Powell's speech marks pivot to labor market support
The U.S. Federal Reserve is expected to follow the Reserve Bank of New Zealand (RBNZ) in cutting interest rates, a move anticipated by Kiwibank after a key speech by Fed Chair Jerome Powell at the Jackson Hole Symposium.
Powell signaled a shift in the Fed's monetary policy, indicating that a rate cut could come as soon as September. This change reflects the Fed's growing confidence in inflation control and its increasing concern over rising unemployment, which has reached 4.3%.
Kiwibank analysts noted that Powell's emphasis on supporting the labour market marks a significant pivot from the Fed's earlier focus on inflation.
“We do not seek or welcome further cooling in labour market conditions… We will do everything we can to support a strong labour market as we make further progress toward price stability,” Powell said. This suggests that the Fed is considering a 50 basis point cut, especially if upcoming economic data, such as the August payroll report, indicates further weakness in the labour market.
The market's response to Powell's comments was immediate, with equities rising, bond yields falling, and the U.S. dollar weakening as investors began to price in the likelihood of a new rate-cutting cycle. Kiwibank's research highlights that this aligns the Fed with other central banks, including the European Central Bank, the Bank of England, and the Bank of Canada, which have already begun easing monetary policy.
In New Zealand, economic data released last week showed continued weakness, particularly in retail sales, which contracted by 1.2% in the June quarter. According to Kiwibank, this contraction suggests another quarterly decline in GDP, consistent with the RBNZ’s forecasts. House prices also fell for the third consecutive month in July, underscoring the challenges facing the domestic economy.
Kiwibank analysts noted that while the New Zealand housing market remains under pressure, there is cautious optimism for a recovery in 2025 as interest rates decline and investor activity picks up.
