“It’s here” – US central bank announces hoped-for rate cut

The direction is clear, Powell added, with a view to cutting interest rates. The timing and pace would depend on incoming data, the outlook and risk assessment.

Further steps are likely to follow
His confidence that inflation will converge sustainably to the central bank’s price stability target of 2 percent has increased. The U.S. monetary authorities had already discussed a cut in the policy rate in July, which they have kept within the 5.25 to 5.50 percent range for more than a year. Although they were still reluctant to take a step down, they were clearly considering a cut in September. A majority of economists recently polled by Reuters expect the policy rate to be cut by a quarter of a percentage point on September 18, with further steps down of the same magnitude likely in November and December.

Powell’s signals were very well received by investors. The Dax, the EuroStoxx50 and the major indices on Wall Street extended their gains and rose between more than half a percent and almost one and a half percent. Powell’s speech also boosted the gold price, which reached a new all-time high of $2,517.69 per troy ounce. Investors also grabbed US government bonds. The dollar index, on the other hand, fell by almost half a percent to 101.11 points. Previously, this was almost zero.

The central bank wants to curb inflation
The central bank wants to use its tight policy to curb inflation without strangling the economy. Panic broke out in financial centres at the start of the month as weak labour market data fuelled fears of a US recession. Fears have now subsided thanks to a series of positive data. “We will do everything we can to support a strong labour market as we make further progress towards price stability,” Powell stressed. The current level of interest rates gives the central bank ample room to react to any risks – such as a further unwanted deterioration in labour market conditions.

The Fed’s last rate cut came in March 2020, as the central bank responded to the economic downturn during the coronavirus crisis. The country subsequently kept its key interest rate near zero for an extended period before a sharp rise in inflation forced it to raise interest rates, some massively, in 2022.

US economists warn against rapid easing
U.S. monetary watchdog Patrick Harker recently told Reuters that the Fed should take it easy on easing. His business contacts demanded predictable measures. They did not want the pace to be as aggressive as it was in the case of monetary policy tightening measures in the spring of 2022. Harker assumes that the key monetary policy rate will end up around 3 percent at the end of a rate-cutting cycle.

Regarding the Fed’s dual mandate, Powell had already pointed out that, given the progress made in combating the inflation wave, the central bank no longer needed to focus “100 percent” on inflation. In addition to price stability, the central bank must also promote full employment. In addition to the next inflation report, the focus is also on the August labor market figures, which will be released in early September.

“If this shows that the employment situation is deteriorating faster than the Fed currently assumes, the majority of Fed officials will be concerned that the restrictive monetary policy has been maintained for too long. Then the easing of monetary policy needs to happen faster,” says LBBW economist Elmar Völker, adding: “Even though a moderate, orderly decline from the interest rate peak is the most likely and desirable scenario from today’s perspective, the US is still at a point in the economic development where the signals can change quickly.”