Amid the striking scenery of the Teton mountain range, a seemingly improbable outcome appeared within reach for the top central bankers who had gathered in Wyoming for the Jackson Hole symposium. After enduring the worst inflation shock in four decades, attendees at the Kansas City Federal Reserve’s annual conference expressed optimism that they were nearing a "soft landing" for the global economy, defying the odds.
Andrew Bailey, Governor of the Bank of England, and Jay Powell, Chair of the Federal Reserve, dismissed concerns that economic growth would need to be sacrificed to achieve their inflation goals. As they prepare to cut borrowing costs, both leaders indicated they were still on track to avoid a recession.
Economists in the audience shared this optimism. “No one knows exactly what the next few months will bring, but data indicate that there will be continued low unemployment and sustained strength,” Heather Boushey, a member of President Joe Biden’s Council of Economic Advisers, told the Financial Times.
Two years ago, the outlook was grim. Aggressively raising interest rates to combat the worst inflation in advanced economies since the 1980s was expected to trigger a painful downturn, potentially costing millions of jobs. At the time, policymakers warned that they were navigating one of the most challenging economic landscapes in recent memory.
However, the past year has seen a dramatic shift. Inflation has fallen sharply in the second half of 2023, moving well below its 2022 peaks and now appears on track to hit central banks’ 2% targets. In some countries, such as the UK, this target has already been achieved. Throughout this period, labour markets have remained resilient.
Yet, officials remain aware of the challenges ahead, particularly in timing their interest rate cuts. Markets have adjusted to the expectation of lower borrowing costs, which has helped reduce interest rates on mortgages and other financial products. However, central banks still need to follow through.
A bout of market turmoil in early August, following disappointing U.S. jobs data and an unexpectedly hawkish stance from the Bank of Japan, underscored the underlying anxiety about the economic outlook. The early August equity sell-off was a preview of a potential "risk-off event," especially if the ongoing moderation in growth leads to a more severe downturn, warned Pierre-Olivier Gourinchas, Chief Economist at the IMF, in an interview with the Financial Times. “We’re going to see some volatility because the market has to adjust to a new phase in the disinflation cycle, which is the normalisation of monetary policy.”
Gourinchas endorsed the pivot from central banks, calling it the “right” move. “In principle, this easing could be good for global growth because it will help stabilise activity,” he said, noting that emerging market economies, in particular, would benefit from a weaker dollar—a likely consequence of lower U.S. interest rates. The European Central Bank, Bank of England, and Bank of Canada have all lowered interest rates this summer and are expected to continue doing so in the coming months.
The Fed is expected to join them in September, as Powell indicated on Friday. This meeting comes just six weeks before the U.S. presidential election, an event that looms large over the world’s largest economy. The lengthy delay in rate cuts by the Fed and other central banks underscores the severity of the inflation challenge they’ve faced over the past three years.
Initially dismissed as a “transitory” issue, inflation quickly evolved into a persistent problem for consumers worldwide. The path back to 2% has been bumpy, exacerbated by conflicts in Ukraine and the Middle East. As recently as the start of the year, an unexpected resurgence in price pressures rattled U.S. officials.
Central banks have long been cautious about the risk of lowering interest rates too soon, fearing that inflation could remain above target—or worse, flare up again as expectations of continuous price increases become entrenched. They are still not ready to declare victory over the worst inflationary pressures in a generation.
Bailey reiterated on Friday that he would take a cautious approach to cutting rates, reinforcing expectations that the Bank of England would hold off in September before lowering borrowing costs again in November. On Saturday, ECB Chief Economist Philip Lane warned that their inflation goal was “not yet secure.”
U.S. officials also advocate for a gradual approach to rate cuts but have left the door open for more aggressive measures if necessary. Having raised borrowing costs too late to contain inflation, policymakers recognise the risks of moving too slowly in this next phase.
