Last Friday, officials from the three major central banks of the United States, the United Kingdom, and Europe coincidentally stated that they will enter a cycle of interest rate cuts in the coming months, or continue the previous pace of interest rate cuts. This marks the end of the era of high global borrowing costs as the global economy gradually emerges from the high inflation of the post pandemic period, and a new chapter in the easing policies of major central banks is about to begin next month
Federal Reserve Chairman Powell made it clear at the global central bank annual meeting held in Jackson Hole, Wyoming last Friday that the time for policy adjustment has arrived. This statement essentially put an end to the Federal Reserve's historic anti inflation campaign. Federal Reserve officials are scheduled to hold their next policy meeting on September 17-18. It is widely expected that the Federal Reserve will lower the benchmark federal funds rate at this meeting.
In fact, Powell is not the only central bank governor who hinted at a steady decline in interest rates at this annual meeting. The European Central Bank and the Bank of England have also shown signs of potential further action. Slightly different from the Federal Reserve, both major European central banks have previously cut interest rates once.
Given that the start date of the Federal Reserve's interest rate cut has been largely determined, and many large central banks around the world are working in the same direction, this undoubtedly eliminates some of investors' concerns. After speeches by Powell and many other central bank officials last Friday, the US stock and bond markets both rose, with the Dow Jones Industrial Average closing up 460 points and the 2-year US Treasury yield closely linked to the Federal Reserve's interest rate expectations falling below the 3.9% mark.
Of course, significant uncertainty and risks still exist. Powell and his colleagues have not provided much guidance on how quickly they plan to cut interest rates in the coming months. At the same time, under this uncertainty, the weakness of the labor market and overall growth is replacing inflation as the main threat facing central bank decision-makers.
Regarding this, Federal Reserve Chairman Powell's view last Friday was that the direction forward is clear, and the timing and pace of interest rate cuts will depend on new data, constantly changing prospects, and the balance of risks. He also stated that from now on, he and his colleagues will gather more signals from the labor market rather than inflation data.
According to data from the interest rate swap market, traders are currently pricing the Fed's rate cut for the year at around 102 basis points, which means it will be cut at the last three rate meetings of the year, including a significant 50 basis point cut.
In addition to Powell, several officials from the European Central Bank's Governing Council also attended this central bank event last weekend and enjoyed the magnificent scenery of the Grand Teton National Park in the United States together.
European Central Bank officials, including Olli Rehn, President of the Finnish Central Bank, Martins Kazakhstan, President of the Latvian Central Bank, Boris Vujcic, President of the Croatian Central Bank, and Mario Centeno, President of the Portuguese Central Bank, have stated that they will support another interest rate cut next month, following the milestone cut in June.
Ren described the inflation slowdown in the eurozone as "on track," while warning that "Europe's growth prospects, especially in the manufacturing sector, are quite bleak. This strengthens the reasons for the September interest rate cut.
Sentino stated that considering inflation and growth data, it is "easy" to make another decision to cut interest rates in less than three weeks.
Policymakers in the eurozone now seem to be more concerned about economic growth, as the region's economic growth rate has declined after experiencing strong growth in the first half of this year. Although the main responsibility of the European Central Bank does not include employment, they have also expressed concerns about the weakness of the labor market and reduced concerns about inflation.
Officials from the European Central Bank seem to have reached some consensus that as long as the inflation rate remains consistent with the bank's forecast, the ECB will cut interest rates twice this year (including in September), and the bank predicts that the eurozone inflation rate will fall within the central bank's target of 2% in the second half of 2025.
In addition, Bank of England Governor Bailey also delivered a speech at the Jackson Hole Conference on Friday. In his speech, Bailey expressed cautious optimism about better anchoring of inflation expectations, and the second round effect of inflation seems to be smaller than expected, indicating that he is open to further interest rate cuts. The Bank of England just lowered its benchmark lending rate by 25 basis points to 5% earlier this month, marking its first rate cut in this cycle.
In other countries, major central banks such as Canada and New Zealand are currently relaxing their policies. The biggest exception may only be Japan, where Bank of Japan officials launched their first tightening cycle in 17 years earlier this year.
The three-day Jackson Hole Global Central Bank Annual Meeting is essentially academic in nature. At this year's annual meeting, economists also published four research papers, all related to the theme of "re evaluating the effectiveness and transmission of monetary policy".
Given that people are increasingly concerned about employment issues, the research of Pierpaolo Benigno from the University of Bern and Gauti Eggertsson from Brown University may be most relevant to the current economic situation. Their conclusion is that the cooling of the labor market is approaching a turning point, and if the economy slows down further, the US unemployment rate may rise significantly.
Of course, not everyone is optimistic about the inflation outlook. During a panel discussion last Saturday with Brazilian Central Bank Governor Roberto Campos Neto and Norwegian Central Bank Governor Ida Wolden Bache, European Central Bank Chief Economist Philip Lane stated that the ECB's battle to reduce inflation to 2% has not yet been won. Meanwhile, Neitu believes that the tight labor market makes the task of curbing inflation very challenging.