Federal Reserve chair Jerome Powell said Friday that the "time has come" for the United States to start lowering interest rates, raising expectations of a rate cut next month.
"The time has come for policy to adjust," he said in a keynote speech at the Jackson Hole Economic Symposium in the western US state of Wyoming, in unusually direct remarks about the likely path of monetary policy.
"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," he added.
US stocks rose following Powell's remarks, with all three major indices on Wall Street ending the day up by at least 1.1 percent.
"Fed chair Powell sealed the deal for a September rate cut," Bank of America economists wrote in a note to clients, adding: "we don't think he sees elevated recession risks yet."
The Fed's benchmark lending rate currently sits at a 23-year high of between 5.25 and 5.50 percent, which has acted to cool demand in the world's largest economy ahead of November's presidential elections, in which inflation and the cost of living have taken a central role.
Powell said Friday that the Fed's restrictive monetary policy had "helped restore balance between aggregate supply and demand, easing inflationary pressures and ensuring that inflation expectations remained well anchored."
"My confidence has grown that inflation is on a sustainable path back to two percent," he added, referring to the Fed's long-term inflation target.
The Fed has a dual mandate from Congress to tackle both inflation and unemployment, and has been signaling in recent months that the risks to the two sides of its mandate are now coming into better balance.
The US labor market "has cooled considerably from its formerly overheated state," Powell said, noting that the unemployment rate is up sharply from last year, although at 4.3 percent it remains low by historical standards.
"The cooling in labor market conditions is unmistakable," he added.
While inflation has fallen and the labor market has cooled, economic growth has remained positive, raising confidence that the Fed could pull off a "soft landing" -- where it hits its inflation target without bringing about a recession or a substantial rise in unemployment.
The minutes of the Fed's July rate decision published this week spelled out the likely direction of travel, noting that most members of the bank's rate-setting committee thought it would likely be "appropriate" to cut rates in September if the data continued to come in as expected.
"Inflation gives them the reason to start to cut rates," Nationwide Mutual chief economist Kathy Bostjancic told AFP ahead of Powell's speech, adding that the upcoming labor market data would likely dictate how aggressively they do so.
Many analysts expect the Fed to move ahead with a more cautious quarter-percentage-point rate cut in September, but see a larger half-point cut as a possibility -- depending on upcoming data.
Futures traders put the chances of a smaller cut in September around 65 percent and the probability of a bigger cut at approximately 35 percent, according to data from CME Group.
The decision to cut by 25 or 50 basis points "will depend on how the data come in over the next month or so, and importantly, what the next jobs report looks like," Deutsche Bank chief US economist Matthew Luzzetti told AFP ahead of Powell's speech.
A weaker jobs report would likely raise the chances of a larger half-point cut, he added.
Both Bostjancic and Luzzetti see three quarter-point cuts in the remaining three rate decisions this year as the most likely scenario -- higher than the median expectation of Fed policymakers back in June.
The Bank of America economists said they "retain" their forecast of quarterly quarter-point cuts, starting in September, but conceded that the "risks of 25bp (basis point) cuts at every meeting have risen."
In contrast, the financial markets think the Fed could go further.
Futures traders currently assign a probability of more than 75 percent that the Fed will cut interest rates by at least a full percentage point by the end of the year, according to CME Group data.
