“The time has come”: with these words, the chairman of the American Federal Reserve (Fed) Jerome Powell gave on Friday in Jackson Hole, Wyoming, the signal that the markets were waiting for, opening the door wide to a first rate cut at the institution’s next meeting, on September 17 and 18.
“The time has come for a policy adjustment” on monetary policy, assured the head of the American central bank in a highly anticipated speech at a symposium bringing together mainly American central bankers in Jackson Hole.
“The direction to take is clear, the pace of rate cuts will depend on upcoming data, the evolution of the outlook and the balance of risks,” between maintaining full employment and controlling inflation, said Jerome Powell.
His “confidence has increased that inflation is on a sustainable path back to 2%,” the target set by the central bank’s mandate.
In the highly codified language of central bankers, this is indeed a signal that the Fed’s monetary committee (FOMC) will lower its rates at its next meeting in mid-September, the last before the US presidential elections on November 5.
Mr Powell’s regular speeches had so far given no indication of the possibility of a cut in Fed interest rates, an action initially expected by the markets in the first half of the year, before persistent inflation led them to hope for it in September.
On Wednesday, the publication of the Fed’s “minutes”, the report of the previous meeting, had already raised this possibility: “the vast majority (of members, editor’s note) emphasize that, if the data continue in the expected direction, it would probably be appropriate to ease (monetary) policy at the next meeting,” it is written.
Increase in unemployment
“We will do everything in our power to support a strong jobs market,” Powell also assured in Jackson Hole, a sign that employment is returning to the institution’s radar, while the pace of job creation is returning to the level it was before the pandemic.
“There is a good chance that the recent data have strengthened the “doves” (more concerned about the evolution of the labor market and in favor of a loose monetary stance, editor’s note) and calmed the “hawks” (more focused on the question of inflation and in favor of monetary orthodoxy, editor’s note) within the institution,” estimated the chief economist of Pantheon Macroeconomics, Ian Shepherdson, in a note.
Wednesday’s revision of job creation for the past fiscal year — the largest revision since 2009 — showed that the jobs market was well into an advanced slowdown.
Previously released data had overestimated the number of jobs created in the United States between the beginning of April 2023 and the end of March 2024 by more than 800,000.
“This highlights a still positive pace” of job creation but “much more moderate than initially envisaged. The nuance is important because, for economists as well as for decision-makers, it underlines that the economy continues to progress, but at a more moderate pace”, estimates the chief economist of EY, Grégory Daco, interviewed by AFP.
“Risk rebalancing”
So far, the data has shown a gradual slowdown in job creation, but with unemployment rising relative to 4.3% in parallel, there is now a risk that it will once again become a major issue.
According to the minutes, Fed officials also emphasize “a rebalancing of risks related to inflation and employment.”
The rise in unemployment has particularly worried the markets, which fear that the “Sahm rule” will be verified again: according to this, the American economy enters into recession when unemployment increases by 0.5 percentage points on average over three months.
The increase in July was 0.53 points compared to the previous month.
All analysts are now expecting a rate cut in September, with the majority predicting a 25 basis point cut, but nearly 40% of them expect a 50 basis point cut.