As interest rate cuts loom, global investors welcome September

Other central banks will likely follow the Fed's lead, and these positive trends are expected to be reflected in the markets, especially on Wall Street, in the coming autumn and winter.

Main drivers

When considering the main drivers that may have accelerated the Fed's decision to move closer to a rate cut, the priority is likely to be to support the economy following the latest jobs report, which saw the unemployment rate rise to 4.3%.

That doesn't necessarily mean an imminent US economic recession, but nonetheless, Powell was clear: "We don't seek or welcome further cooling in labour market conditions," he said, as the US labour market approaches a tipping point where slower job growth can lead to a faster rise in unemployment rates.

This shift comes at a particularly critical and sensitive time for the US economy. Presidential elections are scheduled for 5 November, and many families are still concerned about the high cost of living despite the decline in inflation rates.

Defence and admissions

Powell defended the traditional monetary policy pursued by the Fed, stating that it "helped restore balance between aggregate supply and demand, easing inflationary pressures and ensuring that inflation expectations remained well anchored," especially with the gradual exit from the COVID-19 pandemic in 2021.

He also admitted that he and his colleagues at the Fed misjudged the inflationary threat in early 2021 as the severity of COVID-19 subsided.

At the time, they considered rising prices a natural consequence of pandemic-related supply chain disruptions, believing that inflationary pressures were temporary and would "fade away fairly quickly without the need for a monetary policy response – in short, inflation would be temporary." Most analysts and central bank governors in advanced economies predicted the same.

Gradual reduction

Despite announcing an imminent easing of monetary policy, Powell was adamant he would not compromise on what could negatively impact the US economy. He made it clear that "the timing and pace of rate cuts will not be reactionary but will depend on incoming data, the evolving outlook, and the balance of risks". These forecasts concluded that interest rates could be gradually cut by 25 basis points in September, November, and December, respectively.

The Fed's careful and precise approach to adjusting interest rates, whether up or down, is well-known. Achieving an inflation rate of 2.5% from a peak of 7.1% (with the Consumer Price Index rising to 9.1%) two years ago is a testament to this, and the rate is now close to the targeted 2%.

The Fed had expected to cut interest rates three times this year, but that didn't happen due to the slow progress in curbing inflation at the start of 2024.

The opinion of Philip Lane, chief economist at the European Central Bank (ECB), aligned with that of the Fed in maintaining caution. Despite actual and expected rate cuts by the ECB and by the Bank of England by 25 basis points in the summer, Lane pointed out that "the return to the (inflation) target isn't yet secure" as the ECB seeks to achieve a delicate balance between price stability and supporting economic growth.

Optimal opportunity

Following Powell's "statement of intent" in Jackson Hole, the S&P 500 stock index rose, and the prices of US Treasury bond, a haven for investors, subsequently fell due to the improvement in financial market activity.

The decision to cut interest rates was anticipated before the meetings, reinforcing trading trends during this period. However, this drop in bond prices provides an invitation for savers to invest in them to capture attractive returns, before the precise timing and pace of interest rate reductions is defined.

Despite the caution, the general financial and economic climate at this moment inspires optimism, with upcoming rate cuts a welcome step after a long wait. Welcome, September.