The chairman of the US Federal Reserve has paved the way for a pre-election rate cut in a sign that the era of high borrowing costs around the world is coming to an end.
The Fed on Wednesday held interest rates unchanged but signalled that the central bank will cut rates in September if inflation continues to ease.
US stock markets rose after Jerome Powell said the economy had made “considerable progress” in getting inflation back down to its 2pc target, ahead of a similar rate decision by the Bank of England today [THURS] that rests on a knife edge.
Speaking after the Fed held borrowing costs in a range of between 5.25pc and 5.5pc for the eighth time, Mr Powell said: “The broad sense of the committee is that the economy is moving closer to the point at which it would be appropriate to reduce our policy rate.”
Investors have fully priced in a September rate cut, which will be the final meeting before November’s US presidential election.
Markets also now believe there is a 60pc chance the Bank of England will reduce rates on Thursday. The Bank will decide whether to lower interest rates from a 16-year high of 5.25pc, with Governor Andrew Bailey expected to have the deciding vote on a divided nine-person committee.
Speaking on Wednesday evening, Mr Powell said a rate cut in the US would depend on “the totality of the data [being] consistent with rising confidence on inflation and maintaining a solid labour market,” with two official inflation readings expected before the September meeting.
“If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September,” he said.
Mr Powell noted that the Fed’s favoured measure of inflation had “eased substantially” from its peak of 5.6pc in 2022 to 2.6pc today. He added that consumer spending had “slowed”, while the jobs market remained “strong but not overheated” and similar to pre-pandemic levels.
“As the labour market has cooled and inflation has declined, the risks to achieving our employment and inflation goals continue to move into better balance,” said Mr Powell.
In the UK, analysts at Bank of America believe the Monetary Policy Committee (MPC) will narrowly vote to reduce borrowing costs to 5pc, though they added that the cut was unlikely to be the beginning of a campaign of rate cuts.
While inflation in the UK has already dropped back to the Bank’s 2pc target, many analysts remain concerned about the strength of services inflation, which remains stubbornly high.
Analysts at Bank of America said in a note: “While we are concerned about inflation persistence in the UK and think that the data doesn’t provide clear signals that inflation persistence is beaten, we also think that the Bank could be willing to tolerate and explain away some upside strength to justify a cut.”
Benjamin Nabarro, chief UK economist at Citi, added: “The risks of course remain skewed towards a delay, with even a cut, if delivered, likely to be presented only as a modest adjustment, rather than marking a definitive cycle.”
The decision by the Fed came just hours after data showed the US jobs market was continuing to cool, which should ease inflationary pressure within the economy.
The ADP employment report showed private sector employment grew by 122,000 in July, which was down from the upwardly revised figure of 155,000 the previous month.
It was also lower than the 150,000 expected by economists.
Meanwhile, pay growth as measured by the government’s Employment Cost Index rose by 0.9pc in the second quarter, down from a 1.2pc increase in the first three months of the year, according to the Labor Department.
Compensation growth was 4.1pc on an annual basis, a slight drop from 4.2pc in the first quarter.
ADP chief economist Nela Richardson said: “With wage growth abating, the labour market is playing along with the Federal Reserve’s effort to slow inflation.”
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said the Fed was already behind the curve.
He said: “Our view remains that the Fed is recognising too slowly that the labour market is cooling and that high inflation is yesterday’s problem.”
Mr Shepherdson said the Fed was likely to pick up the pace of rate cuts “much faster than markets currently anticipate if, as we expect, the labour market data continue to weaken and inflation prints remain benign”, with rates down to 4pc by the end of the year “as the Fed scrambles to get ahead of the developing slowdown”.
However, Paul Ashworth at Capital Economics said a Donald Trump presidency could keep inflation and interest rates higher for longer, as he predicted just two rate cuts this year.
Mr Ashworth said: “With Donald Trump still the favourite to win this November’s election… ushering in an inflationary policy mix, we’re happy with that positioning.”
Read the latest updates below.
