Jerome Powell has given the strongest indication yet that the Federal Reserve will cut US interest rates next month, announcing “the time has come for policy to adjust”.
The chairman of the central bank said falling inflation and rising unemployment means officials are able to change their stance, which had taken interest rates to 5.5pc in the battle against the cost of living crisis.
“The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” Mr Powell said at the Jackson Hole economic conference in Wyoming.
“Four and a half years after Covid-19’s arrival, the worst of the pandemic-related economic distortions are fading. Inflation has declined significantly. The labour market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic.”
The remarks will come as relief to financial markets, which went into freefall in early August when a Fed decision to hold rates was followed by a series of weak economic data.
“Overall, the economy continues to grow at a solid pace. But the inflation and labour market data show an evolving situation. The upside risks to inflation have diminished. And the downside risks to employment have increased,” said Mr Powell, noting that the Fed’s job is both to keep inflation and unemployment low.
Fed gives market what it craved
The Federal Reserve has given the market clarity on when rate cuts will begin, analysts have said.
“The ‘Powell pivot’ is here, as the Fed has now firmly turned dovish,” said Ryan Detrick, chief market strategist at Carson Group.
“He said ‘the time has come for policy to adjust’ and that was all the market wanted to hear, as cuts are now coming in September and we will likely see multiple over the coming months.”
Fresh hopes for more rapid interest rate cuts in UK
Andrew Bailey raised hopes this afternoon of more rapid interest rate cuts for millions of mortgage holders in the UK as he said inflation appeared to be fading more quickly than feared.
The Governor of the Bank of England said the “persistent” factors keeping price rises high “appear to be smaller than we expected”, raising the possibility that he may be able to follow this month’s rate cut with more reductions in borrowing costs.
“We are seeing a lower level of inflation persistence than we expected a year ago. But, we need to be cautious because the job is not completed – we are not yet back to target on a sustained basis,” he said at the Jackson Hole conference, weeks after cutting rates for the first time in four years, from 5.25pc to 5pc.