Federal Reserve Chairman Jerome Powell announces that the time has come to lower interest rates
For yet another year, the governors of the world's leading central banks have gathered in the paradisiacal town of Jackson Hole, in the state of Wyoming, at the foot of Grand Teton National Park.
This meeting, which has been organised annually by the Kansas City Federal Reserve Bank since 1982, brings together, in addition to the representatives of the central banks, led by the chairman of the US Federal Reserve, economists, experts and the specialised press.
Jerome Powell's speech
As every year, the highlight is undoubtedly the speech by the Chairman of the US Federal Reserve. Jerome Powell, who is taking part in this forum for the seventh time. His speech was the most eagerly awaited, as he was expected to confirm the change in the upward trend of central banks' monetary policy from 2022.
And Powell did not disappoint analysts; in his speech, he noted that ‘the economy continues to grow at a solid pace. But data on inflation and the labour market show an evolving situation. The upside risks to inflation have diminished. And downside risks to employment have increased’.
A diagnosis that has led to the expected announcement: "the time has come to tighten monetary policy. The direction is clear, and the timing and pace of rate cuts will depend on the new data, the evolution of the outlook and the balance of risks.
The decision to begin rate cuts is motivated by the recent deterioration in US economic data, in particular the pick-up in inflation and the worsening labour market. In Powell's words, ‘we will do all we can to support a strong labour market as we continue to make progress toward price stability. With appropriate monetary policy accommodation, there is good reason to believe that the economy will return to 2 per cent inflation while maintaining the strength of the labour market. The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of a further unwelcome weakening in labour market conditions’.
It should be recalled that the Fed began raising interest rates in March 2022, from a level close to zero, which had been adopted to deal with the economic crisis caused by the pandemic. At present, the Federal Reserve's rates are between 5.25 and 5.5 %, a level that has been maintained for a year.
Attendees
In addition to the Chairman of the US Federal Reserve, Jerome Powell, whose speech is the highlight of the forum, and Jeffrey Schmid, President and CEO of the Federal Reserve Bank of Kansas City, organiser of the event, representatives of various banking organisations attended.
The European Central Bank was represented by Philip Lane, member of the Executive Board, who represented President Christine Lagarde, who has been present at previous editions of the forum.
Also present was Andrew Bailey, Governor of the Bank of England, which has been the first of the Western central banks to start lowering interest rates, by 0.25 %, to 5 %.
Bailey himself told the press a few months ago that ‘there is no law that says the Fed must act first and everyone else, including us, must act later’.
Other representatives of banking organisations present at this year's Jackson Hole were Andréa Maechler, Deputy General Manager of the Bank for International Settlements (BIS); Ida Wolden Bache, Governor of Norges Bank (Norway); and Roberto Campos Neto, Governor of Banco do Brasil.
In addition, several professors and experts from Harvard University, the Massachusetts Institute of Technology, Stanford, Duke, Chicago, Columbia and California, among others, participated.
The importance of Jackson Hole
Historically, this forum has been used to analyse the effectiveness of central banks' monetary policy and to put forward new proposals. But for the press and analysts, the most important thing is that, through the speeches of the governors and presidents, it is possible to get a glimpse of where global monetary policy will be heading in the coming months and what will happen to interest rates.
The trend of the markets over the coming months depends on the conclusions of Jackson Hole and, in particular, on the speech of the Federal Reserve chairman.
A moderate speech such as Powell's on adapting interest rates to the needs of the economy, to combat inflation and encourage the labour market, will serve to calm the stock markets after the shocks of the last few weeks.
The future of interest rates
In any case, we will have to keep an eye on future movements in US interest rates. Before the Jackson Hole forum, the market was betting on up to six rate cuts at the next Fed meetings until January.
After Powell's speech, it seems that the market was right, although everything will depend on the results of the US economy, which, let's not forget, is very much in the electoral race. And this will eventually have an impact on world markets. As they say, if the US sneezes, the world catches a cold.