Jackson Hole bankers pivot to cuts as soft landing comes into view

Against the dramatic backdrop of the Teton mountain range, something many had considered all but impossible appeared to be in sight for the top central bankers who had travelled to Wyoming for the Jackson Hole symposium.

After experiencing the worst inflation shock in four decades, those in attendance at the Kansas City Federal Reserve’s annual conference this weekend were hopeful they were close to beating the odds and achieving a soft landing for the

The European Central Bank, BoE and the Bank of Canada have all lowered interest rates this summer and are expected to reduce them further in the coming months.

The Fed is set to join them in September, as Powell signalled on Friday. That meeting comes just six weeks before the US presidential election, the outcome of which is looming large over the world’s biggest economy.

That it has taken so long for the Fed and other central banks to begin cutting speaks to the extent of the inflation problem that has dogged them for the past three years.

First viewed as a “transitory”, shortlived ordeal, inflation quickly morphed into an explosive and persistent problem for consumers around the world. The path back down to 2 per cent has been bumpy, made worse by wars in Ukraine and the Middle East. As recently as the start of the year, an unexpected resurgence in price pressures rattled US officials.

Central banks have long been fixated on the risk that lowering interest rates too soon would leave inflation stuck above target — or, worse, flaring up again as expectations of price rise after price rise became baked in.

They are still not quite ready to call time on the worst bout of price pressures for a generation.

Bailey on Friday reiterated he would take a cautious approach to cutting rates, reinforcing expectations that the BoE would hold in September before lowering borrowing costs again in November. On Saturday, ECB chief economist Philip Lane warned its inflation goal was “not yet secure”.

US officials support cutting rates gradually too. But they have also left the door ajar to more aggressive moves if necessary.

After raising borrowing costs too late to contain inflation, rate-setters acknowledge the stakes of moving too slowly in this next phase.

“I am concerned that we’re the tightest we’ve been this whole cycle,” Austan Goolsbee, president of the Chicago Fed, told the Financial Times, noting that inflation-adjusted interest rates have risen as price pressures have eased, even though nominal borrowing costs in the US have been the same for more than a year.

“You only want to be that tight for a reason — if you fear overheating — and this is not what overheating looks like,” Goolsbee said.

While Susan Collins, president of the Boston Fed, believed there was a “clear path” to reaching the 2 per cent inflation goal without an “unneeded slowdown”, she acknowledged that risks to the world’s largest economy could materialise.

“I am realistic about that,” Collins told the Financial Times. “Humility is not a bad thing for us to have.”