Where are interest rates going? Jackson Hole heralds monetary policy changes ahead

"The time has come for policy to adjust."

These eight words, uttered by the Chair of the US Federal Reserve, Jerome Powell, at the annual Jackson Hole Symposium, herald another inflection point in the sometimes-dramatic evolution of monetary policy since the pandemic.

After a period of rapid price rises and surging interest rates, most of the world’s major central banks are now sufficiently confident about the trajectory of inflation to start bringing interest rates lower.

“Both political and economic uncertainty remain high,” says Aengus Collins, Head of Economic Growth and Transformation at the World Economic Form, “but it is a very welcome development to see an easing of inflation rates allow for a loosening of monetary policy.”

While many of us would struggle to pinpoint Jackson Hole on a map, the Wyoming town plays host each year to a closely watched gathering of senior central bankers, economists and finance experts to discuss economic trends and potential policy trajectories.

Given the pivotal influence of US interest rate developments on the rest of the global economy, comments by the chair of the Federal Reserve are always pored over for signals about where rates may be going.

Mr Powell’s speech on 23 August, emphasizing how the Fed now intends to focus more on labour market signals in its decisions, was widely interpreted as indicating that the US central bank will lower rates in September.

This shift comes at a pivotal time for the US economy, with the presidential election scheduled for 5 November, and with many households still concerned about the cost of living despite the fall-off in inflation.

“The signal from Jackson Hole that the Fed is about to begin cutting rates suggests that they are confident that inflationary pressures have been contained,” says Collins. “Their priority now is to provide support to the economy, particularly after a recent uptick in unemployment led to jitters about the possibility of a recession.”

Lower interest rates generally lead to an increase in economic activity, by stimulating borrowing and investment. In the World Economic Forum’s latest Chief Economists Outlook, when chief economists were asked which policy levers would be most effective at boosting growth over the next five years, 74% cited monetary policy for high-income economies and 59% for low-income economies.

The Fed's comments and the symposium come at a time when other central bankers are also mulling lower interest rates. Several European Central Bank officials have expressed support for a rate cut, citing concerns about economic growth and softening labour markets. And Bank of England Governor Andrew Bailey has said risks of persistent inflation appear to be waning, suggesting he would be in favour of more easing.

Central banks in Canada, New Zealand and China are also easing, with Japan an exception.

This marks a step change in international policy, after the Fed aggressively raised rates to combat high inflation, bringing the federal funds rate to a range of 5.25% to 5.50% by July 2023, its highest level since 2001. Rates have been held steady at this level for eight consecutive meetings as of July 2024.

The European Central Bank lowered its three key interest rates by 25 basis points in June this year and in the UK, the central bank lowered its benchmark lending rate by a quarter point in August to 5%, the first reduction since the start of the pandemic.

Even so, while the direction of monetary policy seems to be becoming clearer – and rates seem likely to move lower – there’s a level of uncertainty around the pace and extent of any future rate changes.

The Forum's forthcoming Chief Economists Outlook launches 24 September.