The US Federal Reserve is poised to cut interest rates after Jerome Powell, the central bank’s chair, said policymakers needed to react to growing downside risks.
“My confidence has grown that inflation is on a sustainable path back to two per cent,” he said in a speech at the Jackson Hole Symposium.
“The time has come for policy to adjust,” Powell added, pointing to growing downside risks.
“We don’t seek or welcome further labour market cooling,” he said, highlighting that the slowdown in the labour market was “unmistakable”.
At the Fed’s last meeting in July, policymakers unanimously voted to leave interest rates in a range of 5.25-5.50 per cent for the eighth consecutive meeting.
However, inflation has edged lower since then while there are also growing signs that the US labour market, which has remained remarkably resilient, might be on the cusp of a downturn.
Figures out since the end of July show that the unemployment rate has climbed to a three year high of 4.3 per cent, rising from 4.1 per cent. The pace of jobs growth has also slowed.
Global markets plummeted in the immediate aftermath of those figures with many analysts raising concerns that the Fed had waited too long to cut interest rates.
Although anxieties about an imminent downturn have faded, a September rate cut has been seen as a near certainty ever since. The only question has been whether the Fed cuts rates by 25 basis points or opts for a larger 50 basis point rate reduction.
According to CME’s Fedwatch, there is a roughly 32 per cent chance of a 50 basis point rate cut in September.
Powell did not give any indication as to which option he favoured, though he stressed that the Fed had plenty of room to manoeuvre.
“The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labour market conditions,” he said.
Stephen Brown, deputy chief North America economist at Capital Economics, said a 50 basis point cut was very much on the cards after Powell’s speech.
“Given that the July meeting minutes released this week explicitly mentioned the potential for a 25 bp cut, the lack of any guidance on the size of the move next month suggests that Powell is keeping his options open,” he said.