US Federal Reserve officials have said that the health of the US job market is starting to draw their concern after consumer price-based inflation cooled towards the Fed's two per cent target. However, the pace of hiring has slowed, and the unemployment rate has increased in the world's largest economy.
Fed Chairman Jerome Powell will likely provide some hints about how the US central bank sees the economy and its next steps in a high-profile speech Friday in Jackson Hole, Wyoming, at the Fed’s annual conference of central bankers. Fed officials have used the platform to signal changes in their approach. Wall Street and emerging markets have fully priced in a rate cut for September when the Fed meets for its next policy meeting.
Wall Street experts agree that the US Fed is getting closer to conquering high inflation, which began three years ago as the economy rebounded from the pandemic recession, putting millions of households under financial constraint. Few economists think Powell or any other Fed official is prepared to declare “mission accomplished.”
Economists say the Fed is now more focused on labour versus inflation as their policy is calibrated for inflation that is much higher than this. Still, how fast the Fed cuts rates are announced in the coming months will depend on the US economic data. A rate cut by the Fed would significantly impact the global financial markets, including India.
After the US government reported that hiring in July was much less than expected and that the jobless rate reached 4.3 per cent, the highest in three years, stock prices plunged for two days on fears that the US might fall into a recession. Some economists began speculating about a half-point Fed rate cut in September and perhaps another identical cut in November.
Some Fed officials said a half-point Fed rate cut in September would become more likely if there were signs of a further slowdown in hiring. The next jobs report will be issued on September 6, after the Jackson Hole conference but before the Fed’s next meeting in mid-September.
‘’Investors are keenly awaiting signals on the future path of US interest rates in Federal Reserve Chair Powell’s upcoming speech at the Jackson Hole symposium this week, with markets already pricing in multiple rate cuts by year-end,'' said Nigel Green, CEO of deVere Group.
“With the Fed likely to lower interest rates in September, market dynamics are shifting, which presents opportunities and challenges for those managing global portfolios. The dollar’s 2.2 per cent drop against a basket of rival currencies in August suggests a broader shift in investor sentiment as expectations of rate cuts solidify,'' added Green.
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According to Wall Street experts, this change should prompt investors to reassess their strategies, particularly those heavily weighted in dollar-denominated assets. As the US currency weakens, international equities and assets denominated in other currencies stand to gain.
“A weaker dollar traditionally boosts commodities, emerging market equities, and foreign bonds, making them more attractive to US investors seeking to capitalize on favourable exchange rates. For global investors, this might be the time to rebalance portfolios, increasing exposure to international markets that could benefit from the greenback's retreat,” notes Nigel Green.
In its last meeting, Powell set the stage for the central bank's first rate cut in four years, citing greater progress toward lower inflation and a cooler job market that no longer threatens to overheat the economy. Powell said if US inflation continues to fall, “a reduction in our policy rate could be on the table" when the Fed next meets in September.
‘’Global sentiments are cautious ahead of the US Fed meeting minutes' release today. Even Powell speech in Jackson Hole Symposium will be key event to watch out. Both these events are likely to provide some hint as to the Fed's next move with regard to interest rates. Hopes are running high for a rate cut in the September meeting, followed by more cuts in subsequent meets,'' said Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services Ltd.
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