Fed leader tees up interest rate cuts in search of soft landing


After a near textbook campaign to rein in inflation by raising interest rates, the head of the Federal Reserve, Jerome Powell, all but promised Friday to start lowering rates next month — with fingers crossed that it’s not too late to avoid a recession.

From the beginning of the inflationary surge triggered three years ago by the economic disruptions of the pandemic, it was clear that raising interest rates could tame price hikes. It was also clear that, if rates stayed too high too long, they could choke the economy into recession.

And few states are showing stronger signs of a possible downturn than California, which has felt the impact of high interest rates more severely than others. Not only has its unemployment rate been among the highest in the land while its job creation rate lagged, but pillar industries such as entertainment and tech have gone through major disruption and many residents and businesses have left the state.

“Overall, the economy continues to grow at a solid pace,” Powell said in a speech at the annual summer symposium of central bankers in Jackson Hole, Wyo. “But the inflation and labor market data show an evolving situation. The upside risks to inflation have diminished. And the downside risks to employment have increased.

“The time has come for policy to adjust,” he said.

Powell did not tip his hand on the size of the coming rate cut. Analysts widely expect a small quarter-point move next month to be the first in a succession of similar reductions over the next year.

While that should fairly quickly nudge down interest rates on credit cards, auto loans and other consumer financing, the broader economic effects of Fed policy are likely to take hold only gradually.

And with the political climate at a boil and the U.S. unemployment rising significantly since the start of the year, the Fed may find itself behind the curve in reversing course after what has been, up to now, a successful run of lowering inflation while preventing the economy from falling into a recession — the so-called soft landing.

“They’ve got to get going,” said Mark Zandi, chief economist at Moody’s Analytics, who for months has been calling on the Fed to start lowering rates.

Barring major economic changes or extreme volatility in markets, most economists see two to three quarter-point cuts this year and several more over the course of 2025, eventually bringing the Fed’s benchmark rate from the current two-decade high of 5.3% down to around 3%.

Financial markets have already priced in a September quarter-point cut, with stocks having mostly recovered from a big jolt a couple of weeks ago when investors feared the economy was turning down quickly and that it was already too late for the Fed.

Mortgages at a 30-year fixed rate were down to a hair below 6.5% this week, from more than 7% as recently as May. Lower rates should also help with auto purchases. Zandi said car sales have slowed as consumers have been waiting for better rates. The average interest rate on a five-year new auto loan was 8.2% in the second quarter, the highest since the Fed’s record keeping began in 2006.

The overriding question with the economy is jobs, both for workers and for political leaders facing a national election in November. And jobs are one of the two basic elements of the Fed’s responsibility. The other is price stability.

Since March 2022 when the Fed began raising rates, it had focused squarely on consumer price inflation, which peaked in June 2022 at 9.1% and has since dropped to just under 3%. With inflation trending toward the Fed’s 2% target, the central bank’s attention has now turned to employment, which has become a little more worrisome in recent weeks.

First-time unemployment claims have moved up while the number of job openings has shrunk. The nation’s unemployment rate, 4.3% in July, is up from 3.7% in January, and new reports this week indicate that job growth from March 2023 to March 2024 was considerably smaller than previously estimated, though still healthy.

California’s unemployment rate has held steady in the last three months at 5.2%, but that’s still the second highest in the country after Nevada. More recently the pace of job growth in California has picked up, but the July report from the state’s Employment Development Department shows workers in California on average are putting in fewer hours of work.

On one hand, that may not be a bad thing if more workers are opting for a better work-life balance, something that has become more important since the pandemic, said Erica Groshen, an economist and former commissioner of the U.S. Bureau of Labor Statistics. And longer term, it could mean companies are more productive if they’re producing as much or more with less labor input.

But the decline in work hours, she said, could be a sign of weakening demand and even a harbinger of layoffs if business conditions persist or worsen.

The latest data from the state EDD shows average weekly hours of work for all private-sector employees was down to 33.4 hours in July, from 34.5 a year ago. That may not seem like much, but it means a corresponding drop in average weekly earnings, is significant, which turned negative in July compared with a year earlier. Workers in information, education and health services, professional and business services, and the leisure sector, posted fewer hours of work.

“The softening job market tends to go with reduced hours,” said Sung Won Sohn, professor of economics and finance at Loyola Marymount University. “Typically, firms start cutting back hours before shedding jobs.”

That is likely even more true now because over the past several years many employers have had trouble finding new workers when they needed them.

Tom Trujillo, president of a family-owned business that operates eight Wienerschnitzel restaurants in the Southland, has held on to his staff of about 140. But like many other fast-food franchisees, Trujillo said he has cut back on overtime and some part-time employees’ hours as a result of the $20 minimum wage that took effect in April for his industry.

To make up for higher labor costs, he said that he’s raised prices and that some of his stores are opening a little later and some dining rooms closing an hour or two earlier.

Fed rate cuts certainly wouldn’t hurt, Trujillo said. “I have a reserve credit line, with a zero balance. The lower interest rates would be nice if I have to draw on that.”

But what he said he needs most today are more customers and for them to come more often.

Whether lower interest rates could help drive greater sales at Trujillo’s and other businesses remains to be seen.

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