Last Friday, Federal Reserve Chairman Jerome Powell clearly stated at the global central bank annual meeting in Jackson Hole, Wyoming, that now is the time to adjust policies. This remark essentially marked the end of the Federal Reserve's historic anti-inflation efforts. Fed officials will hold a policy meeting on September 17-18, and the market widely expects this meeting to lower the benchmark federal funds rate.
Not only Powell, but officials from the European Central Bank and the Bank of England also hinted at future interest rate cuts at the meeting. Unlike the Fed, these two central banks have already implemented rate cuts. With the Fed's rate cut almost a foregone conclusion, and other major central banks also making similar efforts, this has alleviated some investor concerns. Following the remarks by Powell and other central bank officials, both U.S. stocks and bonds rose last Friday. The Dow Jones Index jumped 460 points, and the yield on the two-year U.S. Treasury fell below 3.9%.
However, uncertainty and risks remain. Powell and other central bank governors did not specify the pace of rate cuts in the coming months. At the same time, a sluggish labor market and economic growth are replacing inflation as the main challenge for central bank decision-making. Powell stated that the future pace of rate cuts will depend on new data and changes in the economic outlook. He also noted that more signals will be taken from labor market data going forward.
Market data shows that traders expect the Fed to cut rates by 102 basis points for the rest of this year, which means a rate cut may happen in each of the next three policy meetings, including one cut by 50 basis points.
At the Jackson Hole meeting, officials from the European Central Bank and the Bank of England also expressed support for further easing policies. Several ECB officials, including Finnish Central Bank Governor Olli Rehn, Latvian Central Bank Governor Martins Kazaks, Croatian Central Bank Governor Boris Vujcic, and Portuguese Central Bank Governor Mario Centeno, all indicated support for further action following the June rate cuts. Rehn believes that the process of reducing inflation in the eurozone is progressing smoothly but warned that the economic growth outlook, particularly for manufacturing, is quite dim, which supports the rationale for a rate cut in September.
Bank of England Governor Andrew Bailey stated that the anchoring of inflation expectations has improved, and he is open to further rate cuts. Earlier this month, the BOE lowered the benchmark lending rate by 25 basis points to 5%.
Other major central banks, such as the Bank of Canada and the Reserve Bank of New Zealand, are also easing policies. Japan is an exception, as the Bank of Japan initiated its first tightening cycle in 17 years earlier this year.
The three-day Jackson Hole meeting was an academic discussion where economists discussed issues such as "reassessing the effectiveness and transmission of monetary policy." Research by Professor Pierpaolo Benigno of the University of Bern and Professor Gauti Eggertsson of Brown University shows that the cooling of the labor market is approaching a tipping point, and if the economy slows further, the U.S. unemployment rate may rise sharply.
Not everyone is optimistic about the inflation outlook. ECB Chief Economist Philip Lane stated that the ECB's goal of reducing the inflation rate to 2% has not yet been achieved. Meanwhile, Brazilian Central Bank Governor Roberto Campos Neto pointed out that a tight labor market makes controlling inflation more challenging.
