Silent approval or wrong signal?

The much-anticipated symposium of central bankers in Jackson Hole produced no major surprises. Jerome Powell confirmed that a cut in key interest rates was imminent, validating the unanimous expectations of investors and traders. The focus on the labour market reflects a ‘bias’ that could imply a slightly deeper and faster easing than previously expected. However, the Fed Chairman did not unveil a precise roadmap. In the words of the speech, ‘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’.

Although Jerome Powell did not make any bold announcements, he did not seek to contradict expectations that the Fed funds rate will be cut by more than 2 percentage points by the end of 2025, including 1 percentage point over the last three FOMC meetings in 2024. These projections remain uncertain, but could materialise if the US labour market continues to weaken and the jobless rate rise above the 4.3% level reached in July.

In line with the ‘dovish’ tone of Powell’s speech, the minutes of the FOMC last meeting tell us that the vast majority of participants felt that an interest rate cut would be appropriate at the next meeting, provided that the data evolve in line with their forecasts. The ‘hawks’ concerned about inflation appear to be a very small minority in comparison with the many ‘doves’ who fear a recession and a rise in unemployment as a result of a too late change in policy.

In capital markets, dollar yields fell, particularly at shorter maturities. The yield on the 10-year T-note fell back below 3.8%, close to the level seen in early August during the episode of stress exacerbated by margin calls and the hasty unwinding of carry trades triggered by the yen’s rebound. In the credit market, as in the equity market, the recovery is almost complete. Panic has been replaced by a degree of complacency on the part of investors, who have great confidence in the Fed’s ability to avoid a recession.

In Europe, euro yields are flat. Several ECB representatives present at Jackson Hole hinted that the central bank was preparing to cut its key rates in September, but the institution’s chief economist believes that a sustainable return of inflation to the 2% target is not yet secured. In the same vein, the Governor of the Bank of England said on Friday that it was ‘too early to declare victory’, prompting a sharp rebound in short- and medium-term UK government bond yields.

The gap between the restraint shown by European central bankers and the dovish signals delivered by Jerome Powell added to the pressure on the dollar, which in the space of a few weeks gave up all the gains it had made since the start of the year. The scale of the movement is such that the ECB, the Bank of England and the SNB may have to cut interest rates more aggressively to counter the effects of a swift fall in dollar interest rates.