Powell: “The time is ripe” for a rate cut

ORIENTATION:
At an annual meeting of global policymakers, Federal Reserve Chairman Jerome Powell all but committed to cutting interest rates next month.

Officials from three of the world's biggest central banks signaled on Friday that they are firmly on track to cut interest rates in the coming months – or to continue cutting them, marking the beginning of the end of an era of high borrowing costs as the global economy slips out of the grip of post-Covid-19 inflation.

“It is time to adjust policy,” Federal Reserve Chairman Jerome Powell said at an annual meeting of politicians and economists from around the world in Jackson Hole, Wyoming, effectively committing the Federal Reserve to a rate cut at the officials' meeting on September 17 and 18.

The fact that the Fed's launch date has been set and many of the world's major central banks are rowing in the same direction alleviates some of the concerns of investors. Nevertheless, enormous uncertainties and risks remain.

Photo: Bloomberg

Neither Powell nor his colleagues gave any clear indication of how quickly they plan to continue cutting interest rates in the coming months. Despite this uncertainty, inflation has become the biggest threat to policymakers as emerging weakness in labor markets and overall growth takes over from inflation.

In addition to Powell, several members of the Governing Council were also present to listen to the exciting discussion and enjoy the breathtaking scenery in Grand Teton National Park.

Bank of Finland Governor Olli Rehn, Bank of Latvia President Martins Kazaks, Croatian National Bank Governor Boris Vujcic and Bank of Portugal Governor Mario Centeno all indicated they would support a further cut in interest rates next month – after a sharp cut in June.

Rehn described the disinflation process in the eurozone as “on track” but warned that “the growth outlook in Europe, especially in manufacturing, is rather subdued.”

“This strengthens the case for a rate cut in September,” he added.

Given the inflation and growth data, Centeno described a decision to ease further in less than three weeks as “easy”.

Eurozone policymakers also now appear more concerned about economic growth, which has stalled after a strong first half of the year. They are also signalling that they are worried about a slowdown in labour markets rather than inflation, even though employment is not part of the ECB's mandate.

There appears to be agreement among ECB officials that there will be two more rate cuts this year, including a cut in the key rate next month, provided inflation remains within the bank's forecasts, which predict a cut to the 2 percent target in the second half of next year.

In prepared remarks released ahead of his speech, Bank of England Governor Andrew Bailey signalled a willingness to cut interest rates further, saying the risks of sustained inflation appeared to be receding.

The Bank of England cut its base rate by a quarter of a percentage point to 5 percent earlier this month, the first cut since the start of the Covid-19 pandemic.

The central banks of Canada, New Zealand and China are also easing their monetary policy. The major exception is Japan, where the central banks have initiated their first tightening cycle in 17 years.

Powell gave few clues that would be helpful beyond the next month: “The direction is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the allocation of risks.”

However, he indicated that he and his colleagues would in future pay more attention to signals from the labour market than from inflation.

In fact, Powell has been a vocal advocate for supporting the US labor market. He pointed to the recent rise in the unemployment rate to a nearly three-year high of 4.3 percent, called the slowdown in the labor market “unequivocal,” and added that central bankers would not welcome further increases.

“We will do everything in our power to support a strong labor market while making further progress toward price stability,” he said.

Research presented at the Jackson Hole conference warned that the U.S. labor market is nearing a tipping point, and policymakers are concerned that a further slowdown could lead to an even sharper increase in the unemployment rate.

“It will depend on what data comes out in the next few days,” said Raphael Bostic, president of the Federal Reserve Bank of Atlanta, on Friday. If unemployment continues to rise, “we will have to intervene more strongly.”

Fed officials would receive an additional employment report and two inflation releases before their next meeting.

Economists surveyed by Bloomberg expected unemployment to rise to 4.4 percent by the end of the year, which could prompt the Fed to cut interest rates more quickly.