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For the first time since 2020, the Federal Reserve finally seems to be on track to cut U.S. interest rates in September. The US Federal Reserve chair Jerome Powell is widely expected to use a keynote speech at a major central banking conference on Friday to indicate support for a rate cut ahead of next month’s rate decision.
Powell’s keynote speech at the Kansas City Fed’s Jackson Hole Economic Symposium is scheduled for Friday at 10 am ET. Past Fed chairs have often used this platform to signal important shifts in central bank policy. A few weeks ago he indicated that the policymakers could cut rates ‘as soon as’ September, given the labor market remains stable and inflation continues to ease.
0.25 or 0.50?
The Fed’s benchmark lending rate currently sits at a 23-year high of between 5.25 and 5.50 percent, cooling demand in the world’s largest economy ahead of November’s presidential elections, in which inflation and the cost of living have taken a central role.
The Deutsche Bank chief US economist Matthew Luzzetti said, “He will likely signal that a rate cut is coming soon, “However, I think he will not indicate the probable size of that rate cut.”
Luzzetti from Deutsche Bank said that Powell is unlikely to come out strongly in favor of either move on Friday and the decision to cut by 25 or 50 basis points will depend on how the data comes in over the next month and importantly, what the next jobs report looks like. He also added that a weaker jobs report would likely raise the chances of a larger half-point cut.
The next jobs report will be issued on September 6, after the Jackson Hole conference but before the Fed’s next meeting in mid-September.
The Risks Getting Better
As inflation continues to ease towards its long-term two percent target, the US Central Bank now seems poised to start cutting rates in September. The Fed has a dual mandate from Congress to tackle both inflation and unemployment and has been signaling in recent months that the risks to the two sides of its mandate are now coming into better balance.
With markets already pricing in multiple rate cuts by the year-end, “The dollar’s 2.2 percent drop against a basket of rival currencies in August suggests a broader shift in investor sentiment as expectations of rate cuts solidify,” said Nigel Green, CEO of deVere Group.
According to Wall Street experts, this change should prompt investors to reassess their strategies, particularly those heavily weighted in dollar-denominated assets. As the US currency weakens, international equities and assets denominated in other currencies stand to gain.