Officials from three of the world’s major central banks on Friday signaled they are firmly on course to lower — or continue lowering — interest rates in the coming months, marking the beginning of the end for an era of high borrowing costs as the global economy slips out of the grip of post-COVID-19 inflation.
“The time has come for policy to adjust,” US Federal Reserve Chairman Jerome Powell told an annual gathering of global policymakers and economists in Jackson Hole, Wyoming, all but committing the US central bank to lowering rates when officials meet on Sept. 17 to 18.
Getting the Fed’s start date fixed, and having many of the world’s big central banks paddling in the same direction, removes some anxieties for investors. Still, tremendous uncertainty and risks remain.
Photo: Bloomberg
Neither Powell nor his counterparts offered much guidance on how quickly they intend to proceed in lowering rates over the next several months. Meanwhile, against that uncertainty, emerging weakness in labor markets and overall growth are replacing inflation as the chief threat for policymakers.
In addition to Powell, several members of the European Central Bank’s (ECB) Governing Council were also present for the wonky talk and 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 another reduction in interest rates next month — after a landmark cut in June.
Rehn described the disinflation process in the eurozone as “on track,” and warned that “the growth outlook in Europe, especially manufacturing, is rather subdued.”
“This enforces the case for a rate cut in September,” he added.
Centeno called a decision to ease again in less than three weeks “easy,” given the data on inflation and growth.
Eurozone policymakers also now appear more concerned about growth, which has stumbled after a strong first half of the year. They are also signaling worry over a softening of labor markets and less about inflation, even though the ECB’s mandate does not include employment.
Among the ECB officials, a consensus appeared to emerge around two more cuts this year, including a rate cut move next month, as long as inflation remains in line with the bank’s projections, which see it coming down to the 2 percent target in the second half of next year.
Bank of England Governor Andrew Bailey’s prepared remarks released ahead of his speech signaled an openness to further rate cuts when he said the risks of persistent inflation appeared to be waning.
The UK central bank lowered its benchmark lending rate by a quarter point earlier this month to 5 percent, the first reduction since the start of the COVID-19 pandemic.
Elsewhere, central banks in Canada, New Zealand and China are also easing. The big exception is Japan, where officials have embarked on their first tightening cycle in 17 years.
Powell gave little guidance that helps beyond next month, saying: “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.”
However, he did indicate that he and his colleagues would , from here, take more signals from the labor market than from inflation.
Indeed, Powell gave a full-throated call to support the US job market. He cited the recent rise in the unemployment rate to nearly a three-year high of 4.3 percent, calling the cooling in the labor market “unmistakable” and adding that central bankers would not welcome any further increases.
“We will do everything we can to support a strong labor market as we make further progress toward price stability,” he said.
Research presented at the Jackson Hole conference warned the US labor market is nearing a tipping point, and policymakers run the risk that additional slowing could bring a much larger increase in the unemployment rate.
“It will depend on what the next couple data points come in,” Federal Reserve Bank of Atlanta President Raphael Bostic said on Friday. If unemployment spikes higher, “we have to move bigger.”
Fed officials would get one additional employment report and two inflation releases before their next meeting.
Economists surveyed by Bloomberg said they expected unemployment to rise to 4.4 percent by the end of the year, which might prompt the Fed to cut more quickly.
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