Powell Opens Door to US Interest Rate Cut, Sends Markets Soaring

Strategic Insights -

Federal Reserve Chairman Jerome Powell yesterday signalled that the US central bank may lower interest rates next month, a move that sent stock markets surging. In a speech to a gathering of central bankers in Jackson Hole, Wyoming, Powell acknowledged the need to balance unemployment and inflation concerns, suggesting that a shift in policy stance may be warranted. The remarks follow months of pressure from President Donald Trump, who has publicly attacked Powell, calling him a "numbskull" and "stupid" for not acting sooner.

Key Takeaways:

  • The Federal Reserve may lower interest rates next month, with a shift in policy stance being considered due to a "shifting balance" between unemployment and inflation concerns.
  • The Fed's inflation risk assessment has been downsized, with analysts citing a decrease in the likelihood of tariff-induced inflation.
  • President Trump's tariffs are expected to have a limited impact on inflation, with the Fed's central case being that the impact will fade over time.
  • The Fed is weighing the need to cut rates to boost jobs against the risk of inflation, with evidence suggesting "downside risks to employment are rising".
  • The dollar and markets have responded positively to Powell's comments, with the pound appreciating sharply against the US dollar.
  • A September interest rate cut is the most likely outcome, with analysts citing a 70-80% chance of a cut.
  • Powell acknowledged that a surprise inflation data point or a recovery in employment data could still derail the rate cut.

Statistics:

  • Stock markets in the US rallied, with the Dow Jones and S&P 500 closing in on all-time highs, gaining 2pc and 1.5pc respectively.
  • The tech-heavy Nasdaq also climbed by 1.6pc, while the FTSE 100 in London ended just 0.1pc higher but still reached a record of 9321.40.
  • The pound against the US dollar saw a sharp increase, rising to above $1.35.
  • Analysts at ING Bank stated that the key move was the downsizing of the tariff-induced inflation risk, with 70-80% confidence in a September rate cut.

Sources:

  • Jerome Powell, Federal Reserve Chairman, speech at the annual gathering of central bankers in Jackson Hole, Wyoming, August 22, 2019.
  • Oliver Allen, senior US economist at Pantheon Macroeconomics, remarks.
  • Luke Bartholomew, economist at fund manager Aberdeen, comments.