Last Friday, officials from the three major central banks in the United States, United Kingdom, and Europe expressed in unison that they will enter an interest rate cut cycle in the coming months, or continue the pace of interest rate cuts prior to this. This signifies the end of the era of high borrowing costs globally as the global economy gradually emerges from the post-pandemic period of high inflation, and the loose policies of major central banks will also usher in a new chapter next month...

Federal Reserve Chairman Powell clearly stated last Friday at the global central bank annual meeting in Jackson Hole, Wyoming that the time for policy adjustment has come. This statement basically puts an end to the historic anti-inflation action of the Federal Reserve. The next policy meeting of Federal Reserve officials is scheduled for September 17-18. It is widely expected that the Federal Reserve will lower the benchmark federal funds rate at this meeting.

In fact, Powell is not the only central bank governor to hint at a steady decline in interest rates at this central bank annual meeting. The European Central Bank and the Bank of England have also indicated that further action is expected. The difference from the Federal Reserve is that these two major European central banks have already cut interest rates once before.

Considering that the start date of the Federal Reserve's rate cut has been basically determined, and many large central banks around the world are working towards the same direction, this undoubtedly eliminates some concerns of investors. After Powell and many other central bank officials delivered speeches last Friday, the US stock and bond markets both rose, with the Dow Jones closing up 460 points, and the 2-year US Treasury yield, closely linked to Federal Reserve rate expectations, falling below the 3.9% level.

Of course, there is still significant uncertainty and risks. Powell and his colleagues did not provide much guidance on how fast they intend to cut interest rates in the coming months. Meanwhile, in this period of uncertainty, labor market weakness and overall growth fatigue are replacing inflation as the main threats faced by central bank policymakers.

In response to this, Federal Reserve Chairman Powell's view last Friday was that the direction forward is clear, and the timing and pace of rate cuts will depend on new data, evolving outlooks, and the balance of risks. He also stated that from now on, he and his colleagues will rely more on signals from the labor market rather than inflation data.

Data from the interest rate swap market shows that traders are currently pricing in a rate cut of about 102 basis points by the Federal Reserve during the year, which means that rate cuts will occur in the last three meetings of the year, including a significant 50 basis points cut.

In addition to Powell, several officials from the European Central Bank's governing council also attended the central bank's grand event last weekend and enjoyed the magnificent scenery of the Grand Teton National Park in the United States.

European Central Bank officials, including Olli Rehn, Governor of the Bank of Finland, Martins Kazaks, Governor of the Bank of Latvia, Boris Vujcic, Governor of the Croatian National Bank, and Mario Centeno, Governor of the Bank of Portugal, all expressed their support for another rate cut next month after the milestone rate cut in June.

Rehn described the process of inflation falling back in the eurozone as "on track", while also warning that "the growth prospects in Europe, especially in the manufacturing sector, are quite bleak. This strengthens the reason for a rate cut in September."

Centeno also stated that considering the inflation and growth data, a decision to cut interest rates again would be "very easy" in less than three weeks.

Policymakers in the eurozone now seem more concerned about economic growth, as the eurozone's growth rate has declined after experiencing strong growth in the first half of this year. While the European Central Bank's primary responsibility does not include employment, they are also concerned about the weakness in the labor market, while concerns about inflation have diminished.

Officials from the European Central Bank seem to have reached some consensus that as long as the inflation rate remains consistent with the bank's forecast, the central bank will cut interest rates twice this year (including the September rate cut). The bank predicts that the eurozone's inflation rate will fall within the central bank's target of 2% in the second half of 2025.

In addition, Bank of England Governor Bailey also gave a speech at the Jackson Hole conference on Friday. In his speech, Bailey expressed cautious optimism about better-anchored inflation expectations and the seemingly smaller second-round effects of inflation, indicating his openness to further rate cuts. The Bank of England had just cut its benchmark interest rate by 25 basis points to 0.5% earlier this month, the first rate cut in this cycle for the Bank of England.

In other countries, major central banks such as Canada and New Zealand are also easing their policies. The biggest exception may be Japan, where Bank of Japan officials launched the first tightening cycle in 17 years earlier this year.

The three-day Jackson Hole Global Central Bank Annual Meeting is essentially academic. At this year's meeting, economists also presented four research papers, all related to the theme of "Reassessing the Effectiveness and Transmission of Monetary Policy."

Given the increasing focus on employment issues, the research of Professor Pierpaolo Benigno from the University of Bern and Professor Gauti Eggertsson from Brown University may be most relevant to the current economic situation. Their conclusion is that the cooling of the labor market is approaching a turning point, and if the economy further slows down, the US unemployment rate may increase significantly.

Of course, not everyone is optimistic about the inflation outlook. In a group discussion held last Saturday with Roberto Campos Neto, President of the Central Bank of Brazil, and Ida Wolden Bache, Governor of the Central Bank of Norway, Philip Lane, Chief Economist of the European Central Bank, stated that the battle to bring the ECB's inflation rate to 2% has not yet been won. At the same time, Neto believes that the tight labor market has made the task of controlling inflation very challenging.

Editor/ping