"The time has come"

US central bank announces hoped-for interest rate cut

Fed Chairman Jerome Powell gave an initial signal for an easing of interest rates in September.

(Bild: AFP)

The US Federal Reserve is about to cut interest rates for the first time since the beginning of the decade. Fed Chairman Jerome Powell gave the financial markets the hoped-for signal for an easing move in September in a speech at the central bank forum in Jackson Hole on Friday: "The time has come to adjust monetary policy."

The direction is clear, Powell added with regard to interest rate cuts. The timing and pace would depend on the incoming data, the outlook and the risk assessment.

Further steps are likely to follow
His confidence regarding a sustainable approach of inflation to the central bank's price stability target of two percent has grown. The US monetary authorities had already discussed lowering the key interest rate in July, which they have kept in the range of 5.25 to 5.50 percent for over a year. Although they were still reluctant to make a downward move, they were considering a reduction in September. A majority of the economists recently surveyed by the Reuters news agency assume that the key interest rate will be cut by a quarter of a percentage point on September 18: Further downward steps of the same magnitude are likely to follow in November and December.

Stock market prices have already reacted to Powell's announcement.

(Bild: 2024 Getty Images)

Powell's signals were very well received by investors. The Dax, the EuroStoxx50 and the most important indices on Wall Street extended their gains and were up between a good half and almost one and a half percent. Powell's speech also boosted the price of gold, which reached a fresh all-time high of 2517.69 dollars per troy ounce. Investors also bought US government bonds. The dollar index, on the other hand, slipped by just under half a percent to 101.11 points. It had previously been close to the zero mark.

Central bank wants to curb inflation
The central bank wants to curb inflation with its tight line, but without stifling the economy. Panic broke out in the financial markets at the beginning of the month when weak figures from the jobs market stoked fears of a recession in the USA. Fears have since subsided in the face of a series of positive data. "We will do everything we can to support a strong labor market as we make further progress towards price stability," Powell emphasized. The current interest rate level offers the central bank plenty of leeway to react to any risks - such as a further undesirable deterioration in the labor market.

The Fed's last interest rate cut dates back to March 2020, when the central bank reacted to the economic slump during the coronavirus crisis. It then kept the key interest rate close to zero for a long time before a surge in inflation in 2022 forced it to make some massive rate hikes.

US economists warn against rapid easing
US monetary watchdog Patrick Harker recently told Reuters that the Fed should take it easy on the easing course. His business contacts called for predictable measures. They did not want the pace to be as aggressive as it was with the monetary policy tightening steps in spring 2022. Harker assumes that the key monetary policy rate will end up at around three percent at the end of an interest rate reduction cycle.

With regard to the Fed's dual mandate, Powell had already pointed out that the central bank no longer had to focus "100 percent" on inflation in view of the progress made in the fight against the inflation wave. In addition to price stability, the central bank should also promote full employment. In addition to the next inflation report, this also brings the labor market figures for August, which will be published at the beginning of September, into focus.

"If these show a more rapid deterioration in the employment situation than the Fed is currently assuming, the majority of Fed officials will be driven by the concern that the restrictive monetary policy has been maintained for too long. The easing of monetary policy will then have to be accelerated accordingly," says LBBW economist Elmar Völker, adding: "Even if a moderate and orderly withdrawal from the interest rate summit is the most likely and desirable scenario from today's perspective, the USA is at a point in its economic development where the signs could change rapidly."