At the Jackson Hole Central Bank annual meeting, increasing signs of sluggish growth and risks in the job market became the reasons for the Federal Reserve's policy shift signal and changes in the trajectory of monetary policy. The actions of the Federal Reserve may drive more central banks to join, while the Bank of Japan will continue to be one of the few global contrarians, but the uncertainty of economic recovery and the volatility brought by previous interest rate trading make further tightening or becoming more cautious.
The Federal Reserve may trigger a new wave of interest rate cuts
Last week, Federal Reserve Chairman Powell delivered a highly anticipated speech on the outlook for the US economy and sent the clearest message so far that the time for policy adjustment has arrived. The research document released at the conference shows that the US economy may be approaching a critical point, and the sustained decline in job vacancies will translate into faster growth in unemployment rates.
The International Monetary Fund (IMF) previously predicted a global economic growth rate of 3.2% in 2024 and 3.3% in 2025, gradually stabilizing but with weak growth momentum. Against the backdrop of intensifying geopolitical conflicts, frequent international trade frictions, and rising trade protectionism, there is still a certain degree of uncertainty in the global economic outlook. With the United States achieving a soft landing, European economic growth recovering, and China emerging from its slump, the global economy is expected to achieve moderate growth in the coming years.
Although major central banks are shifting towards interest rate cuts, it is still too early to judge whether the policy classification as a "normalization" of restrictive policies is the first step in preventing further slowdown in economic growth. Pierre Olivier Gourinchas, Chief Economist of the IMF, said, "As major central banks enter a monetary easing cycle after tightening policies to address inflation outbreaks, we may see other market volatility events as we are now in an unknown territory
The US interest rate cut in September may ease the pressure on other major central banks to relax monetary policy. Different policy stances and expectations for the next steps of the central bank have always been key driving forces in the foreign exchange market. Investors seek currencies with higher interest rates in so-called arbitrage trading to increase their value relative to currencies with lower interest rates. Jumana Saleheen, head of the European Investment Strategy Group at Vanguard Group, said, "The policy decisions of other central banks will mainly depend on the economic and financial conditions of each country. However, in a globally interconnected world, other central banks cannot ignore the impact of the Federal Reserve on global financial conditions
European Central Bank policy makers are reaching a consensus on further interest rate cuts next month, partly due to easing price pressures, but also because growth prospects have significantly weakened. Last quarter, the eurozone economy showed almost no growth as the largest economy, Germany, experienced contraction, manufacturing remained in a deep recession, and exports also declined. The recent increase in negative growth risks in the eurozone has strengthened the need for interest rate cuts at the next ECB monetary policy meeting in September, "said European Central Bank Managing Director Olli Rehn in a recent speech
Among other developed countries, the Swiss and Canadian central banks have already cut interest rates twice this year and may continue to do so. The Bank of England has cut interest rates for the first time in four years, and Daniel McCormack, head of research at Macquarie Asset Management, predicts that the Bank of England is beginning a potentially moderate but long-lasting easing cycle. Australia and Norway may start lowering interest rates at the end of the year.
Emerging economies are also eager to try, with the Philippine central bank announcing a reduction in policy interest rates this month to boost the economy, marking the first rate cut since November 2020. With the consistency of inflation targets, the current macroeconomic outlook supports an adjustment towards a less restrictive monetary policy stance. The statement stated that although inflation unexpectedly rose, domestic growth was weak, and the firm expectation of the Federal Reserve's upcoming interest rate cuts also strengthened the prospect of starting a loose cycle.
The Bank of Korea kept interest rates unchanged last week, but the voting results showed that several members expressed an open attitude towards interest rate cuts in the next three months, which triggered speculation in the market about the future policy direction. After lowering the economic forecast, the Governor of the Bank of Korea, Lee Chang yong, believes that the current economic environment is more complex and the risk of financial stability is increasing.
How will the Bank of Japan's future policies go
Against the backdrop of a global interest rate cut cycle, Japan has become one of the few economies to take countercyclical actions.
However, after the Bank of Japan raised interest rates in July, global risk assets caused a huge shock. Considering the potential correlation, the impact of large-scale liquidation of carry trades has also made the Bank of Japan more cautious about its next steps.
The data released last week showed that electricity prices have increased due to the cancellation of public utility subsidies. The core consumer price index (CPI) in Japan increased by 2.7% year-on-year in July, accelerating for the third consecutive time and reaching a new high since February. As the inflation rate rises, the Bank of Japan is facing further tightening pressure. Bank of Japan Governor Kazuo Ueda stated in a speech in parliament on the 23rd that the monetary policy plan continues to move towards normalization. If the economy and prices match expectations, the Bank of Japan will raise interest rates. He added that the Bank of Japan is closely monitoring the impact of financial market turbulence on inflation.
However, institutions believe that despite the rebound in consumption in the second quarter, there is still uncertainty about whether wages will rise enough to compensate for the increase in household living costs. On the other hand, raising interest rates will push up the yen and affect exports, thereby impacting economic momentum. Domestic demand is very weak, "said Sayuri Shirai, a former member of the board of directors of the Bank of Japan and now a scholar at Keio University in Tokyo." From an economic perspective, there is almost no reason for the Bank of Japan to raise interest rates in the short term
The pricing of interest rate futures shows that investors currently expect the Bank of Japan to keep interest rates unchanged at its September meeting and may raise them in December. Mahjabeen Zaman, head of foreign exchange research at ANZ Bank, predicts that based on recent statements from Kazuo Ueda, the Bank of Japan may take early action in October. Ueda Kazuo is more hawkish than expected by the market, and his tone of speech is similar to his tone at the Bank of Japan meeting in July. The volatility of the stock market and the yen has not really changed his views, and the Bank of Japan's interest rate hike process is not yet complete, "she said.