US Federal Reserve Chair Jerome Powell. File

Federal Reserve chair Jerome Powell said on Friday that the “time has come” for the United States to start cutting interest rates, adding that his “confidence has grown” that the battle against inflation is on track.

“The time has come for policy to adjust,” he said in a keynote speech at the Jackson Hole Economic Symposium in the western US state of Wyoming, in unusually direct remarks about the likely path of monetary policy.

“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,” he added.

US stocks rose on Powell’s remarks, with all three major indices on Wall Street up sharply at around 10am local time in Washington (1400 GMT).

The annual economic symposium in Wyoming gives Powell a global platform to share the Fed’s thinking with financial markets. He had said a few weeks ago that policymakers could cut rates “as soon as” September if the labor market remained solid and inflation continued to ease.

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.

Powell said the Fed’s restrictive monetary policy had “helped restore balance between aggregate supply and demand, easing inflationary pressures and ensuring that inflation expectations remained well anchored.”

“My confidence has grown that inflation is on a sustainable path back to two percent,” he added, referring to the Fed’s long-term inflation target.

After holding its key lending rate at a two-decade high for more than a year, Powell’s remarks suggest the US central bank is now all but certain to start cutting rates in September, as inflation continues to ease.

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.

Powell said Friday that the US labor market “has cooled considerably from its formerly overheated state,” with the unemployment rate up sharply from last year, though at 4.3 percent it remains low by historical standards.

“The cooling in labor market conditions is unmistakable,” he added.

While inflation has fallen and the labor market has cooled, economic growth has remained positive, raising confidence that the Fed could pull off a so-called soft landing -- where it hits its inflation target without bringing about a recession or a substantial rise in unemployment.

Earlier this week, the minutes of the Fed’s July rate decision spelled out the likely direction of travel: Most members of the bank’s rate-setting committee said it would likely be “appropriate” to cut rates in September, if the data continued to come in as expected.

“Inflation gives them the reason to start to cut rates,” Nationwide Mutual chief economist Kathy Bostjancic told AFP ahead of Powell’s speech, adding that the upcoming labor market data would likely dictate how aggressively they did so.

Many analysts expect the Fed to move ahead with a more cautious quarter-percentage-point rate cut in September, but see a larger half-point cut as a possibility -- depending on upcoming data.

Futures traders put the chances of a smaller cut in September around 70 percent and the probability of a bigger cut at approximately 30 percent, according to data from CME Group.

The decision to cut by 25 or 50 basis points “will depend on how the data come in over the next month or so, and importantly, what the next jobs report looks like,” Deutsche Bank chief US economist Matthew Luzzetti told AFP ahead of Powell’s speech.

A weaker jobs report would likely raise the chances of a larger half-point cut, he added.

Both Bostjancic and Luzzetti see three quarter-point cuts in the remaining three rate decisions this year as the most likely scenario -- higher than the median expectation of Fed policymakers back in June.

This would cut the Fed’s benchmark lending rate by a total of 75 basis points, lowering it to between 4.50 and 4.75 percent.

But the financial markets think the Fed could go even further.

Futures traders currently assign a probability of more than 65 percent that the Fed will cut interest rates by at least a full percentage point by the end of the year.

World shares gained on Friday, just shy of all-time highs, while the dollar languished around one-year lows after a speech by the world’s most powerful central banker confirmed the US would soon begin interest rate cuts.

US Federal Reserve Chair Jerome Powell, in a speech on Friday at the annual economic symposium in Jackson Hole, Wyoming, said “the time has come” to cut interest rates as rising risks to the job market left no room for further weakness and inflation was in reach of the Fed’s 2% target, offering an explicit endorsement of an imminent policy easing.

“What he’s suggesting here is if the labor market continues to weaken, we’re looking at a 50-basis-point rate cut in September as opposed to 25,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

On Wall Street, the Dow Jones Industrial Average rose 0.69% to 40,993, the S&P 500 gained 0.87% to 5,618 and the Nasdaq Composite gained 1.20% to 17,830.

Europe’s broad Stoxx 600 index rose 0.1% after Asian shares outside Japan had nudged down 0.1%, but Japan’s Nikkei gained 0.4% as investors digested inflation data and remarks from Bank of Japan Governor Kazuo Ueda flagging a willingness to raise interest rates if the economy and inflation turn out as forecast.

That left MSCI’s all country world index up 0.8%, and with early August’s turmoil in the rear view mirror, it is now trading near its mid-July all-time peak.

Markets are fully priced for a 25 bp US rate cut in September and see a cut at each of the Fed’s three remaining meetings this year, and for one to be a larger 50 bp move.

On the final night of the four-day Democratic National Convention, Vice President Kamala Harris promised to be a “realistic,” “practical” president for all Americans if elected.

For the bond market, expectations that rate cuts are coming have kept U.S. Treasury prices supported and not giving back their safe-haven gains from early August.

Following the Powell speech, the yield on benchmark U.S. 10-year notes was down 5.7 basis points at 3.805%, from 3.862% late on Thursday. The 2-year note yield, which typically moves in step with interest rate expectations, fell 6.7 basis points to 3.9427%, from 4.01% late on Thursday.

Its German equivalent was steady at 2.224%.

The low U.S. yields have hurt the dollar, which has lost ground on almost all major peers in August.

The euro was last at $1.1115, steady on the day and just off a 13-month peak hit earlier this week, and sterling was up 0.24% at $1.3125, battling to push through its July 2023 level, which would take it to its highest in well over two years.

The Japanese yen strengthened, with the dollar down 0.8% at 145.16 after Bank of Japan Governor Ueda’s comments on rates.

“The yen buying today is understandable given Governor Ueda showed very little sign of a shift in the views and plans of the BoJ following the financial market turmoil earlier this month,” said Derek Halpenny, head of research global markets EMEA at MUFG, in a note to clients.

Data out early in the day showed Japan’s core inflation accelerated for a third straight month, but a slowdown in demand-drive price gains suggest no urgency for any immediate rate hikes.

Reuters