‘Time has come’ for rate cuts, hints Fed as Bailey hails faster fall in inflation

Jerome Powell has given his strongest hint yet that the US will start cutting interest rates next month amid hopes that inflation is finally under control across the West.

The Federal Reserve chairman indicated that he will be able to reduce borrowing costs from their current level of 5.5pc in a boost for the global economy. It came as Andrew Bailey, Governor of the Bank of England, suggested that British inflation is also falling faster than feared.

Speaking at the Jackson Hole economic conference in Wyoming, Mr Powell said: “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.

“Four and a half years after Covid 19’s arrival, the worst of the pandemic-related economic distortions are fading.
”Inflation has declined significantly. The labour market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic.”

It raises the prospect of more rapid rate falls across the Western world as the battle against the cost of living crisis edges close to completion.

Mr Powell appeared to promise bold action to support the economy.

He said: “We will do everything we can to support a strong labour market as we make further progress toward price stability.”

The chairman of the world’s most powerful central bank also pushed back against fears of a recession, which had briefly taken hold in markets at the start of the month when a run of weak economic data followed the Fed’s decision to hold rates.

Noting that the Fed’s job is to keep both inflation and unemployment low, Mr Powell said: “Overall, the economy continues to grow at a solid pace. But the inflation and labour market data show an evolving situation. The upside risks to inflation have diminished. And the downside risks to employment have increased.”

His comments triggered a small rise in stock markets and sent the dollar down against the pound. Sterling rose as much as 1pc to $1.32.

Traders in financial markets ramped up bets of a rate cut, anticipating at least a move of 0.25 percentage points from the Fed, and potentially a double cut to take rates to 5pc.

Speaking shortly after the Fed chairman, Mr Bailey said that “persistent” factors keeping price rises high “appear to be smaller than we expected”.

Mr Bailey’s comments raise the possibility that the Monetary Policy Committee may be able to follow August’s rate cut with more reductions in borrowing costs.

That would be good news for mortgage borrowers who currently face an average interest rate of 4.8pc on new loans, up from a low of 1.5pc in late 2021.

“We are seeing a lower level of inflation persistence than we expected a year ago. But, we need to be cautious because the job is not completed – we are not yet back to target on a sustained basis,” Mr Bailey said, almost a month after cutting rates for the first time in four years, from 5.25pc to 5pc.

“Recent experience leads me to be cautiously optimistic that inflation expectations are better anchored as a result of the regimes we have in place. The second round inflation effects appear to be smaller than we expected. But it is too early to declare victory.”

Previously the Governor and other Bank officials had raised concerns that rising wages and stubborn increases in services prices threaten to keep inflation above the 2pc target in the years to come.

Inflation fell to the 2pc target in May and June, but edged up to 2.2pc in July and is expected to rise a little further later in the year on higher energy prices.

Mr Bailey’s comments come amid heightened concern that significant pay rises offered to strikers, and to public sector workers more broadly, are embedding higher costs in Britain’s jobs market.

Alongside a 10pc rise in the energy price cap, higher pay packets raised fears of reigniting the inflation crisis.

Rachel Reeves, the Chancellor, has paved the way for tax rises to fund spending including on pay rises, telling the Telegraph this week she was “shocked” by the state of the public finances left by the Conservatives.