Global Central Banks Signal Rate Cuts, Is the Start of 'Easing Cycle' Really Near Us?
AInvestMonday, Aug 26, 2024 5:34 am ET
3min read
NET --

Last Friday, officials from the central banks of the United States, the United Kingdom, and the Eurozone all but declared that they will be stepping into an interest rate cut cycle in the coming months or continuing the pace of previous cuts. This marks the end of the era of high borrowing costs globally as the world economy gradually moves away from the high inflation of the post-pandemic period, and the major central banks are about to usher in a new chapter of easing next month...

Federal Reserve Chairman Jerome Powell clearly stated at the annual global central bank meeting held in Jackson Hole, Wyoming, last Friday that the time for policy adjustment has come. This statement essentially put a period on the Federal Reserve's historic fight against inflation. Federal Reserve officials are scheduled to hold their next policy meeting on September 17th to 18th. It is widely expected that the Federal Reserve will lower the benchmark federal funds rate at this meeting.

In fact, Powell was not the only central bank governor to hint at a steady decline in interest rates at this central bank annual meeting. The European Central Bank and the Bank of England also showed signals of further action. Unlike the Federal Reserve, both of these European central banks have already cut rates once.

Given that the start date for the Federal Reserve's rate cut is essentially set, and many of the world's major central banks are all working towards the same direction, this undoubtedly alleviates some of the investors' concerns. Last Friday, after Powell and many other central bank officials made their speeches, both the U.S. stock and bond markets rose, with the Dow Jones Industrial Average closing up by 460 points and the yield on the 2-year U.S. Treasury note, which is closely related to Federal Reserve interest rate expectations, breaking below the 3.9% mark.

Of course, significant uncertainty and risks still exist. Neither Powell nor his peers have provided much guidance on how quickly they plan to cut rates in the coming months. In the meantime, under this uncertainty, the weakness in the labor market and overall growth are replacing inflation as the main threat to central bank policymakers.

In response, Federal Reserve Chairman Jerome Powell's view last Friday was that the direction forward is clear, and the timing and pace of rate cuts will depend on new data, the evolving outlook, and the balance of risks. He also indicated that from now on, he and his colleagues will derive more signals from the labor market rather than inflation data.

Data from the interest rate swap market shows that traders are currently pricing in an interest rate cut of about 102 basis points by the Federal Reserve within the year, which implies rate cuts at all three remaining FOMC meetings of the year, including a substantial 50 basis point cut.

In addition to Powell, several officials from the European Central Bank's Governing Council also attended this central bank event over the weekend and enjoyed the magnificent scenery of the Grand Teton National Park in the United States.

European Central Bank officials, including Bank of Finland Governor Olli Rehn, Bank of Latvia Governor Martins Kazaks, Bank of Croatia Governor Boris Vujcic, and Bank of Portugal Governor Mario Centeno, all indicated that they would support another rate cut next month following the milestone rate cut in June.

Rehn claimed the deflation process in the Eurozone has been on the right track, while warning that Europe's growth prospects, especially in manufacturing, are quite bleak, which reinforces the rationale for a rate cut in September.

Centeno, on the other hand, stated that considering inflation and growth data, it would be easy to make another rate cut decision in less than three weeks.

Policymakers in the Eurozone now seem more concerned about economic growth, as the Eurozone's economic growth has slowed down after a strong increase in the first half of this year. Although the European Central Bank's primary responsibility does not include employment, they are also worried about the weakness in the labor market and are less concerned about inflation.

The officials of the European Central Bank seem to have reached a consensus that as long as the inflation rate is consistent with the bank's forecast, the European Central Bank will cut rates twice more this year (including the rate cut in September), with the bank predicting that the Eurozone inflation rate will fall within the central bank's target of 2% in the second half of 2025.

Furthermore, Bank of England Governor Andrew Bailey also spoke at the Jackson Hole meeting on Friday. In his speech, Bailey expressed cautious optimism that inflation expectations are better anchored, and the second-round effects of inflation seem smaller than expected, indicating that he is open to further rate cuts. The Bank of England had just cut the benchmark lending rate by 25 basis points to 5% earlier this month, marking the first rate cut in this cycle by the Bank of England.

Of course, not everyone is optimistic about the inflation outlook. In a panel discussion with Banco Central do Brasil President Roberto Campos Neto and Norges Bank President Ida Wolden Bache on Saturday, European Central Bank Chief Economist Philip Lane stated that the European Central Bank has not yet won the battle to reduce the inflation rate to 2%. Meanwhile, Neto believes that the tight labor market makes curbing inflation very challenging.

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