The Blubber

Federal Reserve Chair Jerome Powell hinted at potential interest rate cuts during his speech on Friday but stopped short of providing specific details on when or how much rates might be reduced.

"The time has come for policy to adjust," Powell said in his keynote address at the Fed’s annual Jackson Hole retreat. "The direction is clear, but the timing and pace of rate cuts will be guided by incoming data, the evolving economic outlook, and balancing risks."

As markets awaited clues about the Fed's next moves, Powell focused on the causes of inflation, which triggered the Fed’s aggressive series of 11 rate hikes from March 2022 through July 2023. He also noted the significant progress made in reducing inflation, signaling that the Fed can now shift its focus toward maintaining full employment.

"Inflation has declined significantly, and the labor market is no longer overheated. Conditions are less tight than they were before the pandemic," Powell said. "Supply constraints have normalized, and the balance of risks to our dual mandates has shifted."

Powell emphasized the Fed’s commitment to ensuring that the labor market remains strong while continuing to monitor inflation.

As Powell spoke, stock markets gained, and Treasury yields dropped. Traders viewed the remarks as a sign of upcoming rate cuts, with a 100% chance of at least a quarter-point reduction in September and a 1-in-3 chance of a half-point cut, according to CME Group’s FedWatch tool.

"This was a victory speech of sorts, with Chair Powell essentially turning the page and saying the focus on inflation over the past two years has been successful," economist Paul McCulley, a former managing director at Pimco, commented on CNBC.

Powell's remarks come as inflation steadily approaches the Fed’s 2% target. The central bank's preferred inflation gauge recently registered at 2.5%, down from 3.2% a year ago and significantly lower than its peak above 7% in June 2022.