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

Author: David Fox, Sarah Holder, Bloomberg; Translated by: Baishui, Golden Finance

It’s finally time to cut interest rates. That’s what Federal Reserve Chairman Jerome Powell said during his 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.

The following is an edited transcript of the conversation:

SARA HOLD: 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 meetings were held in a plain conference room with 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 a beautiful place at least.

HOLD: What was the mood in the room like as everyone was waiting for Powell to take the stage?

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

HOLD: Cut rates. The Fed has kept rates high for a year -- around 5.5%. But with unemployment rising and inflation falling, pressure is growing on the Fed to cut rates. When Powell walked into the room and took the podium, it sounded like he agreed.

Jerome Powell: Now is the time for a policy adjustment. The way forward 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 is expecting a rate cut at the September 18 meeting.

HOLD: Today's show is Federal Reserve Chairman Jerome Powell's statement from Jackson Hole. Why the Fed is signaling that September is finally the time to cut rates, 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 designed to present economic theory, papers on ideas for implementing monetary policy to policymakers.

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

McKee: 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 then 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 interest rates, slower growth, and weaker labor market conditions will reduce inflation, they will also inflict some pain on households and businesses.

Holder: 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 signal, and the market plummeted. But Mike said the tone of Powell's comments this year was much brighter.

McKee: This year is completely different. Powell has been making very tough, tough statements for the last two years, saying that the Fed is going to do whatever it takes. They're not going to give up. Inflation is going to go away, no matter what it takes. This year, inflation is down significantly, and it's moving toward their goal. So the Fed is never going to be complacent. They're never going to say "soft landing," but they feel a lot better about the state of the economy. I think Powell is feeling a lot more relaxed when he's talking to people. He's said, these are my views.

POWELL: That's my assessment of events.

McKee: You might see it differently.

POWELL: You might see it differently.

McGee: I'm not sure what he meant, but it certainly got a lot of laughs from the room.

Holder: Elusive dad jokes aside, Mike says Jay Powell throwing 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?

McKee: They've been watching the inflation data very closely, of course. 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, everybody watches the consumer price index. That's the most widely known price index. A lot of people - ordinary people, Americans watch it. So they're watching that very closely, and combining the two gives them a sense of where inflation is headed, and they've been watching the employment data very closely. For a long time, we've had very high rates 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, jobs are down. Wage pressures aren't as strong as they were before. So we can start to think about cutting rates because we've started to see both sides of the equation come down.

Holder: Of course, the Fed does not make decisions in an economic vacuum. The fact that we are 70 days away from the U.S. presidential election cannot be ignored. Powell has often spoken about how important he thinks it is for the Fed to remain independent.

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

Holder: The central bank is supposed to stay out of politics. Powell said he takes that responsibility so seriously that he has led an increasingly private life to avoid the perception that the Fed's decisions are political. Powell talked about this 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 eat at a restaurant, do you worry that people are listening to you, that they're eavesdropping?

POWELL: That's exactly what I'm worried about. I find myself being recognized now, and 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, 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 now. We eat at home a lot. We eat at friends' houses.

HOLD: 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 factor into the way the Fed makes these decisions? Do people think the Fed will cut rates for political reasons?

MCKEE: Well, the campaign trail and the average person who reads the commentary 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 an election year 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 told us to do. So we're going to do that regardless of what the external conditions are.

Holder: 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 the American consumer 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 plan high above the Tetons. He said, "It's time for a policy adjustment." Mike McGee, who covers international economics and politics for Bloomberg News, was there. So I asked him what the reaction to Powell's comments was?

McKee: The reaction in the room was applause, standard applause. I don't think anybody was surprised because everybody was expecting it to be 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 go up, and I heard a couple of Fed officials say, doesn't the market know this? Because everybody else seemed to know this? So, they were happy about it, but it was a little surprising that anybody was surprised.

HOLD: Mike said the market may have been reacting in part to the language that Powell used. Powell said his "confidence has grown," which again was very direct, especially for a Fed chair. After he said that, the stock market surged.

Mackey: It basically tells them that interest rates are going to go down and they're going to continue to go down. And 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 six months, nine months, 12 months out and discounting your future returns. So it 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.

Holder: Powell's speech contained enough foreshadowing to start the market, although we still don't know the exact scale and pace of the future rate cut cycle.

Holder: Do we know how the rate cut will affect the U.S. economy? Which industries will be most affected?

Mackey: 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 have been affected. We don't know what the interest rate level is going to be to get mortgage rates down enough to get people to go out and buy homes 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'd also look at 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 flowing in there as well. It takes a little 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 US interest rate cut mean for other economies in the world?

MCKEE: Well, it means a lot, especially for smaller economies that are not dependent on the dollar, they are reacting to the dollar because if the dollar is strong, then their currency is going to be weaker. The rest of the world's currencies are going to be stronger. 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 market, the euro, the yen and the pound being the major currencies. That's going to start filtering down to emerging markets as well.

Holder: 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 would likely be too small to have a significant impact on how people vote. Especially if interest rates were reduced by a quarter percentage point, which is the tentative rate cut that many people are looking for.

McKee: A quarter point won't have much of an impact on anybody's monthly payment, and if it does, it won't be more than a few cents. Psychologically, 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 will have a big impact, but it doesn't matter to them, and they're going to do it anyway.

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

McKee: We have a bunch 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 coming.

Holder: Jay Powell has a busy few weeks ahead. But before the Fed Chairman has to return to Washington, Mike tries to get him to relax a little. He invites Powell to the famous Jackson Hole Rodeo.

MCKEE: He's not going to the rodeo. That's all I know of. I invited him. But he's going to hike --

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

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

HOLDER: Do you blame him?

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

HOLD: So the only bull case Powell can see is in the market.