impact.
So what does the announcement of a rate cut mean for the presidential campaign...
for American consumers and for global markets? That’s after the break. Holder: Under the antlers, as economists, academics and journalists sat at attention in their folding chairs inside the Jackson Lake Lodge, Jay Powell did the Fed equivalent of skywriting his plan for interest rates above the Tetons. He said, “The time has come for policy to adjust.
” Mike McKee, who covers international economics and politics for Bloomberg News, was there. So I asked him what kind of reaction did Powell’s remarks get? McKee: The reaction in the room was applause, standard applause. I don’t think anybody was surprised because everybody was kind of expecting that it’s time, even though they hadn’t said they were going to.
But what surprised a lot of people here was the fact that the stock market took off and I had a couple of Fed people say, didn’t the markets know this was coming because everybody else seemed to? So, they’re happy with that, but it was a bit of a surprise that anybody was surprised. Holder: Mike says part of what markets might have been reacting to is the language Powell used. Powell said his “confidence has grown,” which is, again, quite direct, especially for a Fed Chair.
After he said that, stocks surged. McKee: It basically tells them that interest rates are going to go down and keep going down. And the stock market, of course, is a forward discounting mechanism.
And so if you know that they have started a cycle and historically they’ve cut at least three times every time they have started a cutting cycle, then you can start looking out six months, nine months, 12 months, and discounting what your future returns might be. So, it makes it easier for people to plan. Now, why they hadn’t necessarily planned before, or whether they were just waiting for that we don’t know, but if we knew what the stock market would do, we’d all be rich.
Holder: So Powell’s speech contained enough foreshadowing to jumpstart the market, even though we still don’t know the exact scale and pace of the rate-cutting cycle ahead. Holder: What do we know about how a rate cut would affect the US economy? What are some of the industries that would be most affected? McKee: Well, the first thing you look at is housing and automobiles because those are very interest rate sensitive. You have to take out a loan because it’s a big, expensive purchase.
And so the Fed looks at the housing industry and the automobile industry, both of which have suffered. We don’t know what the number is, the level of interest rates that will bring mortgage rates down enough that will entice people to go out again and start buying. Cars should start to do better, and then consumer purchases we hope will increase as credit card rates come down and we’ll also watch for business investment.
It’s been strong. We have fiscal spending coming as part of the Inflation Reduction Act to build more infrastructure. So, there should be some money coming in on that side as well.
It takes a lot longer to hit the economy because it takes a while to build a big building. But those are the things to watch for. Holder: And what might a rate cut in the US mean for the rest of the world’s economies? McKee: Well, it means a lot, especially to smaller economies, which are, if not dependent on the dollar, react to the dollar, because if the dollar is strong, then their currency is going to be weak.
The rest of the world, their currencies will strengthen. It’s just a question of how much they strengthen. It will take a while for that to happen, but we’ve already seen some adjustment in the foreign exchange markets, with the Euro and the Japanese yen and the British pound, the bigger currencies.
And that’ll start to filter down to the emerging markets as well. Holder: Will Powell’s speech also have an impact on the looming US election? Mike says that while both candidates would likely welcome lower interest rates when in office, the economic effects on the American consumer might be too small to have a significant impact on the way people vote. Especially if interest rates are cut by a quarter percentage point, which is the toe-in-the-water rate cut many are expecting.
McKee: 25 basis points isn’t going to change anybody’s monthly payments more than a few cents if at all. It might, as a psychological thing, tell people that things are getting better. And if people feel better about the economy, they might vote one way or another.
The Fed’s view is it doesn’t have a major effect, but it doesn’t matter to them they’re going to do it anyway. Holder: There’s still a lot that can change before November — and a lot more data to be released before September 18. That’s when the Fed meets next, and when they’re expected to announce how deep these long-awaited rate cuts could be.
McKee: We will have a number of economic data, including the latest GDP numbers and the latest spending numbers, which will matter to the Fed. Are Americans still spending money? And then we go into the first week of September, which is always— the first week of the month is always a big week because we get numbers on manufacturing and on employment that matter a lot. And, of course, we have the jobs report.
That’ll be September 6. So that’s a date to watch. If nothing goes wrong there, then rate cuts are coming.
Holder: The next few weeks will be busy for Jay Powell. But before the Fed chair had to go back to DC, Mike tried to get him to let loose a little. He invited Powell to the famous Jackson Hole rodeo.
McKee: He’s not going to the rodeo. As far as I know. I’ve invited him.
But he is going on hikes— Holder: Did he decline? Or just not respond? McKee: He’s declined. I think he doesn’t feel like hanging out with a bunch of reporters, but— Holder: Do you blame him? McKee —I don’t know why. I don’t know why.
Yeah. But he is going on hikes and he and his wife do quite a bit of that when they’re out here, they might do some canoeing or something like that as well. Holder: So the only bulls Powell will see will have to be in the markets.
This episode was produced by David Fox; Senior Producers: Naomi Shavin and Kim Gittleson; Editors: Stacey Vanek Smith, Kate Davidson and Christopher Condon; Senior Editor: Elisabeth Ponsot. Executive Producer: Nicole Beemsterboer; Sound Design/Engineer: Alex Sugiura; Fact-checker: Adriana Tapia..
