Jerome Powell: 'The time has come' for US interest rate cuts
Jerome Powell said that “the time has come” for the Federal Reserve to cut interest rates for the first time since the start of the coronavirus pandemic.
In a speech that left little doubt that the Fed will cut at its next meeting on 18 September, Powell said that the battle has been won against inflation, and now the bigger is that inflation falls below the central bank’s 2% inflation target.
You can read the full report on Powell’s speech from the Guardian’s Callum Jones here:
There were two key paragraphs in Powell’s speech, according to Stephen Stanley, chief economist at Santander US, a bank:
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.
It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon. We do not seek or welcome further cooling in labor market conditions.
Stanley said:
Powell left open the question of whether the September rate cut will be 25 or 50 BPs. The market is currently somewhere in between.
I remain quite confident that the first rate cut will only be 25 BPs. A number of policymakers have hinted in that direction over the past week, using terms like “gradual” (Collins), “methodical” (Harker), “measured” (Kashkari), and “prudent” (Daly). I was expecting and would have preferred Chairman Powell to use some similar qualifier, but he, as he has a number of times in his tenure (several times, to his detriment), was apparently unwilling to steer markets, perhaps in hopes that the economic data will do the work for him. Or, perhaps, Powell is open to the larger move. There is no way to tell from this speech.
Price cap rises in Great Britain
In the UK, the main economics story of the day was the increase in the energy price cap.
The cap for Great British energy bills will rise to £1,717 for a standard dual fuel annual household tariff, regulator Ofgem said.
The Labour government does not set the price cap, but it is facing criticism, including from its own MPs, over the simultaneous decision to limit winter fuel payments only to those who receive pension credit.
Ed Miliband, the energy secretary, did not on Friday address criticisms over the withdrawal of the winter fuel payment. He blamed the previous Tory government for leaving the UK grid dependent on imported gas:
Their failure over 14 years to secure our energy system has left families at the mercy of international markets controlled by dictators.
The only long term solution to achieve energy independence is to sprint towards clean, homegrown power. That’s why we are moving at pace to deliver on our mission for clean power, by lifting the onshore wind ban, consenting solar and getting more renewable projects built.
You can continue to follow our live coverage from across the world:
In the UK, a Metropolitan police probe into election gambling scandal ends with no charges made
In the US, Kamala Harris in for tough election battle after convention; Robert F Kennedy Jr expected to end campaign
In our coverage of the Israel-Gaza war, Israeli forces claim to have killed prominent Hezbollah member in attack on Lebanon’s Ayta al-Jabal
Russia-Ukraine war live: Zelenskiy says India supports Ukraine’s sovereignty with ‘history made’ in meeting with Modi
Thank you for joining us today. That’s all for this week on the business live blog, but please do join us bright and early on Tuesday after the UK bank holiday weekend. It’ll be me taking you through the last week of August. JJ
Jerome Powell may well be quite pleased with the reaction to his speech: markets have got the message that interest rate cuts are here – but traders and economists still don’t know what the pace of cuts over the next few months will be.
“We do not seek or welcome further cooling in labor market conditions.”
— Nick Bunker (@nick_bunker) August 23, 2024
That’s a shift from the “unexpected” weakness line.
Cuts are coming; the labor market data will determine the pace.
What's now clear: rate cuts are definitely happening.
— Marc-André Fongern (@Fongern_FX) August 23, 2024
What's still unclear: Will there be as many rate cuts as the market has already priced in for this year?
⚠️ The latter will form the basis of your strategy in the coming months.
CME FedWatch suggests traders have shifted their bets slightly towards a 0.5 percentage point cut on 18 September, but the consensus is still for a 0.25 percentage point cut.
The probability of the latter is at 67.5%, down from 71.5% earlier, according to probabilites implied by derivative transactions.
