Bloomberg: What the September rate cut means for the economy and the election

By David Fox and Sarah Holder, Bloomberg; Translated by Baishui and Golden Finance

It’s finally time to cut interest rates. That’s what Federal Reserve Chairman Jerome Powell said in a speech at Jackson Hole on Friday, when he let the world know that the Fed would cut interest rates at its next meeting in September.

Here is an edited transcript of the conversation:

Sarah Holder:Some of the most powerful people in finance gathered in a cabin in Jackson Hole, Wyoming, on Friday morning to hear the latest announcement from Federal Reserve Chairman Jerome Powell. Bloomberg’s Mike McKee was there.

Mike McKee:The Fed meeting was held in a plain conference room with deer antler lamps hanging from the ceiling, and we sat at long flat tables and folding chairs. It was not fancy at all, but it was at least a beautiful place.

Holder:What was the atmosphere like in the room as everyone waited for Powell to take the stage?

McKey:You know, people in this business are used to this kind of thing, so you're not waiting for someone to show up like you're at a rock concert. But people were interested in what he was saying, very interested, and especially they were expecting some kind of rate cut announcement.

Holder:Rate cuts. The Fed has kept rates high for a year - around 5.5%. But with unemployment rising and inflation falling, there's increasing pressure on the Fed to cut rates. When Powell walked into the room and took the podium, it sounded like he agreed.

Jerome Powell:It's time for a policy adjustment. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the changing outlook, and the balance of risks.

HOLD:Usually, Powell's speeches are a little vague. 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 pretty much won. They're more confident now because they're getting inflation down to their 2% target. They're starting to worry about rising unemployment. So, what they call the balance of risks has shifted. It's time to cut rates. So, everybody's expecting a rate cut at the September 18th meeting.

HOLD:Today's show is a statement from Federal Reserve Chairman Jerome Powell at Jackson Hole. Why the Fed is signaling that September is finally the time for a rate cut, what that might look like, and what it means for the U.S. economy, the presidential election and more. I'm Sarah Holder, and this is The Big Take from Bloomberg News.

HOLDER: Bloomberg's Mike McKee spoke with us from a mobile studio in the Teton Mountains as equipment was being disassembled around him. I asked Mike to give us some background on the Jackson Hole conference.

McKee: It's an academic conference that's designed to present economic theory, papers on ideas for implementing monetary policy to policymakers.

HOLDER: It's formally called the Jackson Hole Economic Policy Symposium, and it's hosted by the Federal Reserve Bank of Kansas City.

McGee:This has been going on for 47 years, but it didn't really become a big deal until 2010 when Ben Bernanke came out and announced that he was going to start quantitative easing. Since then, Bernanke, and soon after him, Janet Yellen, and now Jay Powell have all used that opportunity to make statements that could really change the direction of the economy.

HOLD:For example, in 2022, Jay Powell came out and told the financial world that fighting inflation was going to mean a tough year ahead.

POWELL:While higher rates, slower growth, and weaker labor market conditions will reduce inflation, they will also bring some pain to households and businesses.

HOLD:People like Mike who cover the Fed are used to reading between the lines. That's because Fed chairmen like Jay Powell are very careful about what they say in public. One word out of their mouth can have a huge impact on the global economy. A few years ago, Powell's mention of "some pain" was seen as a strong warning sign, and the market plunged. But Mike said Powell's comments this year have a much brighter tone.

McGee:This year is completely different. The last two years, Powell has made very strong, harsh comments, saying that the Fed will do whatever it takes. They're not going to give up. Inflation will go away, no matter what it takes. This year, inflation has come down significantly and is moving toward their goal. So the Fed will never be complacent. They will never say "soft landing," but they have a much better sense of where the economy is. I think Powell feels more relaxed when he's talking to people. He has said, these are my views.

POWELL:This is my assessment of events.

McGee:You may see it differently.

POWELL:You may see it differently.

McGee:I'm not sure what he meant, but it did get a laugh from the room.

HOLD:Leaving aside the elusive dad jokes, Mike says Jay Powell getting in a punchline or two means the Fed must be pretty happy with the direction the economy is heading. After two years of tough conditions, high interest rates, and historic inflation levels, I asked Mike how the Fed determined that now was the time to cut rates?

McGee:Of course, they've been watching the inflation data very closely. Their official measure is the personal consumption expenditures index, which is part of the GDP data, and tells them where they think inflation is in relation to their 2% target. But of course, everyone watches the consumer price index. It's the most widely known price index. A lot of people - ordinary people, Americans - watch it. So they watch that very closely as well, and combining the two gives them a sense of where inflation is headed, and they've been watching the employment data very closely as well. For a long time, we've had a very high rate of job creation, and that's been a concern for them because if you're looking for workers and you can't find them, you have to pay higher wages, and that can lead to inflation. Now they're saying that jobs are down. Wage pressures aren't as strong as they were before. So we can start to think about rate cuts because we've got both sides of the equation starting to come down.

HOLD:Of course, the Fed doesn't make decisions in an economic vacuum. And we're 70 days away from the U.S. presidential election, and that fact can't be ignored. Powell has often spoken about how important it is that he thinks the Fed remains independent.

POWELL:The Federal Reserve is a very special American institution that's committed to serving all Americans. And it's critical that we stay in our place, do what we're supposed to do, and not get involved in the big, hot political issues of the day.

HOLD:Central banks are supposed to stay out of politics. Powell says he takes that responsibility so seriously that he's leading an increasingly private life to avoid the perception that the Fed's decisions are political. Powell talked about that last month in an interview with Bloomberg host David Rubenstein, co-founder and co-chairman of Carlyle.

David Rubinstein:Now, when you want to go out, let's say, to a restaurant, do you worry about people listening to you, that they're eavesdropping?

Powell:That's exactly what I worry about. I find that now I'm recognized, and the people at the next table are always eavesdropping. So we don't go to restaurants anymore.

Rubinstein:So what do you do? Do you just go to a private room, or do you not go to a restaurant?

Powell:If you go to a restaurant, you need to be in a private room, and by the way, if you have guests at your table and start talking loudly, everyone will hear. So you have to - we don't do that right now. We eat at home a lot. We eat at friends' houses.

Holder:So why would Jay Powell - a guy who has worked so hard to keep the Fed out of the political spotlight - announce a rate cut on the eve of an election? I'll pass that question over to Mike.

HOLD: Does politics influence the way the Fed makes these decisions? Do people think the Fed will cut rates for political reasons?

McKey: Well, the campaign trail and the average person reading the comments might think so. But Fed officials insist that the historical record shows that an election year does not change what they do. They have raised and lowered rates in election years and shortly before election day. There is no indication that they have ever been biased, and they very much resent the idea that they are biased. Their view is that our job is to get inflation down and employment up. That's what Congress has told us to do. So we're going to do that regardless of what the external conditions are.

HOLD:While the Fed has no political agenda, its decisions do have political implications. So what does announcing a rate cut mean for the presidential campaign ... and what does it mean for American consumers and global markets? More on that after the break.

HOLD:Under the antlers, as economists, academics and journalists sat on folding chairs at the Jackson Lake Lodge, Jay Powell wrote the Fed's interest rate plans high above the Teton Mountains. He said, "It's time for a policy adjustment." Mike McKee, who covers international economics and politics for Bloomberg News, was also there. So I asked him what the reaction to Powell's remarks was?

McKee:The reaction in the room was applause, standard applause. I don't think anybody was surprised because everybody was expecting it was time, even though they hadn't said they were going to do it. But what surprised a lot of people was that the stock market started to rise, and I heard several Fed officials say, doesn't the market know this? Because everyone else seems to know this? So they were happy about it, but it was a little surprising that anyone was surprised.

HOLDER:Mike said that the market was probably reacting in part to the language that Powell used. Powell said that his "confidence has grown," which again is very direct, especially for a Fed chairman. After he said that, the stock market surged.

McKey:That basically told them that rates were going to go down and they were going to keep going down. Of course, the stock market is a forward discounting mechanism. So if you know that they've started a cycle, and historically every time they've started a rate-cutting cycle, they've cut rates at least three times, then you can start looking at what that looks like six months, nine months, 12 months out and discount your future returns.So that makes it easier for people to plan. Now, why didn't they necessarily have a plan before, or they were just waiting for an outcome that we didn't know, but if we knew what the stock market was going to do, we'd all be rich.

Hold:Powell's speech contained enough foreshadowing to kickstart the market, although we still don't know the exact size and speed of the future rate cut cycle.

Hold:Do we know how the rate cuts will affect the U.S. economy? Which sectors will be most affected?

McGee:The first thing to look at is housing and autos because they are very sensitive to interest rates.You have to take out a loan because it's a big, expensive purchase.So the Fed is looking at the housing sector and the auto sector, both of which are affected.We don't know what interest rate level is going to be to get mortgage rates down enough to entice people to go out and buy a home again. Autos should start to do better, and then we'd expect consumer purchases to pick up as credit card rates come down, and we'll also be watching business investment. It's been strong. We're going to be doing fiscal spending as part of the Inflation Reduction Act to build more infrastructure. So there should be some money coming in on that front as well. It takes longer for it to hit the economy because it takes a while to build a building. But those are things to watch.

HOLDER:What does the U.S. rate cut mean for the rest of the world economy?

McKee: Well, it means a lot, especially for smaller economies that are not dependent on the dollar, they react to the dollar because if the dollar strengthens, then their currencies are going to weaken. The rest of the world's currencies are going to strengthen. It's just a question of how much stronger they are. It's going to take a while to play out, but we're already seeing some corrections in the foreign exchange markets, with the euro, yen and pound being the major currencies. This will start to filter through to emerging markets as well.

HOLD:Will Powell's speech also have an impact on the upcoming US election? Mack said that while both candidates would likely welcome lower interest rates while in office, the economic impact on US consumers is likely to be too small to have a significant impact on how people vote. Especially if rates are lowered by a quarter of a percentage point, which is the tentative rate cut that many people are looking for.

MACKEE:Twenty-five basis points is not going to make much of a difference to anybody's monthly payment, and if it does, it's not going to be more than a few cents. On a psychological level, it might tell people that things are getting better. If people feel better about the economy, they might vote for it. The Fed doesn't think it's going to have a significant impact, but it doesn't matter to them, and they're going to do it anyway.

HOLD:There's still a lot that can change before November -- there's a lot of data coming out before September 18th. The Fed will have its next meeting on September 18th, when they're expected to announce these long-awaited rate cuts.

McKEE:We've got a slew of economic data coming out, including the latest GDP numbers and the latest spending numbers, which are important for the Fed. Are Americans still spending money? And then we get into the first week of September, which is always -- the first week of every month is always an important week because we get very important manufacturing and employment data. And of course, we also have the jobs report. That's September 6th. So that's a day to watch. If all goes well, then a rate cut is on the way.

HOLD:Jay Powell has a busy couple of weeks ahead of him. But Mike tried to get him to relax a little bit before the Fed chairman has to go back to Washington. He invited Powell to the famous Jackson Hole rodeo.

McGee: He's not going to the rodeo. Not that I know of. I invited him. But he's going to raise rates --

Holder: Did he say no? Or did he just not respond?

McGee: He said no. I don't think he wanted to be around a bunch of reporters, but --

Holder: Do you blame him?

McGee: I don't know why. I don't know why. Yes. But he's going hiking, which he and his wife do a lot when they're here, and they're probably going to go canoeing or something like that.

Holder: So the only bull that Powell sees is in the market.