- Jerome Powell ‘increasingly confident’ over falling US inflation
US Federal Reserve chief Jerome Powell yesterday declared ‘the time has come’ to cut interest rates adding to speculation they could fall as much as half a percentage point next month.
The dollar slid lower on the remarks, helping the pound climb above $1.32 to its highest level since March 2022.
Powell said he was increasingly confident that inflation in the world’s biggest economy was ‘on a sustainable path’ back to its 2 per cent target.
Caution: Bank of England boss Andrew Bailey and Fed chief Jerome Powell in Wyoming
‘The time has come for policy to adjust,’ Powell told an annual meeting of central bankers in the US state of Wyoming.
‘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.’
Markets were cheered by the remarks, with London’s FTSE 100 ending 0.5 per cent, or 39.78 points higher at 8327.78 and New York’s S&P 500 rising 0.9 per cent while the tech-heavy Nasdaq climbed 1.3 per cent.
Powell’s speech prompted traders to increase bets on a jumbo rate cut at the Fed’s next meeting in September.
Markets now see a one-in-three chance of a half-percentage point cut at the meeting, up from one in four. But a smaller quarter-point cut is still seen as the most likely outcome. It would be the first cut since 2020 when rates were slashed to near-zero in the face of the economic shock caused by the pandemic.
A subsequent surge in inflation saw the Fed and other central banks embark on an aggressive programme of rate hikes.
Now that inflation has fallen, the Bank of England and the European Central Bank have begun to cut rates.
America’s inflation rate has proven a bit more stubborn, leaving the Fed more hesitant.
But US inflation has now fallen below 3 per cent for the first time since 2021. And recent weaker-than-expected jobs figures have left some worrying that the Federal Reserve may have left it too long to act.
Powell indicated that the Fed had taken notice of the ‘unmistakable’ employment trend. ‘Job gains remain solid but have slowed this year,’ he said, adding: ‘We do not seek or welcome further cooling in labour market conditions.’
Guy Stear, head of developed markets strategy at Amundi Investment Institute, said: ‘The Fed chairman not only reiterated his belief that inflation is moving towards 2 per cent, but also emphasised that the job market is slowing and they need to, and have ample room to, respond.
‘He strongly signalled the beginning of a cutting cycle in September, suggesting they don’t want to wait to see unemployment rising.’
Experts said the US jobs data, set to be published in two weeks, now looked increasingly critical to the decision on the size of the next rate cut.
Powell’s comments came as Bank of England Governor Andrew Bailey also addressed the Jackson Hole conference, saying that inflation fears were fading more quickly than expected.
‘The persistent element of inflation is still with us but it is smaller in magnitude now than we expected a year ago, and considerably smaller than the type of persistence seen in the 1970s,’ Bailey said.
He signalled that a ‘soft landing’ for the economy – when inflation is brought down without causing an economic downturn – was in sight.
But he cautioned: ‘It is too early to declare victory.’
Financial markets expect two more rate cuts in the UK this year but believe only a 30 per cent chance that the first will come as soon as next month.
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