Jackson Hole Bankers Pivot to Cuts: A Soft Landing in Sight

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, attendees 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 global economy.

Andrew Bailey, governor of the Bank of England, and his counterpart at the Fed, Jay Powell, hit back at fears that growth would need to be sacrificed to reach their inflation goals. As they begin to cut borrowing costs, both men signalled they were still on course to avoid a recession.

Economic Optimism from Key Economists

Economists in the audience echoed their optimism. “No one knows exactly what the next few months will bring, but data indicate that there will be continued low unemployment and continued strength,” Heather Boushey, a member of US President Joe Biden’s Council of Economic Advisers, told the Financial Times.

Shifting Dynamics of Inflation

Two years ago, the prognosis was bleak. Raising interest rates aggressively to stamp out the worst bout of inflation in advanced economies since the 1980s was expected to trigger a painful downturn that would cost millions their jobs. However, the past twelve months have been a game-changer. Inflation fell sharply over the second half of 2023, moving well off of its 2022 peaks and appears on track to hit central banks’ prized 2 per cent targets.

• Labour markets have remained on solid footing
• Markets have moved to reflect expectations of lower borrowing costs
• Central banks must follow through with rate cuts

Watchful Eyes on Future Volatility

Officials are aware of the challenges ahead — notably pacing their interest rate cuts right. A bout of market turmoil in early August highlighted the undercurrent of angst about the economic outlook. Pierre-Olivier Gourinchas, chief economist at the IMF, expressed concerns about possible volatility as markets adjust to a new phase in the disinflation cycle.

Nonetheless, Gourinchas endorsed the pivot from central banks, stating it was the "right" move, as easing could potentially benefit global growth.

Upcoming Rate Cuts and Examination of Inflation Goals

Central banks, including 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, just before the US presidential election. This cautious approach underscores the inflation struggles that have persisted over recent years.

Officials remain vigilant, concerned that moving too slowly in cutting rates could risk heating the economy again.