Powell suggests a cut in interest rates and emphasizes the importance of flexibility.

During the recent central bank symposium in Jackson Hole, Federal Reserve Chairman Jerome Powell delivered a speech that set the tone for monetary policies in the short term. In his remarks, Powell made it clear that an adjustment in interest rate policy is approaching, suggesting that the Fed is likely to cut rates by at least a quarter point at its next meeting in September. This decision, though modest, aligns with the reality of inflation that, while remaining slightly above the 2% target, has shown signs of deceleration. The current context suggests that this cut is reasonable. Inflation has been gradually decreasing, partly due to a labor market that has begun to cool. However, Powell emphasized a critical point: the biggest mistake the Federal Reserve could make would be to give the impression that it is straying from its primary objective of controlling inflation. The dual mandate of the Fed, which encompasses both price stability and full employment, requires a balanced and meticulous approach. In his speech, Powell also addressed how the Fed has managed to reduce inflation without causing a negative impact on the economy. He highlighted that the tightening of monetary policy starting in the spring of 2022 was a key factor in ensuring that inflation expectations remained anchored. At that time, core inflation stood at 2.6% in June, a notable drop from the peak of 5.6% recorded the previous year. However, the path to price stability has not been without challenges. Powell indicated that had expectations for inflation been allowed to soar, the economy could have faced a recession as a consequence of attempts to control prices. This proactive and decisive approach has been a crucial component in managing market expectations. The attitude of investors and analysts, who often seek drastic changes in economic policy, further complicates the situation. At times, central banks, in an effort not to surprise the market, suggest that changes in interest rates imply long-term commitments, which can create confusion. This trend was evident in the Fed's decisions not to raise rates in the second half of 2021 and in the recent meeting where they remained unchanged. In this regard, it is necessary for the Fed to adopt a more flexible stance, responding to changes in the economic environment without committing to a rigid timeline. The idea that decisions should be based on concrete data rather than long-term projections is a line of thought that has gained traction in Powell's recent statements and those of other members of the Fed. The upcoming review of the Fed's monetary strategy offers an opportunity to delve deeper into this new direction. The notion that rate adjustments should be more reactive to available information will allow the Federal Reserve to maintain credibility and effectiveness in its response to inflation and employment. This approach is undoubtedly sound and necessary in times of economic uncertainty. Therefore, a small cut in interest rates seems justified at this moment. The decision of whether this should be 0.25% or 0.50% can wait until new information on prices and employment is released, which will allow the Federal Reserve to act with informed judgment. Ultimately, decisions regarding rates should be grounded in updated data, highlighting the importance of flexibility and commitment to the structural goals of the central bank. In conclusion, Powell's speech underscores a critical point in monetary policy: the need to maintain an appropriate balance between price stability and full employment. The Federal Reserve finds itself at a crossroads that requires prudence, clarity, and a renewed commitment to its mandate. How it manages this transition will be crucial for economic stability in the near future.